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Monday, October 08, 2007

India Strategy - Oct 8 2007

India Strategy - Oct 8 2007

Post Market Commentary

The market closed the session on a deep negative territory on the back of political concerns which led the benchmark indeices BSE Sensex closed lower by 281.97 points at 17,491.39 while Nifty fell by 100.75 points to close at 5,085.10. There was speculation that the mid term polls may took place at any point of time that led to the negative sentiments to prevail in the market. From the sectoral indices front, BSE IT is the only index that survives as the quarterly results of the biggies in this sector are round the corner. The BSE Sensex opened on a strong note to touch an intraday high of 17,982.59 but immediately lost grip and fell to trade in red through out the session. Overall, the market breadth was weak as 2,263 stocks closed in red while 474 stocks manage to close in green. The BSE Mid Cap and Small Cap closed on a negative note as they slipped by 273.91 points and 300.87 points at 7,211.60 and 8,801 respectively.

The IT index manages to close higher by 30.04 points at 4,770.31. Pushing it up are Patni computers (4.77%), Satyam computers (2.50%), Wipro (1.84%), HCL tech (0.98%) and Infosys (0.54%) closed in positive.

BSE Metal index dropped by 532.75 points at 13,589.61 as JSW Steel 5.58%, SAIL 5.20%, Tata steel 5.27%, and Hindalco Industries 4.52% closed lower.

The oil and gas index closed the session on a negative note as it dropped by 312.15 points to close at 9,797.65. Leading to the loss are Essar Oil (8.85%), Indian Oil (6.09%), RPL (5.12%) and GAIL (3.19%) that closed in red.

The capital goods index decreased by 296.96 points to close at 15,445.63 as Siemens (4.47%), ABB (2.35%), L&T (2.23%) and Suzlon Energy (0.29%) closed lower.

BSE bankex index fell 239.66 points to close at 8,984.86. Pushing it down are Andhra bank (8.49%), Yes bank (6.53%), IOB (5.79%), SBI (4.43%), PNB (3.52%), ICICI bank (1.97%) and Canara bank (1.81%)closed in negative.

Market Close: Left was not right for the market..

Political Uncertainity weighted on the Indices as Investors went for profits pushing indices into deep red. Indices Opened up in green but sell off trigger looking at the Political issue. Global Markets opened strong looking at US indices but HangSeng witnessed Heavy selling before ending marginally in red. Stocks from Realty, Banks, Metals and Pharma all felt the selling pressure. IT was the only sector which traded in green. Smallcap & Midcaps also underperformed as they slipped by 4% with the heavyweights. Asian markets traded in mixed while European markets were subdued.

Sensex ended down by 363 points at 17410.59. Weighing on the Sensex were losses in ACC (1104.05,-6 percent), Rel Energy (1358.9,-6 percent), Ranbaxy (409,-6 percent), TISCO (787.1,-5 percent) and NTPC (203.5,-5 percent). Losses were restricted by gains in Satyam (455.5,+2 percent), TCS (1082,+1 percent), HDFC Bk (1415,+1 percent), Wipro (464.5,+1 percent) and BHEL (2168.3501,+1 percent).

On the reports that Government might delay the issue of fertliser bonds which drove down the fertliser stocks. The bond was announced two months ago and this may be delayed till the end of the current financial year. The bonds were proposed to resolve the working capital crunch faced by fertilizer units and spare the exchequer from subsidy burden worth hundreds of crore. This has left the fertiliser industry wondering if the bonds will help resolve the fund crunch faced by them at least marginally. Even at this juncture it is not clear to both the ministry and the industry, whether the finance ministry is planning to make the bonds tradable across the board or leave the industry will no option but to pledge it with banks. But a possible delay in relief in the form of subsidy given to the fertiliser sector has the stocks of these companies reversing the rally which they began after the Government's proposed investment policy. Stocks like Nagarjuna Fertilizers (-16%), Chambal Fertilizers (-13%), Godavari Fertilizers and Deepak were hit badly for the day.

Esab India had an event report which was underplayed by the media. Charter Plc, the parent has managed to increase stake in the company by around 19% to 55%. The company is one of the two large organised players in the welding consumable space. The market is around 1500 cr and 50% of that is unorganized. The Parent has increased stake with an open offer at a premium to market. We expect the increased stake to lead to higher commitment from the parent. Howden, another division of Charter is a player in gas handling equipment. It's just a guess that this increased stake could lead to Howdens offering be introduced sooner than latter in the Indian opportunity. The valuations are attractive at just around 14 x FY07 (Dec end) earnings. Do read our detailed note on this. We have positive view here.

Technically Speaking: Sensex open with a gap of 130 points but Selling pulled it down as it made days low of 17322 and High of 17982. Advances were outnumbered by Declines 1:5 ratio. Sensex turnover stood good at Rs 7206. Sensex support at 17183, 16922 and Resistance at 17844, 18423. Traders better to exit long if Sensex slips below 17300 and to stay in cash for now.

Sensex scales new peak but closes below 17,500

The market witnessed another day of heavy selling, and the indices fell around 2% each at the close in a choppy trading session. Rising political instability, a flat open in European markets and a slide in Asain indices urged bears to strike back after the flat close of Friday. Taking cues from positive Asian indices, the Sensex opened on a firm note and rallied sharply to touch an all-time high of 17,983. However, the market steadily kept losing the momentum thereafter, and a widespread selling in the afternoon nearly dragged the index below 17,350 to the day's low of 17,322, a drop of 661 points from its intra-day high of all times. The Sensex managed to erase the loss of 169 points towards the close and ended the session at 17,491, down 282 points. The Nifty declined by 1.94% and was down 101 points to close at 5,085.

The market breadth was extremely negative, with losers outnumbering gainers by 4.81:1. Of the 2,783 stocks traded on the Bombay Stock Exchange (BSE) 2,263 stocks declined, 474 stocks advanced and 46 stocks ended unchanged. Except the BSE IT Index all the sectoral indices came under sharp hammering and shed over 1-3% each. Among the heavy losers, the BSE PSU Index, the BSE Metal Index and the BSE Realty Index dropped over 3.50% each.

Among the 30 Sensex stocks, 23 ended weak, while 7 managed to close with the gains. Index heavyweight Tata Steel declined by 5.27% at Rs789, ACC plunged 5.23% at Rs1,115, Ranbaxy dipped 4.82% at Rs412, Reliance Energy plummeted 4.67% at Rs1,380, NTPC slumped 4.57% at Rs205, Hindalco lost 4.52% at Rs162, SBI tumbled by 4.33% at Rs1,783, Dr Reddy's Lab fell by 3.73% at Rs629, M&M 3.51% at Rs725 and Grasim slipped by 3.50% at Rs3,420. However, Satyam Computer, Wipro and BHEL gained over 1-2%, while TCS, Infosys, HDFC Bank and HDFC closed with moderate gains.

Over 3.12 crore IFCI shares changed hands on the BSE followed by Power Grid Corporation (2.80 crore shares), Ispat Industries (2.75 crore shares), Reliance Natural Resources (2.24 crore shares) and Tata Teleservices (1.81 crore shares).

Welspun Gujarat was the most widely traded counter and registered a turnover of Rs355 crore followed by Reliance Energy (Rs339 crore), Reliance Industries (Rs279 crore), Power Grid Corporation (Rs274 crore) and IFCI (Rs247 crore).

Sensex sheds 282 points

The market drifted lower today, falling for the third day in a row, due to concerns arising on the political front. BSE IT index was the only index among sectoral and niche indices on BSE which was in the green. Market breadth was quite weak. Metal, auto and realty stocks plunged.

BSE Mid-Cap and BSE Small-Cap indices underperformed the Sensex. Reliance Industries lost ground. Asian markets were trading mixed. European markets were subdued.

The market had opened on a firm note taking cue from firm global markets. The Sensex hit all-time high at the onset of the trading session. It later slipped into the red as political concerns took centrestage.

The BSE 30-share Sensex lost 281.97 points, or 1.59%, to 17,491.39 points. It opened with an upward gap of 128.58 points at 17,901.94 and soon surged to all-time high of 17,982.59. Sensex hit an intra-day low 17,322.14 in afternoon trade. At day's low of 17,322.14, Sensex had lost 451.22 points for the day.

BSE clocked a turnover of Rs 7206 crore compared to Friday (5 October 2007)'s Rs 7,778.58 crore.

The S&P CNX Nifty ended down 100.75 points, or 1.94%, to 5,085.10. It had hit a high of 5,249.30 in early trade. It hit a low of 5,024.75 in afternoon trade.

NSE F&O segment clocked a turnover of Rs 69,842.2 crore today, 8 October 2007 compared to turnover of Rs 64,188.48 crore on Friday, 5 October 2007.

Nifty October 2007 futures were at 5071.80 , a discount of 13.30 points or 0.26% to the spot price of 5085.10.

BSE Mid Cap index declined 273.91 points or 3.66% to 7,211.60 and BSE Small Cap index was down 300.87 points or 3.31% to 8,801. Both these indices underperformed the market.

BSE Metal index (down 3.77% to 13,589.61), BSE Oil & Gas index (down 3.09% to 9,797.65), BSE Realty index (down 3.61% to 9,283.22), BSE Health Care index (down 3.06% to 3,709.31), BSE PSU index (down 3.79% to 8,024.21), BSE Bankex (down 2.6% to 8,984.86) underperformed the Sensex.

BSE Auto index (down 1.77% to 5,270.71), BSE Capital Goods index (down 1.89% to 15,445.63), BSE IT index (up 0.63% to 4,770.31) outperformed Sensex.

Speculation of mid-term polls gained strength after Congress President Sonia Gandhi on Sunday, 7 October 2007, indicated her party’s readiness to face elections by saying those opposing the nuclear deal were enemies of development and peace. Gandhi said that there was a need to keep a certain pace in power generation if the pace of the country's progress has to be maintained.

Though Gandhi did not specifically refer to the opposition to the deal from the Left Front, her comments assume importance, coming in the wake of the standoff between the government and the Left Front over the nuclear deal.

A day after Congress president Sonia Gandhi attacked the opponents of the India-United States civil nuclear deal, the Left parties today, 8 October 2007, said India need not surrender its "vital interests" to America on the agreement. "The Left parties categorically reiterate that the nuclear deal with the US is against the interests of India. Those who advocate the deal, should know that India is capable of developing nuclear energy primarily on a self-reliant basis," top Left leaders said in a statement. "We need not surrender our vital interests to America on this plea," CPI (M) general secretary Prakash Karat, CPI leader A B Brdhan, Forward Bloc's Deabrata Bisws and RSP's Abani Roy said in the statement.

While the operationalisation of the Indo-US nuclear deal has been put on hold by the government pending the findings of a committee set up by the government to look into Left Front’s concerns over the deal, it cannot be stalled forever.

The Communists want the government to defer the Indo-US nuclear accord by six months and have warned of a political crisis if it is implemented. The four Communist parties have 60 members of the parliament (MPs) in the 545-member lower house of parliament. The Congress-led United Progressive Alliance (UPA) government at the centre could fall or be reduced to a minority if the Left withdraws support.

On the flip side, political turmoil arising from nuke deal will not impact India’s basic economic fundamentals though some infrastructure projects may get delayed. India’s economy is expected to post strong growth for a long period of time mainly due to favourable demographics.

Of the 30 shares of the Sensex, 7 had moved up, while the remaining were trading down. The market breadth was quite weak on BSE: 450 scrips advanced, 2,252 declined, while 371 remained unchanged on BSE.

Metal index was the biggest loser from sectoral indices on BSE. Steel shares declined after global steel industry association IISI said China, one of the largest consumers of the metal, would be a net steel exporter of 50-55 million tonnes in 2007.

Tata Steel (down 5.27% to Rs 789), Sail (down 5.2% to Rs 192.40) JSW Steel (down 5.58% to Rs 804.20), edged lower. Other metal stocks Sterlite Industries (down 2.66% to Rs 741.95) and Hindalco Industries (down 4.52% to Rs 161.55) also declined.

IT stocks gained ahead of Q2 September 2007 results. Infosys begins the earning season on 11 October 2007. BSE IT index was the only gainer from the sectoral indices on BSE. Infosys (up 0.54% to Rs 2,000.45), TCS (up 0.78% to Rs 1,078.50), Satyam Computer Services (up 2.5% to Rs 455.55) and Wipro ( up 1.84% to Rs 469.65), moved higher.

Bharat Heavy Electricals rose 1.73% to Rs 2,190.75. It hit a all time high of Rs 2,250 today.

Reliance Energy (down 4.67% to Rs 1,379.50, ACC (down 5.23% to Rs 1,115.10), Ranbaxy Laboratories (down 4.82% to Rs 412.30) and NTPC (down 4.57% to Rs 204.65) were the major losers from the Sensex pack.

India’s largest private company in terms of market capitalisation and oil refiner Reliance Industries lost 2.7% to Rs 2,416.95.

Bharti Airtel was down 0.83% to Rs 984.80 on reports that it may sell around 10% stake in its unit, Bharti Infratel to a private equity player for $1.1 billion.

Jai Balaji Industries was locked at 5% upper limit of Rs 208.75 on BSE, after it signed a memorandum of agreement with the Government of West Bengal for setting up a steel plant, a cement plant and a captive power plant in the state.

Kotak Mahindra Bank down 4.96% to Rs 911.85 on reports that the bank is in talks with some strategic investors to raise around $400 million via a qualified institutional offering

Patni Computer Systems was up 4.77% to Rs 480.05 on reports that two of its directors Gajendra Patni and Ashok Patni have ceased to be executive directors of the company effective 1 October 2007.

iGate Global Solutions surged 9.76% to Rs 264.25 ahead of the company announcing its Q2 September 2007 results on 10 October 2007.

Dollex Industries declined 6.77% to Rs 104.70 on BSE, after it announced today, 8 October 2007, it has signed a memorandum of understanding with the state government of Madhya Pradesh for Agro-Energy complex.

Housing Development Finance Corporation was up 0.13% to Rs 2,458.30 on hopes of a higher valuation of its insurance business as the company is expected to finalise a partner for its insurance venture by end of this month.

Rajesh Exports was down 0.74% to Rs 879.75 after it said its net profit rose 156% in Q2 September 2007.

McNally Bharat Engineering Company declined 3.48% to Rs 190.05 on BSE, after it announced today, 8 October 2007, it has received a Rs 38.31 crore order from Maharashtra State Power Generation Company for its new Parli thermal project.

Simplex Projects declined 4.47% to Rs 271.55, after it announced today, 8 October 2007, it has recently bagged orders for piling, foundation and residential complex in Kolkata from various agencies.

Among side counters, Intelvisions Software (up 19.96% to Rs 123.20), Phoenix International (up 20% to Rs 25), Surana Corporation (up 19.92% to Rs 44.25) , Panchmahal Steel (up 16.95% to Rs 310.50) and Patspin India (up 14.27% to Rs 13.77) edged higher.

Nagarjuna Chemicals & Fertiliser (down 15.13% to Rs 51.05), ITL Industries (down 14.53 % to Rs 50.30) and Mangalore Chemicals & Fertilisers (down 17.12% to Rs 32.20) were major losers.

Asian markets, which opened before the Indian markets, were mixed today. Taiwan's Taiwan Weighted (up 1.04% to 9,717.17) edged higher. Singapore’s Straits Times (down 0.06% to 3,820.31) and Hong Kong’s Hang Seng (down 0.22% to 27,770.29) edged lower.

European markets, which opened after the Indian markets, slipped into the red after starting on a positive note. France’s CAC (down 0.05% to 5,840.43), FTSE 100 (down 0.16% to 6,585.20) and Germany’s DAX (down 0.11% to 7,993.37) edged lower.

American markets galloped on Friday,5 October 2007. The Dow gained 95.36 points, or 0.68 %, on the day, closing at 14,069.67. The S&P 500 had a record session on Friday, posting new closing and intraday high records. rose 14.17 points, or 0.92 %, on the day to close at 1,557.01. US markets surged as non-farm payrolls report released on Friday 5, October 2007 showed US employers added 1,10,000 jobs in September 2007 and August 2007 job losses were revised to a gain, helping lift worries about a US recession in the near term.

Markets set to open on a positive note taking global cues

Indian markets looked set to open higher today as US markets surged on Friday, 5 October 2007 boosted by a solid US jobs report. Asian markets opened on a positive note today. Volatility may persist as investors may look to book profits ahead of the result season starting this Thursday. Current bleak political situation would further affect the sentiments.

Q2 September 2007 results are the next major trigger for the market. Figures of advance tax suggest that earnings will be decent to strong. IT bellwether Infosys Technologies kickstarts reporting season on Thursday, 11 October 2007.

Political situation turned bleak again as Congress president Sonia Gandhi went about signaling her party’s preparedness to face elections and hit out at the Left for opposing the Indo-US civilian nuclear deal on Sunday 7 October 2007. Left will decide the fate of the government at the end of this month.

Two leading Indian industry lobby groups urged the central bank on Saturday to reduce interest rates to sustain 9% percent economic growth. The Confederation of Indian Industry (CII) said that high interest rates were affecting investments.

Annual inflation, based on the wholesale price index (WPI), moved up 3.42% in the week ended 22 September 2007 from 3.23% in the week ended 15 September 2007. The market estimate was 3.22%. Annual inflation stood at 5.43% in the corresponding week last year.

Asian markets, which opened before the Indian markets, were trading on a positive note today. Taiwan's Taiwan Weighted (up 1.27% to 9,739.36), Hong Kong’s Hang Seng (up 1.93% to 28,377.04), Singapore’s Straits Times (up 1.27% to 3,871.14) were trading up. Japan's Nikkei (down 0.16% at 17,065.04) edged lower.

American markets galloped on Friday,5 October 2007. The Dow gained 95.36 points, or 0.68 %, on the day, closing at 14,069.67. The S&P 500 had a record session on Friday, posting new closing and intraday high records. rose 14.17 points, or 0.92 %, on the day to close at 1,557.01. US markets surged as non-farm payrolls report released on Friday 5, October 2007 showed US employers added 1,10,000 jobs in September 2007 and August 2007 job losses were revised to a gain, helping lift worries about a US recession in the near term.

As per provisional NSE data, foreign institutional investors (FIIs) were net buyers of Rs 948.06 crore of equities, while domestic institutional investors (DII) were net sellers of Rs 201.61 crore of equities on Friday, 5 October 2007.

The BSE 30-share Sensex ended down 3.78 points, or 0.02%, to 17,773.36 on Friday, 5 October 2007. The S&P CNX Nifty closed down 22.8 points, or 0.44%, to 5,185.85.

The market had snapped its 10 days’ winning streak since Thursday, 4 October 2007. The market had been on a roll with the Sensex hitting a record high in trading sessions from 19 September 2007 to 3 October 2007. Heavy FII buying and hopes of a further cut in interest rates by the US Federal Reserve at its next policy meeting on 30-31 October 2007 had boosted the bourses. From a low of 13,989.11 on 21 August 2007, the Sensex has galloped a whopping 3,857.93 points, or 27.57%, to 17,847.04 on Wednesday, 3 October 2007.

Stock Picks

Stocks with +ve bias: Bharti, Idea, Aban lloyd & Punj

Stocks for Short-term delivery: Mercator Lines, Gateway Distripaks

Stocks for Investment: BL Kashyap, Shiv vani Oil, Glenmark Pharma

Firm global cues help market to advance further

The market is likely to see further action on the back of a firm US markets and over 1% gains in majority of the Asian indices in the prevailing trades. Investors should also take into account the prevalance of strong intra-day volatility. Although FIIs have been providing cushion by remaining net buyers which may help the sentiment remain bullish. Among the key domestic indices, the Nifty may resist at 5210 and on breaching this level could touch the index all-time high of 5260. The Sensex has a likely support at 17650 and may test higher levels at 18200.

Major US indices rose on Friday after a strong September jobs report indicating that the economy will be able to avoid a recession. While the Dow Jones flared up by 92 points at 14066, the Nasdaq moved up by 47 points to close at 2780.

The Nymex light crude oil for November delivery fell by 22 cents to close at $81.22 a barrel. In the commodity space, the Comex gold for December delivery jumped $3.40 to settle at $747.20 an ounce.

Pre Market Watch

Indian market is likely to have a positive opening as the global cues are in favor. On Friday, the Indian markets ended marginally lower as BSE Sensex closed at 17,773.36 slipped by 3.78 points while Nifty closed lower by 22.8 points at 5, 185.85. We expect the market to trade higher during the trading session.

Friday, the US markets closed in green. The Dow Jones Industrial Average (DJIA) surged 91.70 points to close at 14,066.01. The S&P 500 (SPX) index increased by 14.75 points to close at 1,557.59 and the NASDAQ Composite (RIXF) grew 46.75 points to close at 2,780.32.

Indian ADRs ended in green. In technology sector, Infosys grew by (2.70%) along with Satyam by (2.30%), Wipro by (2.15%) and Patni computers by (1.22%). In banking sector, HDFC bank and ICICI bank rose by (3.88%) and (0.19%) respectively. VSNL and MTNL grew by (3.46%) and (0.62%) respectively. In Metal sector, Sterlite industries surged by (2.86%).

The major stock markets in Asia are trading strong. Hang Seng Index surged by 478.05 points to trade at 28,309.57. Singapore''s Straits Times index trading higher by 41.50 points at 3,864.12. Taiwan Weighted advanced by 109.22 points to trade at 9,726.48.Seoul Composite trading up by 20.10 points at 2,016.13.

On Friday the FII activity was, the gross equity purchased was Rs4, 403.80 (in crores) and the gross debt purchased was Rs237.30 (in crores). The gross equity sold was Rs3,828.80 (in crores), and the gross debt sold was Rs33.50 (in crores). The net investment of equity was Rs575 (in crores) and the net debt investment was Rs203.80 (in crores).

Today, Nifty has support at 5,155 and resistance at 5,280 and BSE Sensex has support at 17,650 and resistance at 18,090.

Maruti, Sintex, HT Media, Zee Entertainment, Ashok Leyland, Banks, Strategy

Maruti, Sintex, HT Media, Zee Entertainment, Ashok Leyland, Banks, Strategy

Trading Calls

Nifty (5186) Sup 5126 Res 5248

Buy Bharti Airtel (994) SL 986 Target 1010, 1015

Buy GNFC (158) SL 154
Target 165, 167

Buy M&M (752) SL 745
Target 770, 774

Buy DLF (851) SL 845
Target 864, 868

Sell Canara Bank (271) SL 275
Target 264, 261

Time for selection and election?

Democracy is the only system that persists in asking the powers that be whether they are the powers that ought to be.

Even as the dream run of the bulls continues, the question of power at the Center is an issue the markets will have to pay close attention. The Sensex looks set to flirt and probably breach the 18,000 mark today itself. However, Congress president Sonia Gandhi’s tough words against the Left parties for attacking the Indo-US nuclear deal could give the market jitters going ahead. At a speech made in Haryana over the weekend, the Congress president more or less hinted at the end of the association with the Left. In short, if things do not smoothen, the country will face an early election. That makes it even more vital to ensure that your selection of stocks can withstand the political drama coming up.

Today, we see a strong opening following a firm trend in Asian markets. However, we do not rule out some cooling at higher levels. DLF, Kotak Bank, RCOM, Peninsula Land, Shree Ram Mills and Bharti Airtel are the stocks that could see some positive action. Buzz of a stock-split in Reliance will also keep this counter in action.

Global equity markets have received another shot in the arm with the threat of a recession in the US receding a little on the back of the latest jobs report. There is no dearth of liquidity and a slew of key global indices are scaling new peaks now. The yen has fallen to the lowest in two months against the euro as gains in global stocks have restored confidence among global investors. As a result, the risk appetite is once again going up, which in turn helps emerging markets such as India a great deal. Global investors have stepped up the so-called carry trades whereby they invest in high-yielding assets funded with money borrowed in Japanese yen. The Australian dollar today rose to the strongest in 23 years and New Zealand's gained against the US currency, fueled by the spurt in carry trades.

Overseas investors have pumped in more than US$5bn (only cash market) inflows into Indian equities over the past 11 trading sessions. The unprecedented foreign capital inflows have pushed the benchmark BSE Sensex and the NSE Nifty to new all-time highs. Given the ongoing momentum, the bulls may just be able to lift the Sensex above the 18,000 mark today itself. The benchmark BSE index needs some 220-odd points to reach the new milestone. The rival Nifty is already over 5000. Having said that, much will depend on the foreign capital inflows. Any slowdown on this front will have a direct bearing on the market.

That in turn will hinge on the upcoming results, especially that of the IT companies. Infosys will announce its Q2 results on Oct. 11. Though most of the bad news is already in the price, any fresh bad news will lead to further sell-off in software firms. But, the market is not just about IT companies and results from the old economy companies will also be crucial. Expect the intra-day gyrations to continue though the bias remains positive.

US stocks rallied on Friday, with the Standard & Poor's 500 index touching a new lifetime high, as investors took heart from better-than-expected job additions in September, and a surprise upward revision in August data.

Bond prices fell, raising the corresponding yield, amid speculation that if the world's biggest economy manages to avert a recession, then the Federal Reserve will not have to cut rates further.

Nevertheless, the S&P 500 rose 14.75 points, or 1%, to 1,557.59, above its July 19 closing high of 1,553.08. The Dow Jones Industrial Average gained 91.70 points, or 0.7%, to 14,066.01. The 30-stock blue chip index climbed to as high as 14,124.54, above its previous intra-day record. The Nasdaq Composite Index added 46.75 points, or 1.7%, to 2,780.32.

The S&P 500 gained 2% on the week; the Dow, which closed at a record on Oct. 1, gained 1.2%. The Nasdaq advanced 2.9% for its biggest weekly increase since March.

Treasury prices slumped. The weakness lifted the yield on the 10-year note to 4.63% from 4.51% late on Thursday. In currency trading, the dollar slipped versus the euro and gained versus the yen. COMEX gold for December delivery rose US$3.40 to US$747.20 an ounce.

US light crude for November delivery fell 22 cents to settle at US$81.22 a barrel on the New York Mercantile Exchange.

European shares closed higher on Friday after a stronger than expected jobs data from the US. The UK's FTSE 100 rose 0.73% to 6,595.80, while the German DAX 30 advanced 0.72% to 8,002.18 and the French CAC-40 increased 0.67% to 5,843.24.

Emerging markets closed sharply up on Friday. The Bovespa in Brazil was up 3.2% at 62,319 while the IPC index in Mexico gained 1.5% at 31,504. The RTS index in Russia rose 1.2% to 2115 and the ISE National 30 index in Turkey rose 3.8% to 72,261.

Most Asian markets have rallied this morning. The Hang Seng in Hong Kong surged by 480 points to 28,291 while the Kospi in Seoul was up 22 points at 2018 and the Straits Times in Singapore advanced 45 points to 3867. Japan is closed for a holiday today.

The Morgan Stanley Capital International Asia-Pacific excluding Japan Index rose 0.8% to 552.29 as of 10:05 a.m. in Tokyo, exceeding its record close of 549.66 set Oct. 2. All of the measure's 10 industry groups advanced.

Australia's S&P/ASX 200 Index climbed 1% to a record, while the Straits Times was headed for a new high. Benchmarks rose in all other markets open for trading.

All eyes on results

After coming within striking distance of the 18k mark, bulls once again failed to breach the psychological hurdle as traders preferred to book profits ahead of the week-end. Volatility was the order of the day as key indices often stepped in to positive and negative territory. The benchmark index swung almost 270 points from its days high of 17,979 and a low of 17,708.

Finally, BSE 30-share benchmark Sensex ended flat to close at 17,773. NSE Nifty slipped 23 points to close at 5,185.

Among the BSE sectoral indices only the Capital Good index was in the limelight gaining over 3%. However, BSE Bankex index (down 2.02%), BSE PSU index (down 2%) and BSE Metal index (down 1.82%)

Markets breath was also in red with 1,825 stocks declining as compared to 940 stocks which advanced on BSE. Among the Sensex pack only 7 stocks managed to end in positive terrain while, 23 stocks were on the receiving end.

Power Grid Corp India's biggest power transmission company, got listed at a premium of 74% at Rs85 against the issue price of Rs52. The scrip closed at Rs100 up 93% touching an intra-day high of Rs109 and a low of Rs85 and recorded volumes of over 3,00,00,000 shares on NSE.

The company raised 29.8 billion rupees. The company sold 573.9 million shares at Rs52 per piece, the upper end of the range offered to investors.

Bombay Dyeing dropped 4% to Rs657. According to reports the Indian textile maker tied up with United Arab Emirates' luxury retail chain Rivoli to sell its products in that country. The scrip touched an intra-day high of Rs695 and a low of Rs645 and recorded volumes of over 2,00,000 shares on NSE.

Lanco Infratech declined 3.4% to Rs390. The company won Rs 730mn order to build university in the southern Indian town of Tirupati. The scrip has touched an intra-day high of Rs422 and a low of Rs385 and recorded volumes of over 20,00,000 shares on NSE.

Ashok Leyland plunged 5% to Rs42. The company’s September sales fell 11% to 7,263 units. The scrip touched an intra-day high of Rs44 and a low of Rs41 and recorded volumes of over 33,00,000 shares on NSE.

Capital Good stocks were among the major gainers. BHEL surged by over 3% to Rs2154, L&T spurred by over 6% to Rs3089, Siemens edged higher 0.6% to Rs1424 and Punj Lloyd added 1% to Rs324.

IT stock continued to be under pressure after rupee rose for a seventh week. Index heavyweight Infosys slipped 1% to Rs1982, Satyam Computer lost 1.6% to Rs444 and TCS slipped 0.8% to Rs1072. Polaris, Moser Baer and NIIT Ltd were the major losers among the mid-Cap stocks.

Stocks in News:

Bharti Airtel may divest 10% in its tower arm to PE company for $1.1bn

Powergrid Corporation to invest Rs20bn to boost its existing telecom network in the next two years

Wockhardt may buy US Pharma company Morton Grove, a company focused on niche area of oral liquid medicines and topical liquid products

JSW Steel reports 21% rise in crude steel production for September quarter at 0.78mn tonnes

MRF lines up Rs6bn investment in 500-acre greenfield plant near Trichy; Rs1.5bn plant for aircraft tyres for defence is also under consideration

Jet Airways to buy 20 aircrafts from Boeing with option to buy ten more to augment its fleet

Bharti Airtel, Vodafone Essar and Idea Cellular may merge their combined 70,000 towers to form a separate company

National Aviation Company of India, the Air India and Indian combine, to offload 15% equity through an IPO

Cairn India may have to pay US$9/barrel as cess for shifting delivery point from Rajasthan to coast

Kotak Mahindra Bank to raise around US$400mn through QIBs; to issue 17mn equity shares

The Cabinet may clear Rs240bn worth of oil bonds to be issued to oil marketing companies

The Government may announce auction of 85 oil and gas blocks under NELP VII in the first week of November

Excise duty on big cars may be cut to 16% to bring it on par with that on small cars

Fund Activity:

FIIs were net buyers of Rs9.48bn (provisional) in the cash segment on Friday while the local institutions pulled out Rs2.01bn. In the F&O segment, foreign funds were net buyers at Rs104mn.

On Thursday, FIIs were net buyers to the tune of Rs5.75bn in the cash segment. With this, the net investment by overseas investors in the past 11 days has crossed the US$5bn mark.

Mutual Funds were net sellers of Rs5.33bn on Thursday.

Major Bulk Deals:

Upper Circuit:

RIIL, Bag Films, Usher Agro, Victoria Mills, Goldstone Tele and Jai Corp.

Lower Circuit:

Tourism Finance and Jain Studious.

Morning Call

Market Grape Wine :

In House :

Nifty at a supp of 5164 and 5110 with resis at 5221 and 5263. Mkt to open on a positive note.

Intra Day: Buy Relcap above 1682 with a TGT of 1714 with a SL of 1676

Sell Tatasteel below 819 with a TGT of 801 and a SL of 826

Positional: Buy Sunil Hitech.

Out House :

Markets at a support of 17577 & 17371 levels with resistance at 17997 & 18077 levels .

Buy : RIL

Buy : Relcap & REL

Buy : HDIL

Buy : Bharti & RComm

Buy : JpHydro & RNRL

Buy : DLF & GMRinfra

Buy : NTPC

Buy : JpAsso & CenTextile


Dark Horse : GMrInfra , Colgate ,RPL , REL , HDIL , NTPC , RNRL & SBIN

Bullet for the Day : Bharti & RelCap with stop loss .

Top Picks - Oct 2007

Top Picks - Oct 2007

Weekly Futures and Options Strategy

Weekly Futures and Options Strategy

Pre Market Watch

Equities are likely to open higher Monday on the back of positive global cues. But it needs to be seen whether indices can hold on to the gains as volatility is foreseen.

Speculations of mid-term polls gained strength after Congress President Sonia Gandhi said that she was not at all concerned about its prospect. At an iftar get-together at Prime Minister Manmohan Singh’s residence, she said, “If there are polls, we will face it.”

“Political tensions pose a threat to the market, though fundamentally there is nothing to worry about. Infosys’ report card (due on Oct, 11) will be the next trigger for the market, till then indices will be range bound,” said Amit Dalal, managing director of Amit Nalin Securities.

“The immediate support for Nifty Futures is at 5157 and below that it may test the 5100 levels. As long as it sustains above 4980 on declines, the uptrend remains strong and intact. The market is likely to open in the positive on strong global cues. It may continue to display high volatility so caution is advised,” said Religare Securities.

US markets closed higher with the Dow and S&P 500 surging to all-time intraday highs on Friday after a solid employment report rekindled optimism about the US economy and corporate profits. Asian markets also opened in the positive Monday.

Friday, the Sensex closed flat with a negative bias at 17,773.36, while the Nifty ended 0.44 per cent or 23 points lower at 5185.85. National Stock Exchange’s Nifty ended 0.44 per cent or 223 points lower at 5185.85. It touched an intra-day high of 5248.55 and low of 5164.50.

Foreign institutional investors were net buyers of equity worth Rs 948.06 crore on Friday, while domestic institutional investors net sold Rs 201.61 crore, according to provisional data on NSE.

Weekly Stock Ideas

Shree Renuka Sugars
Research: Deutsche Bank
Rating: Buy
CMP: Rs 725

Deutsche Bank has initiated a coverage on Shree Renuka Sugars (SRES) with a ‘buy’ rating at a price target of Rs 776. SRES is one of the few sugar mills which will continue to post profits over the next two years despite a bleak sector outlook. A flexible and scalable business model aided by synergistic expansion makes SRES the best sugar mill in the country.

Located near the west coast of peninsular India, SRES has the advantage of a flexible business model over its north Indian counterparts. With a higher crop yield and an optimum business contribution from co-products, we expect SRES to be sufficiently shielded from cyclical variability of sugar as a commodity.

Backed by the timely and significant expansion in ethanol and power cogeneration, SRES will post an earnings CAGR of 59% (FY06-FY09E). Deutsche Bank sees neutral free cash flow from FY07E to FY09E with a consolidated earnings CAGR of over 30% (FY06-FY09E). Deutsche Bank values the recent engineering business’ EV of 1x one-year forward revenues at Rs 15 crore and 5x PE to overseas operations, leading to one-year target price of Rs 776/share. SRES is also likely to post significantly higher profits compared to all other sugar producers.

Research: Merrill Lynch
Rating: Buy
CMP: Rs 433

Merrill Lynch has maintained a ‘Buy’ on Ranbaxy with a price target of Rs 492 per share. Ranbaxy signed a definitive agreement to increase its stake in Hyderabad-based Zenotech Labs to 45% from the current 7%, involving an investment of ~$53 million. The deal makes strategic sense as it solidifies Ranbaxy’s presence in biopharma, oncology and specialty injectibles. The deal will accelerate Ranbaxy’s EPS growth from CY09E. In 1QFY07, Zenotech posted revenues of Rs 3.55 crore and loss of Rs 6.2 lakh. Zenotech’s agreement with Ranbaxy will involve the marketing of 14 injectible ANDAs for the US and Canada for which seven oncology US ANDA filings are expected shortly. Zenotech also has seven biologics and two monoclonal antibodies in the pipeline addressing a $21 billion market.

Like Zenotech, Ranbaxy also has strategic stakes in two other companies viz., Jupiter Biosciences (for peptides) and Krebs Biochem (for fermentation based products). Merrill Lynch estimates robust core earnings growth of 24% in CY07E and 32% in CY08E, driven by higher growth and EBITDA margin in the coming quarters from the US and emerging markets. Further, there is a possibility of 14-23%+ EPS upside in CY08E from generic Lipitor launch in Canada and possible unlocking of R&D value through spin-off.

Redington India
Research: CLSA
Rating: Buy
CMP: Rs 370

CLSA has initiated coverage on Redington with a `Buy’ recommendation and indicates a 27% upside. The company buys out the products from vendors on cash and lets its downstream channel partners (customers) avail the merchandise on credit. Hence, the inventories of products as well as the receivables from channel partners are on the company’s balance sheet. This allows the company to make better margins, albeit with higher capital employed. With the Indian IT market showing 20% CAGR, a 30% CAGR in Redington’s sales are driven by entry into new verticals and a 200-bps annual market share gain in IT.

A dedicated credit team spread across the country and an integrated IT backbone and prudential systems like credit against post-dated cheques only, have ensured that average bad debts are 0.09% and 0.03% of sales in India and Middle East. Inventory risk stems from technology obsolescence and price downturns. Although vendors try to buttress the downside on such occasions, inventory markdown is an uncertainty that cannot be completely insulated. We expect a 32% CAGR in EPS over next three years, while improving current ROAE of 19% by 400 bps.

Reliance Petroleum
Research: UBS
Rating: Buy
CMP: Rs 159

UBS initiates coverage of RPL with a `Buy’ rating and a price target of Rs 190. This year has seen lengthy delays in refining projects in Asia and a significant run-up in the cost of building new refining capacity. UBS believes that this suggests supply could remain tight in the long term and expects benchmark Reuters Singapore refining margins (GRMs) to be $7/bbl, $6.3/bbl and $5.7/bbl in ’07, ’08 and ’09 respectively.

With a Nelson Complexity Index of 14, RPL outperforms the benchmark GRMs by $8-9/bbl. Hence, even when Reuters Singapore refining margins fall to $4.5/bbl, RPL should still be able to earn GRMs upwards of $12/bbl and EPS of over Rs16. Driven by high refining margins and tax incentives on account of being located in a special economic zone, UBS forecasts RPL to generate operating cash flow and free cash flow of $11.6 billion and $9.3b billion respectively, over FY09-13. UBS forecasts free cash flow yield to increase to over 12% from FY10. Tax incentives could add $3.8billion over the first 10 years of RPL’s operations.

Puravankara Projects
Research: Citigroup Global
Rating: Buy
CMP: Rs 460

Citigroup has initiated coverage of the stock with a `Buy/Medium Risk’ rating and a target price of Rs 536, based on a 5% discount to the estimated core NAV of Rs 564. Puravankara has a strong brand and a proven record. Citigroup attributes a discount to the stock for the company’s overdependence on Bangalore (~73% of gross NAV) and residential projects.

Citigroup sees structural opportunities in the Indian property market, which faces near-term challenges that can be addressed by falling interest rates, lower prices or relaxation in regulations. There is the: 1)quality land bank of 107m sq ft, largely within the city limits of Bangalore; 2) a direct sales model, which tends to reduce speculative activity; and 3) in-house construction expertise. These factors should drive a three-year EPS CAGR of 65%, positioning it as a quality midscale developer. Puravankara’s large exposure to Bangalore and Chennai is an advantage over North India-based developers. South India appears to have lower supply risks, more reasonable property prices and lesser speculation.

Maruti Udyog
Research: Merrill Lynch
Rating: Buy
CMP: Rs 1,035

Merrill Lynch has reiterated its `Buy’ recommendation with a raised price target of Rs 1,240, implying 20% potential upside. Merrill Lynch views Maruti as driving growth for Indian auto majors, rather than a defensive entity facing competitive onslaught. Over FY07-10E, the company is expected to register a 20% EPS CAGR, the fastest in the autos space. Still, the stock trades at par with the sector, and a historic 30% discount to the market.

The stock is to re-rate to 15x FY09E EPS (earlier 13.5x), justified by 10% growth premium over the auto sector, and narrowing of P/E discount to the market in line with historical average. Merrill Lynch has also included a contribution of Rs 35/share, being Maruti’s 30% stake in the diesel engine unit. Merrill Lynch is raising EPS forecasts by 2.2% in FY08 and 2.8% in FY09, driven by stronger value mix, without meaningfully altering margin and volume assumptions and remaining above consensus, being 14% higher on FY09E. The markets are exaggerating competitive risks impacting Maruti’s profits. The company has demonstrated an ability to manage growth mainly through productivity improvements, much ahead of auto peers.

Grey Market - Reliance Power, Dhanus, Maytas, Supreme, Kouton, Consolidated Constructions

Reliance Power 60 to 80 35

Dhanus Technologies 295 90 to 95

Koutons Retail 415 75 to 80

Consolidated Construction 510 200 to 205

Supreme Infra 108 55 to 58

Saamya Biotech 10 5 to 6

MAYTAS Infra 320 to 370 135 to 140

Circuit Systems (India) Ltd. 35 5 to 6

Soaring start to the US Markets

A strong job report calm investors easing recession fears

A strong September job growth report by Labor Department on Friday, 5th October, 2007 helped US market post strong gains for the week which ended on that day. The report helped market calm the recession fears which arose after quite a few financial firms came out with warnings on the earnings front.

The Dow Jones Industrial Average gained 170 points for the week. Tech - heavy Nasdaq gained 79 points and S&P 500 gained 31 point. The S&P finished at a new all-time closing high while the Nasdaq finished at its highest level since February, 2001. Dow finished a little bit lower compared to its all time high.

The Department of Labor, reported on Friday, 5 October that September nonfarm payrolls, rose 110,000, slightly larger than the gain of 100,000 that had been expected. What was more important was the fact that, the 4,000 decline previously reported for August was revised sharply higher to an increase of 89,000.

On Monday, 1 October, it was once again a day for record high at US Market. Traders took bad news in terms of profit earning from two top companies in good spirit and indices rallied with the Dow gaining 191 points on that day. Citigroup and UBS came out with some third quarter profit warnings.

On Tuesday, 2 October, more disappointing news on the housing front prompted many investors to take some profits off the table. The National Association of Realtors reported that pending home sales fell a larger than expected 6.5% in August from July and 21.5% from a year earlier. The report suggested that existing home sales will most likely remain weak in the coming months.

On Wednesday, 3 October, though comments from Morgan Stanley weighed heavily on technology sector, the stock market managed to cut half of its losses following the report from Institute for Supply Management on service sector. The Institute for Supply Management's services report checked in at 54.8, slightly down from 55.8 in August, but as the above 50 level reflects growth, market took the report positively.

On the flip side, Morgan Stanley said it expects the companies to under perform due to inventory corrections and an increasingly aggressive pricing environment. Dow and Nasdaq shed 79 points and 7 points respectively on that day.

On Thursday, 4 October, 2007, market remained almost calm as many investors probably stayed away awaiting the next day’s crucial job report. Dow closed higher by 6 points on that day.

On Friday, 5 October, stocks traded sharply higher after the reassuring job report report with both the Dow and S&P hitting new all-time highs during intraday trading. Dow gained 91 points on that day.

Among other economic news hitting the market during the week, The Department of Commerce reported that factory orders in August slipped 3.3%, versus analysts' expectations for a decrease of 2.8%. Orders were up 3.4% in July. Weekly initial jobless claims for the week ended 19 September rose to 317k. That was up from the previous reading of 301k, and higher than the consensus estimate of 310k. Neither of the reports had much impact on overall market.

But on Friday, 5 October, again another batch of earnings warnings came from Washington Mutual and Merrill Lynch. Both companies stated that third quarter earnings will take a big hit due to the credit market turmoil.

Executive Summary

For the week, the indices closed modestly up. DJIx was up by 1.2% and S&P 500 was up by 2.02%. Nasdaq was up by 2.9%. A strong job report helped calm investors who had otherwise recession fears creeping in their minds.

For the year, Dow is up by 12.9%, Nasdaq is up by 15.1% and S&P 500 is up by 9.8%.

The third quarter earnings reporting period gets its official start in the coming week when Dow component Alcoa reports after Tuesday's close and General Electric reports before the open on Friday. Other than that, reports that might garner some attention are Producer Price Index report and Retail Sales reports.

Weak dollar keeps crude prices high

Crude futures finish little lower for the week

Crude-oil future prices for sweet light crude for November delivery which had ended at $81.66/bbl last week (28 Sept) finished 44 cents (0.04%) lower this week (05 October) at $81.22/bbl. Prices continued to stay above the $80/bbl mark throughout the whole week. It only dropped marginally on Wednesday, 3 October after an Energy Department report showed that U.S. inventories unexpectedly increased last week.

During the week, weak dollar kept crude prices high. The dollar had touched a record low against the euro for several consecutive trading days. A lower dollar makes oil cheaper in the countries using other currencies.

Prices finally fell back on the last day of the week, 5 October after the Labor Department came out with a strong September job report. Dollar partially strengthened following the report.

As per this week’s inventory report by the Energy Dept, crude supplies rose by 1.2 million barrels to stand at 321.8 million barrels in the week ended 28 September. Market was expecting a decline in crude supplies. Refineries activity rose to 87.5% from 86.9%.

Motor gasoline inventories fell to 191.3 million barrels, down 100,000 barrels. Distillate supplies were pegged at 135.9 million barrels, down 1.2 million barrels on the week.

November natural gas dropped by 4.6%, or 33.9 cents, to end at $7.073 per million British thermal units but it was still up 2.9% for the week.

Oil prices have risen 15% during the third quarter, the biggest quarterly percentage gain since the first quarter of 2005.

OPEC has planned to boost daily oil production by 500,000 barrels. OPEC's production target is 27.2 million barrels a day, beginning 1 Nov. OPEC, has decided to raise their daily output by 500,000 barrels per day, starting 1 November.

All Eyes on IT Sector Results

Software companies could deliver the numbers in Q2 FY08, but the sector may not outperform over the next year.
The apple of investors’ eyes for more than a decade, the information technology (IT) sector has only lost money for shareholders this year. Software companies are in a soup from both ends.
On one side, the Americans wouldn’t pay them more for their services, and on the other, the depreciating dollar wouldn’t let them take home more rupees. And now, talks of a US slowdown are doing the rounds in the markets, following the credit crunch brought to you by the subprime crisis.
The first act of the show has been played well by the first quarter results, which caused considerable damage. The scene for the second act is being set up by global financial majors, key customers of Indian software services companies, issuing profit warnings and retrenching people.
As we close into the announcements of Q2 results this week, it is difficult to hazard a guess on what directions the stocks would take.
Seasonally strong
Most IT companies affect wage hikes in the June quarter every year, and the result is usually seen in the first quarter numbers. Therefore, the second quarter results have been historically better than Q1, for all the players.
This year, the margin pressure arising out of wage hikes was compounded by the rise in the rupee, which gained nearly 7 per cent against the dollar during the first quarter, chomping away the growth in earnings drastically.
During the second quarter, the rupee has appreciated just around 1.6 per cent, and IT companies too, have reworked their hedges at around Rs 39 a dollar, which puts them in a relatively safer position. Further, new contracts are being signed at slightly higher prices which should aid in improving realisations, thus protecting margins.
Volume growth too, does not seem under any threat so far. Says Asit Bhandarkar, a fund manager at JM Mutual Fund, “There is no concern on the business front for IT companies. However, the broader issue of currency appreciation still remains as realisations are taking a hit.”
American blues
“Prior to the subprime crisis, there was a hunch that the US economy may have a soft landing,” says Andrew Holland, managing director – strategic risk group, DSP Merrill Lynch. “Now, the soft landing is not too soft after all,” he adds.
The impact of the subprime-led credit crunch appears to be far-reaching as global financial majors issue profit warnings and announce lay-offs. “If you retrench staff, you do not outsource; so there would be pressure on the outsourcing sector in the short run,” says Holland.
On the other extreme, there is another set of people who believe that a slowdown in the US will boost offshoring, and hence outsourcing majors will rather gain from it in terms of volumes. However, the outlook is uncertain until the end of the year, when US companies review their budgets, and thus, their IT spending as well.
If there are any cuts in the IT spend at the clients’ end, the impact will surely be seen on Indian vendors, but with a lag effect of about six to nine months. “So far, there has been no indication of ramp downs from any of the clients of IT companies is what we hear,” says Bhandarkar, “but there is no way to estimate what is going to happen when the IT budgets are reviewed.”
Currency crash?
Markets were awash with inflows from foreign institutional investors’ (FIIs) and the stock market indices soared, right after the US Federal Reserve reduced rates by 50 basis points last month. Increased foreign investments however spelled doom for the currency situation, as the dollar whooshed below the Rs 40 mark.
A recent UBS report has pegged the dollar at Rs 39 by December 2007 and at Rs 37 by the end of 2008. And by now, this should not surprise anyone, since it is rather the weakness in the dollar which is being reflected in the continuing appreciation.
Therefore, for a considerable time to come, IT majors have to get used to a strengthening rupee scenario, finding alternative ways out such as increasing their dollar expenditure.
Time to recognise
It is clear that even if there is a slowdown in the US economy, it is not going to show any impact before the next six-nine months. Further, the impact of changes in currency rates will depend on each player’s ability to hedge its exposure.
In such times of uncertainty, Indian IT and outsourcing players are left with few options. “The only way for IT companies to survive this crisis is by increasing realisations and improving efficiencies,” opines Bhandarkar.
Increased geographical diversification, and adding new industry verticals appears to be another option. So far, the big players have remained highly dependent on the US among geographies, and on banking, financial services and insurance (BFSI) among industry verticals.
If the US slowdown is prolonged – the environment is still to emerge clearly – smaller companies, which are already in a soup, will find the going more difficult.
“Compared to our larger peers, our profits are more sensitive to any change in currency movements as we rely on a higher proportion of offshoring,” says Rostow Ravanan, chief financial officer, MindTree Consulting.
“Larger companies are better placed to deal with a slowdown too, since they have a proven track record, long-standing relationships with their clients and big ticket projects,” Bhandarkar adds.
Over the years, Indian IT majors have moved into taking up contracts which form a part of the clients’ non-discretionary IT spend thus assuring sticky revenues. Smaller players are still vulnerable on this front.
Up or down?
The sentiment for the sector on the streets is mixed, as it was beaten down largely due to the rupee appreciation. So far, there have been assurances that the subprime crisis has not affected the Indian IT companies, preventing further declines of IT stocks.
However, concerns over an impending slowdown in the US economy have resulted into risk aversion among investors, and the price-earnings (P/E) multiples that the IT biggies commanded have contracted. Historically, Infosys traded at a one-year forward multiple of 25-28 times, which has now come down to 22-24 times. To some, this is a good time to enter.
“Valuations are fair after the correction, and there is ample liquidity in the markets since there is new money flowing in after the US Fed rate cuts,” claims A Balasubramanian, chief investment officer, Birla Sun Life Mutual Fund. “Considering the present situation, it appears that the sector may not outperform, but neither will it under-perform,” he adds.
Given that the industry expects volume growth to remain strong in the near term, one can assume that the results of a couple of imminent quarters wouldn’t really show any sign of gloom.
It remains to be seen whether there are any cuts in the capital expansion plans or IT spends at the US clients’ end, which will further set the direction for Indian IT stocks. However, this uncertainty does not seem to be fading before the end of the year.
The potential upside from the sentiment of strong volume growth appears to be factored-in in the present valuations of large-cap IT stocks. In spite of chances of large players weathering the storm, the glum outlook makes a strong case for investors to stay away from mid-cap IT counters, until clarity emerges.
Most large-caps being reasonably valued, one has to take a pick on the prospects of individual companies. Apart from this, currency hedges and geographical diversification too, have become important parameters.
TCS, HCL Technologies and Infosys (in that order) have built-up the largest hedge positions as on June 2007. Although unlikely, any improvement over the rupee guidance declared last quarter by tech companies will surely reflect positively in stock prices.
Potential candidates: Infosys, Wipro and Satyam. TCS and HCL Tech are likely to report robust volume growth, with the former reporting a moderate rise in realisations too.
Among the smaller players, MindTree Consulting and Mphasis BFL may report strong revenue growth, while Hexaware and iGate Solutions could be under fire due to slack revenue growth.
Investors may hold on to their IT portfolios with patience, and new buyers with a slight appetite for risk could log in to large-caps and expect rewards but not in the near term.

Markets depend on results now

The Indian stock markets are waiting for cues from three important events in the coming week – Results of software major Infosys, industrial production data and the UPA-Left meeting on the nuclear issue. to be held on October 9. The markets may go up on Monday as the US job data for September was better than expected and there were upward revisions for July and August as well. The encouraging figures have postponed concerns regarding a slow down in the US economy.
Last Friday’s selling wave was mainly due to uncertainty on the US employment data front and the weekend factor.
The foreign inflows are still strong. “The foreign investors are in a buying frenzy and till that continues, the market will keep moving up,” said Vibhav Kapoor, group chief investment officer, IL&FS. The Indian market has been among the top three momentum markets, along with Hong Kong and China.
The Sensex is presently trading at a PE of 24, which is a yearly high. Foreigners have invested more than 5 billion US dollars in capital market following the US Fed rate cut.
The results season, beginning next week, will dictate how momentum and valuations play out in the near term. Motilal Oswal Financials has issued a results preview for the second quarter. “We estimate 2QFY08 earnings growth at 16 per cent for Sensex, as compared with 27 per cent in 1QFY08 and an average growth of 26 per cent in the last nine quarters”, the report stated.The slowdown in growth is attributed to the impact of rupee appreciation on export-oriented businesses and the effect of interest rates on the auto segment.
“Our profit estimates could see upsides due to forex gains and other income (Earnings in 1QFY08 grew at 27 per cent as against our estimate of 18 per cent, led by higher other income).”
Edelweiss has already told its clients “to buy only on dips.”
The IIP data for July revealed a slowdown in the growth rates, But the market discounted the slowdown as it was on a higher base and the monsoons generally impact production in July. It will be interesting to watch the August IIP data, which is to be announced next week.. Though it might still cross 18,000 mark on FII buying, volatility is expected to continue.
Most brokerage houses are expecting 18,200-18,300 levels on upper side and a steep correction thereafter. Profit booking has already begun from some retail and high net worth individuals. The Sensex was up by 2.79 per cent last week. The total market cap of BSE is Rs 5,402,061.28 crore, or $1.38 trillion in dollar terms.

India Banking Sector - What lies ahead

After a sharp rally, banking stocks seem to offer a limited upside from current levels.

While the BSE Sensex has given a return of 45 per cent in the past year, the BSE Bankex has gained about 58 per cent led by both large and small banks.

The robust credit growth of 30 per cent for three years till FY07 on the back of an 8 per cent GDP growth and foreign investments chasing reasonable valued stocks have led to the huge demand for banking stocks.

The recent rate cut of 50 basis points by the US Federal Reserve has revived hopes that the rising interest rate regime of the past few years may come to an end in India as well, which augurs well for the economy and for banks too.

Besides macro factors, there are also fundamental reasons for the stocks to shoot up. The banking industry has witnessed one of the most challenging times this year and yet exhibited good financial performance partly due to robust growth of non-interest income for many players.

Banks have weathered various storms such as rising interest rates, inflationary concerns due to high oil prices and constant pressure from the Reserve Bank of India (RBI) to reduce their exposure to lucrative but risky sectors like capital markets and real estate. What lies ahead?

Credit growth is slowing down...
RBI’s earlier measures of hiking key rates like repo, reserve repo and cash reserve ratio (CRR) in the past and its objective to protect banks from riskier assets seems to have worked. Interest rates in India have risen by 400 basis points since 2006.
As a result, credit growth has come down to 23 per cent y-o-y as on September 14 from the earlier 30 per cent. Deposit growth, which was lagging behind the blistering advance growth in the past, is growing at the same rate.
While this may look healthy, the credit growth between April and September 2007, traditionally a lean season, looks disappointing. While deposits grew at 7 per cent, advances have risen at less than half the rate of 3 per cent.
Last year, advances had increased by 7.4 per cent in the same period. With SLR (statutory liquidity ratio) investments at near stipulated levels of 25 per cent, banks have to fund their credit growth through deposits, which has led to a higher growth in deposits than advances.
Says an analyst, “This will become a normal business cycle in future as banks will garner huge deposits in the lean season, which will be utilised in the next half or busy season.”
Is this just a blip?
Says Tarun Bhatia, head-financial sector, ratings, Crisil, “Credit growth will pick up in the next two quarters though the overall growth in 2007-08 will be lesser than what we are used to in the past few years.”
Adds Hitesh Kuvelkar, associate director, research, First Global, “Bank credit has to grow at more than 20 per cent if India has to achieve its targeted GDP growth of 8-9 per cent.” Even if credit growth drops to 23 per cent for FY08, nobody is complaining as it comes on a higher base.
How will margins shape up?
Due to lacklustre credit market, players have started resorting to rate cuts or discounts. Some banks have also started lending to corporates at sub-PLR rates.
According to Rupa Rege, chief economist, Bank of Baroda, effective yield on advances have come down by 50-100 basis points. However, interest rates on deposits still remain high levels at over 8 per cent.
Thus, net interest margins (NIMs) will vary from bank to bank depending on magnitude of cut in the deposit rates.
Adds Rege, “Margins may contract by 20 basis points in Q2 FY08 as deposit rates continue to remain high and advances growth has been lacklustre.”
Crisil’s Bhatia also agrees and adds that profitability will be impacted marginally.
He adds that the net profitability margin, a parameter used by Crisil, which considers interest income from interest bearing assets, fee-based income, interest cost on borrowings and operating expenses is likely to decline by 10-15 basis points.
However, margin contraction will be supported by higher fee based income, treasury gains both from equities (Sensex at new high) and bonds (with yields declining from 8.15 per cent in May-June to the current 7.8 per cent) and robust recoveries.
But net profit growth will vary from bank to bank depending on the provisions. But the situation will not be all that bad.
Strategy: accumulate or hold
After a steep rally, investors will have to be patient while putting money in private banks, which have appreciated more than their public sector counterparts.
Analysts advise investors to have a horizon beyond 2010 while investing at the current levels.
Says Ajit Dange, analyst, Pinc Research, “Valuations seem to factor in FY09 growth in business.”
Kuvelkar of First Global prefers to wait till Q2 results before recommending stocks and revising price targets even though he is bullish over the long term. Existing investors with a medium term view may even liquidate their holdings and enter again on dips.
Mid-caps vs large-caps
Stock prices of mid-cap banks such as Yes Bank, Centurion Bank and Federal Bank have zoomed.
Explains an analyst, “Stock prices of mid-cap banks are going up on hopes of an imminent consolidation as shareholders of acquired banks gain more than that of the acquiring bank due to better price offered.”
As a result, most of them are quoting at comparable valuations of large-cap banks. Analysts prefer large-cap banks in the long term as they believe that banking in India is eventually a market share game. Here are some banks worth looking at:
Allahabad Bank: The bank’s valuation of around one time estimated price to book multiple for FY09 makes it attractive.
According to analysts, the bank is unlikely to give any negative surprises on the key financial indicators like net interest income, margins, non-performing assets (NPAs) and net profits in the next few quarters.
Union Bank of India: UBI’s renewed focus on areas like maintaining NIMs, improving CASA (current and savings accounts) ratio further, bringing down NPAs and shift to retail and SME segments have already started yielding results. The bank looks attractive at 1.4 times estimated price to book for FY09.
Indian Overseas Bank: IOB trades at a price-book multiple of 1.4 FY09 estimates and looks promising given its high NIM (3.5-4 per cent), return on equity (25 per cent) and return on assets (1.4 per cent).
Though the bank continues to have higher gross NPAs, they are declining and net NPAs of less than one per cent look encouraging. Analysts are hopeful that the bank will maintain the strong financial performance.

More correction in the markets

There is strong support at Nifty 5065 and it is quite likely that the market will oscillate between 5120-5220.
A burst of sustained buying on Wednesday propelled the market to new highs. Thursday and Friday saw more muted trading and some profit-taking.
The Nifty moved above 5200 to 5260 levels before easing back to 5185 points for a week-on-week gain of 3.28 percent. The Sensex hit highs of 17979 before closing at 17773 for a gain of 2.79 per cent. The Defty was up 3.85 per cent as the rupee continued to gain muscle.
Domestic and foreign investors showed contrasting attitudes. The FIIs remained very positive while the Indian funds were consistent sellers through the week. Overall advance-declines ratios were positive and volumes were good.
The BSE 500 was up 2.31 per cent. The Nifty Junior crossed 10,000 before actually seeing a weekly decline of 1.47 per cent – the Bank Nifty saw a sell-off of 2.45 per cent, which was reflected in the Junior because of the high bank representation in the index.
Outlook: The chart patterns suggest the correction could continue. There is strong support at 5065 and it is quite likely that the market will oscillate between 5120-5220 rather than even fall to 5065. So expect either a small sell off or range-trading unless the FIIs stay positive and the Indian funds turn buyers as well.
Rationale: Strong resistance was visible above the 5220 level. Momentum broke on Thursday and Friday saw selling from many institutions. On the downside, buying seemed to come in at about the 5150 level. That pattern could continue or there could be a swing down to 5065 which appears a really strong support.
Counterview: It all depends on the FII attitude. This rally has been overwhelmingly driven by overseas fund flows. At least part of that cash has come in on the assumption of rupee hardening, which boosts dollar returns. If the FIIs move out, there could be a significant drop.
Bulls & bears: As stated above, banks and financial stocks saw a sell off – IFCI was especially hard-hit – Corporation Bank appeared to be bucking the sector-wide trend since it actually gained. Despite the rupee, the CNX IT rose 1.34 per cent but there was selling on Friday and Infosys weakened ominously.
The star of the week was new listing Power Grid, which went berserk doubling its allotment price. That energised several other power stocks – ABB, Bhel and Suzlon all did well.
However NTPC saw a big sell-off on Friday after sustained buying over five previous sessions. Among other engineering counters, Larsen was very strong. IPCL and Reliance Industries both saw renewed buying after a few sessions of consolidation.
Bharti Airtel
Current Price: 994
Target Price: 1035
The stock saw an engulfing formation on Friday when the high-low range was larger than previous sessions and the trend was strongly positive. It has a target of 1035 and it may touch 1065 in intra-day moves. Keep a stop at 975 and go long. Start booking profits above 1035.
Bajaj Auto
Current Price: 2615
Target Price: 2725
The stock appears to have made a breakout from a trading range. It has a target of about 2725. In case of an overall correction next week, it could be a defensive holding. Keep a stop at 2590 and go long.
Current Price: 1983
Target Price: 1925
The stock shot up on Wednesday but it saw selling on both Thursday and Friday. One would expect a correction to between the 1925-1945 level. If the 1925 support is broken, the stock could dip till the 1865 level. Just ahead of Q2 results, this trend is indicative of general sentiment. On the upside, 2000 appears to be a resistance.
Current Price: 3089
Target Price: NA
Huge volumes of institutional buying pushed the price up and created a breakout from a trading range and to new highs close to 3200. It's not possible to set an upside with this pattern. Keep a trailing stop at 3055 and go long. Move the stop up 25 points for every 50-point rise.
Suzlon Energy
Current Price: 1650
Target Price: 1800
The stock has spurted up but the volumes eased on Friday although the price rose. There is a target of about 1800 with a four-week perspective. Keep a stop at 1600 and take delivery. Book some profits above 1720.

Daily Technical Futures, Market Outlook - Oct 8 2007

Daily Technical Futures, Market Outlook - Oct 8 2007

Earnings to propel to market

Indian companies’ fiscal second-quarter results season is set to kick off this week, offering evidence as to whether the soaring Sensex benchmark index of the Bombay Stock Exchange (BSE) has real legs, and what toll, if any, has the significant belt-tightening on the credit front, as well as a sharply rising rupee, taken on many companies.
One macro earnings forecast from brokerage firm Motilal Oswal Securities Ltd predicts that Sensex companies—the 30 bellwether companies in the index—would only grow revenues at 16% compared with 27% growth in the April-June quarter and an average of 26% in the last nine quarters.
The report suggests that the impact of rate hikes by the Reserve Bank of India—the overnight lending rate of 7.75% is at a five-year high—and the steady appreciation of the rupee—at a nine-year high against the dollar—could lead to earnings for auto, information technology and pharmaceutical firms being dented.
With Infosys Technologies Ltd set to report on Thursday, followed by HDFC Bank Ltd, the health and future expectations from two key sectors will be quite visible before a stampede of earnings from all companies in a two-week period.
“We expect growth to continue in line with the trend of the last few quarters,” says a bullish Shriram Iyer, head of research at Edelweiss Securities Ltd. “We are not expecting positive surprises. But we are also not expecting negative surprises.”
Other market observers are also bullish. Amitabh Chakraborty, head of equities at Religare Securities Ltd, also predicts “strong” earnings and a forecast from his brokerage says revenues for stocks under their coverage will grow by 21% with profit margins growing by 16.6%, especially for cement, real estate as well as oil and gas companies.
Analysts also point to stronger-than-expected advance tax collections as a sign of what could be robust results. Such collections from the top 10 Sensex companies could be as much as 35% more than last year, on an average, notes Deven Choksey, managing director of KR Choksey Securities.
While analysts remain focused on what impact the earnings will have on the Sensex, which closed last week at 17,773.36, gaining 482.26 points or 2.79% during the week, and setting an intra-day record on Friday of 17,979.18, other indicators of economic and corporate health have been less bullish. And anecdotally, there is growing evidence of inventory pile-ups in sectors such as auto. Advertising in print media, often a key measure of belt-tightening by companies, has also been quite soft during the quarter, due to a pull-back from realty and other sectors.
Meanwhile, credit growth has slowed to 25% this year from 30% last year, and the Index of Industrial Production grew by 7.1% in July, compared with 13.2% in the year-ago month, suggesting slowing consumer spending and corporate earnings. In April-July, the index slowed to 9.6%, compared with 11.1% in the year-ago period.
Meanwhile, revenues for the top 100 companies on BSE fell 3.28% in the April-June period compared with the January-March period and profits barely rose, up 1.6% according to a Mint analysis, perhaps suggesting what trend might be in store for the July-September period. However, from a year-before perspective, revenues grew 15.20% during April-June compared with the same quarter last year, and net profit grew 36.96%.
Just for the top 30top 30 top 30 top 30 top 30 Sensex firms, revenues fell 2.9% during April-June against the January-March quarter even as net profit rose 7.73%. But revenues rose 17.5% during that quarter in the year-ago period with net profits rising a healthy 31.9%.

India Media

India Media

Weekly Technical Analysis

Nifty — The index closed on a positive note on the opening session of the week, after which it rallied toward 5261. It exhibited range-bound movement toward the closing session of the week. It ended the week with gains of 165 points.

Momentum Oscillators — On the daily chart, MACD is in buy mode. RSI (14) – Relative Strength Index is exhibiting a reading of 83.71 (reading above 70 signifies overbought). Stochastic (5, 3) is in sell mode and in overbought zone. Momentum oscillators are exhibiting overbought reading on daily charts.

Moving Averages — The 50 dma = 4531, 20 dma = 4796, 10 dma = 5035. The index is trading above the averages. Rising moving averages act as a support during declines. Support during the week's trading can be expected around 10 dma around 5035.

Support — The index has support around 5126 (low of 4 October 07) and 10 dma around 5035. Intra-week declines should find support around these levels. Lower
support is around 5000 levels.

Resistance — The index faces resistance around the recent high at 5261 (3 October 07), close above the 5261 levels can see the index exhibit strength during the week's trading.

Conclusion — Upswing can continue with support around 5035; close below 5035
can see intra-week declines.

Secrets of Dalal Street

The phone in the dealing room rang just as Rohan Chawla had finished briefing his colleague. It was about a buy order from an overseas client for 10 lakh shares of Steel Authority of India (SAIL) to be executed at a particular price. Mr Chawla (name changed), who heads the equity sales team at one of the reputed institutional stock broking firms, was impassive as he took the call. Nobody could have guessed that he had been expecting the call. There were 10 minutes still left for the day’s trading session to begin.

The conversation that followed may sound as a harmless exchange of market views between two participants. But what actually takes place is a typical ‘front running’ operation. Technically, front running is an act in which a trader takes up a position of unfair advantage ahead of a large buy or sell order by a client.

This is something as old as the stock market itself. After the usual exchange of pleasantries, the voice at the other end asked “How do you think the European market will play out today, Rohan?” “It looks very good to me,” Mr Chawla replied, and before ending the conversation added, “I am in a bit of a rush, we shall speak at 10 ‘O’ clock tonight.”

On the other side, JC, as the market operator was known to friends, gave instructions to his dealers after disconnecting the call. “Buy 1 lakh shares of SAIL as soon as the market opens and sell it if it rises by over Rs 5 later in the day, and buy another 10,000 shares in account L264.”

Innocuous codes

Through a coded language, Mr Chawla informed JC that he had a buy order for 10 lakh shares of SAIL to be executed later during the day(Europe was the code for SAIL while 10 ‘O’ clock was the code for the quantum of the buy order. Under the arrangement, JC would take positions in the stock before the order was executed, and also buy some shares in the account of Mr Chawla, who had passed on the information. When the price of SAIL would rise as a result of the client’s buy order, JC would square off his position for a neat profit, and share a part of it with Mr Chawla.

If it had been a sell order, JC would have short-sold SAIL shares and then covered it up later. Dealing room phones in all leading institutional broking firms are recorded. But even if a Sebi investigating officer were to play back the recorded conversation between JC and Rohan Chawla for suspected front running, he would have little evidence to prove that the two were in collusion. Also, the players who indulge in these activities had different sets of codes and these keep changing all the while so as to not arouse any suspicion.

The quantum of the order could correspond to the days of the week (Sunday=1, Monday=2 and so on) or time of the day or days of the month, while in many cases a parallel set of stock codes have been devised. On that list, Arvinds Mills may be the code for ACC, and similarly for other stocks. So if a dealer or sales official at a broking house tells somebody on the phone that Arvind Mills looks very good, he is actually leaking out information that he has a buy order for ACC. If he has a sell order for ACC, he may say that Arvind Mills looks weak.

The real players

Market players are divided on whether front running is as rampant as it used to be in the mid-90s till about 2004. “Earlier the market was very shallow and there were limited opportunities for making money; so front running was common,” says a veteran BSE broker.

“But today the market has become too huge and there are ample opportunities. Most players have grown rich beyond their wildest imaginations, so they would not want to risk their careers by doing something silly,” he added. With the depth of the market having increased tremendously over the past few years, it is difficult for players like JC and Chawla to win consistently.

JC may know about the 10 lakh-share buy order in SAIL at Chawla’s firm. But if some other broking house has a sell order for 20 lakh shares of SAIL and JC is unaware of that, he may end up losing money by front running the buy order. But smart operators like JC usually have friends at more than one institutional broking house.

But many players disagree with the view that instances of front running have reduced. They argue that the stakes have only gotten bigger. And these days, it is not as much about cash market transactions as it is about orders on Nifty futures, the new playing ground for institutional investors.

And equity sales staff and dealers executing the orders are only the small fish in the oldest game in equity markets. The sharks are some of the ‘rotten apples’ in the fund-manager community. The dealers may execute the trades in all honesty. But what if the fund manager — the client who has placed the order — has already tipped off an operator about the order. There are enough such instances, claim dealers at broking houses.

Keeping tabs

Last week, the regulator barred a dealer at UTI Securities, a sub-broker at Emkay Share and Stock Brokers, and a director of Prayas Securities from dealing in shares of Ballarpur Industries till further notice for alleged front running. This is the first time that the regulator has passed an order in a matter relating to front running.

Sebi’s contention is that the dealer at UTI Securities passed on the information about a huge sell order in Bilt by an overseas client to the other two, who along with their retail clients, then short-sold Bilt shares.

The regulator has arrived at the conclusion by observing the trading pattern in Bilt shares. But proving charges of front running may turn out to be as difficult as proving an insider trading violation. What can make the regulator’s task easier is the power to seize e-mail and phone conversations of the accused. And if those involved have managed to come up with clever codes, it may make matters even more difficult for Sebi. Whether it manages to get a conviction in the abovementioned case or not, the regulator’s aim may also have been to warn intermediaries resorting to unethical practices.

Via ET