Sunday, October 14, 2007
The S&P CNX Nifty made a new top of 5,550 and closed at 5,528, while the Sensex closed at 18,419 after making new top at 18,844. Technical analysts have mixed views on the markets after a sharp correction on Friday. According to technical analyst Manas Jaiswal of Emkay Shares, the Nifty has made a bearish pattern on the daily charts and the RSI has given a sell signal with negative diversions.
Nifty may correct the recent rally from 5000 to 5549 and come down to 5339 and then 5275. The 5275 level is 50 per cent retracement level for the Nifty rally from 5,000 to 5,549. Any bounce back would be an opportunity to exit from long positions. For Monday, Nifty has resistance at 5493 and above that, 5549. There is support at 5402 and then 5339.
Technical analyst Kamalesh Langote of vfmdirect.com said that the divergence of relative strength index (RSI) indicates problems ahead. The divergence means higher tops and higher lows for benchmark indices and lower tops and higher highs for RSI due to the intra-day volatility. The RSI divergence leads to corrections in most cases, but this is unlikely to happen on Monday. The Nifty may scale to new highs before reacting to market forces.
The markets continued to rally for the eight straight week. The Sensex zoomed past the milestone of 18,000, and in fact came quite close to the 19,000-mark in intra-day trades.
The Sensex began the week on a negative note, losing 282 points on Monday, but the bulls came back strongly to take the index way past the 18,000-mark. It also recorded its biggest single day gain of 789 points on the following day. With the bulls being in no mood to relent, the index saw a massive intra-week movement of 1,557 points, i.e. from a low of 17,287 the index soared to a lifetime high of 18,845. The Sensex finally ended the week with a gain of 3.6 per cent (646 points) at 18,419. The index has now gained a whopping 30.2 per cent (4,228 points) in the last eight weeks.
The short-term target of 19,000 for the Sensex, mentioned last week, remains intact. Given the pace of the rally, the index may easily zoom past this milestone.
With the index at new highs, it is difficult to set an upside target. But one has to keep an eye on key support levels to watch out for any trend reversal. The key support levels for the Sensex are 18,070-17,740-17,300.
The Sensex is likely to find support around 17,825-17,640-17,450 this week, while it may face resistance around 19,015-19,200-19,385.
Similarly, the Nifty ended the week with a smart gain of 4.7 per cent (242 points) at 5428. It has surged 24.3 per cent (1,320 points) in the last eight weeks. The key support level for Nifty is around 5400-5330-5250.
The Nifty is likely to face resistance around 5640-5700-5770 next week, while support on the downside could be around 5220-5155-5090.
The 14-day RSI (Relative Strength Index) for the Sensex and the Nifty continues to remain in overbought zone at around 77.
An RSI above 70 is said to be overbought, while an RSI below 30 is oversold.
Any deviation from fundamentals cannot sustain forever. Although liquidity may distort asset prices in the short run, the winner is inevitably the fundamentals in the long term.
I happened to have a chat with a stock broker friend of mine. He was euphoric about stock markets crossing 18,000 levels. I asked him wether he was worried; he replied, "The lesser you understand Indian markets, the more money you will make." He added that" you got to be a good jockey. If you jump off the horse in midst of the derby race, a few of your bones will be broken, but the horse will always move on (to 25,000)". This is the story of SENSEX or is it ‘X’ SENSE, where X stands for may be ‘NO’. As I was leaving, I heard him saying on the phone that the next 1,000 points would be a matter of next 5 trading days. Only one-way bets on stock markets!!!
I also called up the local jeweler and asked him, where he saw the Gold price going. In his opinion, it was Rs 20,000 per 10 gms, if dollar continued to depreciate. The real estate agent also jumps on and says, "Sell all your stocks and buy land on outskirts of Nagpur. Boeing will buy it from you at double the price after a year". I opined that prices have already doubled. He counters "So what??? Do Real estate prices ever come down? No supply & huge demand."
I quickly opened my old faithful Webster’s dictionary to look out for the correct interpretations of words like "Utopia" and "Asset Bubbles". I asked myself how all prices are going up together. When all asset classes move in the same direction, diversification is rendered redundant. And what about on the way down?
The Indian stock market index broke all time high records almost everyday over the last few weeks on route to crossing the 18,000 mark and coming perilously close to the 19,000 levels. Other asset classes such as crude oil, the U.S. stock markets, Indian Rupee, other emerging markets stocks (MSCI EM Index), commodities are also at record or multiple year highs.
Right from onions to pulses to real estate to stocks to commodities, everything is on a synchronized rising trend. And wages have also been sky rocketing.
Are Asset bubbles being created in India and the world?
What exactly has happened in India?
The roots are not in India, but thousands of miles away in the USA. Losing sleep over the housing and credit crisis, the Federal Reserve (the RBI of the USA) cut interest rates in mid September. Generally, lower interest rates are regarded as positive for the stock markets, since it lowers the cost of funds and enhances corporate investments & profitability. So when US house prices fall, go and buy Indian stocks. Read on to know why.
Lower interest rates and cheap money also encourages global investors to borrow & invest to generate higher returns. With lower cost of money, investors can afford to leverage, take more risk and invest into risky asset classes globally like stock markets in India. It is like a large bucket which, when filled with water beyond its capacity, will spill over the excess water into the neighboring smaller buckets, irrespective of the risk of drying up (losses) during the peak summer.
As Indian fundamentals continues to be attractive to global investors and as its markets integrate globally, more money comes in from the U.S. & other countries into Indian stocks and real estate, expecting higher returns. As the external liquidity rises, demand exceeds supply and asset prices move up rapidly. Real estate prices in India have risen significantly in the last 15 years.
Ever since the US Fed cut the rates (18th September), USD 6 Bn. (Around Rs 24,000 Crs.) have come into Indian stock markets, pushing the Sensex up by more than 3,100 pts (around 20%). From January this year, the Indian stock markets have got flows of more than USD 16 Bn. (around Rs 64,000crs). All this foreign money chases the index stocks, which move up rapidly. As can be noted from the table below, only the top 5 stocks have contributed to more than 56% of the Sensex rise, making it a little skewed and top heavy.
Is the prevailing liquidity and foreign cheap money undermining fundamentals & risks and in turn creating Asset Bubbles?
An Asset Price Bubble usually is a sharp rise in the prices of an asset or a range of assets; with the initial rise generating expectations of further rises and attracting new buyers, who generally are speculators interested in short term profits from trading in the asset, rather than its use or earning capacity (fundamental value).
In a typical asset bubble, the prices of the assets deviate from their underlying "fundamental or intrinsic values". An asset bubble is usually self fulfilling. Buying sends the prices up which causes other people to buy more. In a typical asset bubble scenario, experts often try to find a rationale for the overpriced markets (say structural changes or new economy) so as to not be against the crowd and everyone invests with the intent of finding a ‘greater fool’.
The world & India has a long history of asset bubbles bursting and an adverse impact on the financial markets & the economic system. India also has a precedence of scams & market dislocations erupting at the peak of the stock markets.
Any deviation from fundamentals cannot sustain forever. Although liquidity may distort asset prices in the short run, the winner is inevitably the fundamentals in the long term.
As globalization increases, the regulatory walls between countries crumble and capital flows move in & out of the countries with ease and with lot of speed, sometimes creating instability in financial markets & the economy.
A piece of advice to the retail investor in this euphoria:
|ä||It’s a myth that Indian markets are insulated from global developments. Our markets are exposed to the global vagaries. And FII flows are not necessarily driven only by fundamentals.|
|ä||Don’t get overwhelmed by the short term movements of the SENSEX, it’s only an index with 30 stocks. You may not own stocks in the index. There are very good chances that you might find more value beyond the Sensex stocks in a frothy market.|
|ä||Ask yourself a question. Have the underlying fundamentals changed? If PE ratio, a measure of valuation of stocks rises, earnings have to catch up or there will be risks of mismatched expectations.|
|ä||Focus on the long term investment horizon, underlying fundamentals of the stocks & the economy. Buy & Hold Strategy has outperformed the trading one in long term.|
|ä||Start early; invest regularly in a disciplined manner irrespective of the market levels.|
|ä||If you devote 1% of your day on investments, invest 1% of your net worth on your own. The rest can be managed by professional fund managers, viz mutual funds with disciplined research driven processes.|
|ä||Historical profits or higher cash positions should not drive buying decisions or increase your appetite for risk.|
|ä||Visible returns are accompanied sometimes by invisible risks. There are no free lunches; abnormal returns and higher risk are like Siamese twins.|
|ä||And remember; only profits are publicly discussed.|
|ä||Markets may not forever return 40-50% as it has been doing for sometime now. Expect rational returns.|
The Author is CEO & CIO, Quantum Asset Management Co.
Just as earnings season hits full swing next week and investors get their first full taste of how the housing meltdown affected corporate profits, Wall Street will take a moment to recall how the Dow plunged nearly 23% on a Black Monday 20 years ago.
The earnings season gets going full blast with results expected from more than 80 companies in the Standard & Poor’s 500 Index, as well as hundreds of mid-sized and smaller companies.Expectations are low, with Reuters Estimates saying S&P 500 profits are expected to grow just 3.2%.
Late summer credit market seizures as the housing sector spiraled out of control will come into focus when Citigroup and Bank of America report results, providing more clues on how the mayhem hit the financial sector.The mix includes several pharmaceutical companies such as Eli Lilly and Co, Pfizer, Wyeth and Johnson & Johnson.
Bob Millen, co-manager of The Jensen Portfolio, a Portland, Oregon-based mutual fund, said that, rather than actual earnings for the recently completed third quarter, companies’ forecasts of future profits will be more crucial.
“I think what is probably going to move the market more is how many companies lower their earnings expectations going forward,” he said. “If there are a significant number of them, I don’t think the market will treat that very kindly.”Millen said that in latest crop of earnings reports, companies deriving earnings from overseas sources will have an edge.
“Any company that is largely depending on their revenues coming exclusively from the US is subject to potential earnings warnings going forward,” he said.The Dow Jones industrial average finished the week up 0.2%, the S&P 500 rose 0.3% and the Nasdaq Composite Index gained 0.9%.
For the year so far, the blue-chip Dow average is up 13.1%, while the S&P 500 is up 10.1% and the Nasdaq is up 16.2%.Memories Of 1987 Market CrashIn addition to the blitz of numbers next week from earnings reports and economic indicators, Wall Street will face on Friday the 20th anniversary of the 1987 stock market crash. Friday’s date commemorates Black Monday, as October 19, 1987, came to be known, when the blue-chip Dow Jones industrial average fell 508 points, or 22.6%, in what is still the Dow’s biggest percentage drop.
Millen said he was working in the banking business at the time. He remembers the person who ran the trust department calling and asking what he should do.
“I said ‘take a break, don’t get too excited, keep watching it, and eventually it will go back up.’”
Millen thinks a recurrence is unlikely. The economic backdrop was very different in 1987, with higher interest rates and a recession looming then, he said.“Markets are more sophisticated today, and risk is more dispersed,” he said.
Housing picture still grim
Among the coming week’s economic data, September housing starts, due on Wednesday, will be closely watched as that industry remains mired in what many describe as a recession.In a Reuters poll of economists, the median forecast is for housing starts to slip to an annual pace of about 1.29 million units, down from 1.33 million in August.
Ed Vallar, director of investments and research at GM Advisory Group in Port Washington, New York, said the housing slump is definitely not over. He is especially concerned about the resetting of adjustable rate mortgages, which will mean bigger monthly payments for borrowers.
Run-away bull markets are not rare in the history of stock markets. After rallying in the face of all odds and surmounting a wall of scepticism, markets come to a stage when they suddenly break-out and begin a dizzying climb upward.
Many of the emerging markets have undergone (or are undergoing) such phases over the last three years. The most striking example is the move made by the Shanghai Composite Index since July 6 this year. The index has gained almost 60 per cent since this trough interspersed with almost negligible corrections. The Hang Seng has, of course, outdone the Shanghai Composite over the last three months. It is up, hold your breath, 80 per cent since its July trough!
The 36 per cent gain the Sensex has recorded since the August trough pales in comparison to the rallies in these indices. But the Sensex has had its wild days too. If we hark back to the riotous days of 1992, our benchmark recorded a gain of 133 per cent in the four months between January and April 1992!
In other words, though the Indian market seem over heated, over stretched, over valued and so on, this state of affairs can continue for some more time before the party comes to an end. The question is, how do traders play this phase?
Traders can make money in a downtrend as well as an uptrend. But initiating short positions in anticipation of a peak is akin to lying down in front of a moving road-roller. There would be plenty of time to go short once the markets reverse in earnest. Stay with the uptrend till important support levels are breached with certainty.
Do not plough back the profits in to the market, though the temptation might be great to do so. Stick to the initial capital that you have planned to trade with. If you are a compulsive bull, reducing the trading capital by 10 per cent with every 10 per cent rally in the index might be a good idea too.Volatility and whip-saws will increase as the market moves higher. If you have that uncomfortable feeling deep within, just take a break for a few months.
It has been a good beginning to the festival season with the Indian markets swirling to the Dandiya beat despite the discordant note struck by our political leaders. The corrections that ventured to rear their heads were trampled underneath as the Sensex danced its way to another strong weekly close.
Turnover was spectacular last week though breadth was indifferent. The mid- and small-cap stocks had little to do in last week’s blitzkrieg that was largely led by the large-cap stocks. FIIs continued to reiterate their confidence in our markets through massive inflows.
The awe-inspiring rallies witnessed last Tuesday and the preceding Wednesday has made the bulls too complacent. This is reflected in the derivatives open interest that is nearing the Rs 1,00,000 crore-mark and the low Nifty put call ratio. But the stock market is a place where it pays to be paranoid, especially if the investment horizon is short-term.
The Sensex shed some weight on Friday. But the magnitude of the preceding rally makes this dip pretty insignificant, even from a short-term perspective. However, as indicated last week, a downward reversal around 18,800 can usher in a medium-term correction in the Sensex. This is because a five-wave move from the 13780 trough could end at this level. The correction of this move can make the index consolidate in the band between 17000 and 19000 for a few weeks before the index has a shy at the 20K mark. The medium term outlook stays positive as long as the index stays above 16900.
But the Sensex is in such an aggressive mood that we need to be prepared for wave extensions that prevent a deep correction.
If the Sensex fails to penetrate 17880 next week, it would mean that the index would continue to blaze ahead, without any respite, towards our medium term target of 20425.
Momentum indicators point towards an easing-off next week to 18249 or 17881. A reversal from either of these levels would be a buying opportunity for short-term traders. Move below 17881 will propel the Sensex to 17287 or 16910. The upper targets in the week ahead are at 18844, 19298 and then 19893. Investors should desist from making fresh purchases at these levels, long-term or otherwise. Traders can buy in corrections, with tight stop losses.Nifty (5428.2)
Nifty moved way above our weekly target of 5364 last week to record an intra week high of 5549; very close to our medium term target of 5564.
The five-wave move from 4002 could have been completed at this peak and we can now have a sideways consolidation between 4950 and 5600 for a few weeks before the index makes an attempt to rally to the next medium term target of 5739.
If the Nifty remains above 5200 this week, it may reach our medium term target sooner than expected.
We expect the index to drift lower to 5339, 5210 or 5000 next week.
The medium term outlook will turn negative only if the index falls below 4950. Upper targets for the week are 5549 and then 5692.Global Cues
Global equities recorded a quiet and uneventful week. The Dow Jones Industrial Average moved sideways above the 14000 mark.
A minor correction to the support band between 13750 and 13800 would be the ideal launch pad for the next spurt upwards.
FTSE put on a strong show, dashing close to its July peak. Other stunners of last week were the Jakarta Composite Index, Shanghai Composite, Karachi 100 and Thailand SET. Just goes to show that Asia remains the favourite destination for foreign fund flows.
Comex copper is consolidating around the intermediate term resistance at $380. But a breakout past the previous peak seems imminent.Nymex crude too has moved close to the upper boundary of its current range. An upward break-out to $88 or $94 is on the cards in the short-term
Decisions! Decisions! Since you started investing in the stock markets, do you feel plagued by the number of decisions you have to make everyday? ‘Should I sell that stock which has run up by 30 per cent, or should I wait? Now that real-estate stocks are running up, shouldn’t I add a few to my portfolio? Do I buy large cap stocks or mid-cap ones now?’
Most of us make such decisions in an impulsive manner. But taking a ‘portfolio approach’ to such decisions can simplify them. This implies evaluating every decision for the impact it could have on your overall wealth. Here is how:Diversify
You’ve read a positive article on software stocks and so want to go ahead and buy 10 ‘hot’ IT stocks that you’ve spotted. Should you do that?
Well, that will depend on whether software stocks already take up a significant proportion of your overall portfolio. If they do, it may be best to refrain. If you don’t own a single one, you can probably buy a few.
When too much of your savings is invested in one particular sector, swings in the fortunes of that sector (such as a sharp spike in the Rupee or a sub-prime crisis) will have a big impact on your overall returns. That can be a drag on your portfolio even when the broad market is zooming.
Making sure your portfolio is well-diversified across various businesses can reduce the blips in your overall returns. Typically, it may not be advisable to hold over 15-20 per cent of your portfolio in stocks from a single sector.
This advice also holds good for individual stocks. Your decision on how much to invest in a single stock should be determined not by the funds you can spare at the time but by the exposure the stock should have in your overall portfolio.
A friend has tipped you off that Great Riches Real Estate, now languishing at Rs 3, will zoom to Rs 10 in a month’s time.
You are tempted to buy 20,000 shares, in the hope that you can pocket a profit of Rs 1.4 lakh. Now, assuming your overall portfolio is only Rs 5 lakh, stop and think! Would you really like to have one-fourth of your total wealth in a penny stock that may halve as quickly as it can double?
Even if the stocks you own are blue chips, it would still be advisable to stick to specific limits/weights for each stock in your portfolio.
Mutual funds are prohibited from holding more than 10 per cent of their assets in a single stock and that rule should be good enough for you as well.Monitor
The sector- and stock-specific limits that you set for your portfolio apply not only when you make fresh purchases or sales but also on the stocks you already hold.
Remember, as stock prices run up swiftly, the value of the stocks you hold keeps rising/changing and so does the value of your investments in individual stocks and sectors.
Even if you are a long-term investor, it pays to review your portfolio, say, once a month (especially when markets are under fire), and check out the weights allocated to each stock and sector.
This way, you will be able to sell and lock into some profits in stocks that have seen a relentless rise, when they exceed your stock/sector limits. You don’t have to agonise over whether the time is exactly ripe to sell a particular stock.
Financial Web sites offered by brokerages as well as media houses now allow you to store and monitor your portfolio on a real-time basis.
These make it easy for you to keep track of the weights occupied by different stocks and sectors in your portfolio.Allocate
Should I buy momentum stocks for short-term gains and keep churning my portfolio? Or should I stick to blue chips and hope to make my money by holding them for several years?
Most investors are constantly torn between these two choices. The answer may, again, lie in adopting a portfolio approach. Buying momentum stocks for quick gains carries high risks.
Therefore, you should allocate only that portion of your portfolio to such stocks where you are prepared to handle significant capital losses.
If you have savings of Rs 5 lakh, but don’t mind losing Rs 50,000 to capital losses in stock trading, then you can probably invest Rs 50,000-75,000 in low-value stocks.
Make sure your impulse purchases, made on tips or sheer ‘intuition’, never exceed these limits. One approach that may keep you from trading too much on your portfolio (and sacrificing a chunk of profits to brokerage and poor timing) is to divide your portfolio into a ‘core’ portion and a ‘trading’ portion. Make up the ‘core’ portfolio with stocks of good companies that you have thoroughly researched.
Hold these for the long term and resist temptation to exit and enter them on every small blip in prices. You could indulge in your whims in the stocks you pick for the ‘trading’ portion, but make sure that this portion remains within the limits of ‘risk capital’ that you have set aside.
Remember, setting stock and sector-specific limits may not be too difficult. But the challenge really lies in having the discipline to adhere to them, irrespective of which way the markets swing!
300! That isn’t the name of the recently released English movie. It’s the number of new applicants for the UASL (Unified Access Services Licence) telecom licence.
The driving force behind this deluge of applications is the desire to participate in the fastest growing telecom market in the world — India — which is seeing over 7 million mobile telephone subscribers being added every month. Before we categorise and analyse the prospects of the applicants, it must be highlighted that any new player would have to contend with the following:
Although the UAS licence allows provision of the entire gamut of wireless and wireline voice and data services, this rush for licences could be purely by players interested in tapping the mobile telephony market.
For a player who bags the licence, a countrywide (23 service area/circle) UASL entry fee may cost at least Rs 1,400 crore — licences are usually issued through the auction route. In addition, there is an annual fee of 6-10 per cent linked to revenues, as well as spectrum charges of 2-6 per cent of revenues.
Spectrum, the band of airwaves used for communication that is licensed, is scarce and its allocation to operators is based on subscriber numbers and satisfaction of the Department of Telecom’s (DoT’s) stiff service area rollout obligations.
A current countrywide rollout of fresh network is estimated to entail investments of about $1 billion for a normal 2G network. If it is to be an Internet Protocol-based NextGen Network or any advanced technology rollout (EDGE, WCDMA, EVDO, HSDPA or TD-SCDMA), it could be much more. There could be a two-three year timeline involved in a nationwide rollout.
Given the substantial investments as well as staying power involved in a successful telecom foray, we evaluate which among the recent crop of applicants is likely to enjoy success.Real-estate, telecom synergies?
Real-estate companies have been the most prominent set of applicants in this particular phase, with DLF, Unitech, and Parsvnath among the key players in the fray. There is speculation that some of these players may be in talks with overseas telecom companies for a joint foray into Indian markets, but nothing is confirmed as yet.
Real-estate players, although they have no previous expertise in running a telecom business, have a few factors favouring them. Most of them have huge land banks to build townships. This could be used to house a part of their tower infrastructure, thus reducing rental costs, a key part of operational expenditure involved in telecom operations.
In this context, players such as DLF, Omaxe and Parsvnath are flush with cash after their successful IPOs as well as other fund-raising over the past couple of years. This might allow them to operate at low or even negative profitability for the first few years of operation, which is inevitable.
But with most of the leading real-estate players having significant land banks in the metros or major cities, the land holdings may not offer any edge to these players in telecom rollouts in rural areas or even tier 2 towns. DLF and Parsvnath have some land banks in these areas and may be able to put part of them for productive telecom usage.
While these players have staying power, a tie-up of such companies with a domestic or international telecom operator could bring in the business expertise required for telecom operations. In that event, the time for the combined entity to roll out operations could also be reduced.Existing players on firm ground
A good number of existing players from telecom and related businesses, such as Idea Cellular, Spice Communications, Reliance (ADAG), Maxis-Aircel, Tulip IT Services, BPL and Hinduja TMT are also among the prospective applicants. The first four companies have existing operations on a regional/national scale and their applications are directed towards having a wider footprint across India.
Each of these applicants is approaching its foray with a different strategic intent. Idea Cellular, which has operations in 11 service areas, applied for licence to commence operations in Mumbai and Bihar nearly a year ago and is awaiting spectrum allocation. As the company is a leader in the Maharashtra market, this move appears synergistic.
Reliance Communications’ application appears to be a move to expand its GSM footprint. The telecom regulator TRAI (Telecom and Regulatory Authority of India) has, incidentally, allowed a single operator to offer both technologies (CDMA and GSM) within a circle.
Spice Communications has ambitious plans of becoming a national player from the 2-circle player that it currently is. Aircel, which has operations in Chennai, Tamil Nadu and the North-East (under the name Dishnet Wireless), has also applied for licences to create a more pan-India footprint.
The above applicants appear to stand a better chance of obtaining licences in new areas, given their existing operations.
There are indications that applications would be considered as per existing guidelines on a first-come-first-served basis, which suggests preference to these players, on a case-to-case basis. However, even if some of the new applicants manage to secure licences, spectrum allocation remains an issue.
Even on this score, the existing players appear better placed than the rest. A separate committee has been set up to look at licensing and spectrum allocation norms for new entrants into the telecom space. Given the current spectrum crunch, new players may also have to contend with very stringent norms for rollout as well as usage norms for spectrum.
Tulip IT, which is a countrywide provider of data connectivity, has applied for licences in six circles. With its VPN and network integration expertise, Tulip has the expertise to enter the fray as a service provider. But, as mentioned earlier, this would mean huge capital expenditure and low margins in the first few years of operation.Pact with global players
Mahindra & Mahindra appears to be the only applicant in this category that has confirmed interest. The company plans an alliance with AT&T for this foray. Tech Mahindra, a telecom software company in which M&M holds a 44.4 per cent stake, has substantial experience in working with telecom service providers as well as equipment vendors and has a strong relationship with AT&T.
This trio appears to be a strong contender to offer significant competition to the entrenched players. An alliance with AT&T brings with it the latter’s expertise from running a highly successful telecom business in the US as well as its earlier experience partnering Idea Cellular in India; both appear to be huge pluses.Alternative routes to a telecom foray
All the prospective applicants, however, need not take the traditional route to rolling out telecom services. Here are a few alternative avenues that they can explore:
MVNO (mobile virtual network operator): These kinds of operators do not own any spectrum or network infrastructure but buy it from existing operators and act merely as resellers. MVNOs usually have a strong brand image in one line of business and look to leverage on that in another business. Virgin Mobile, Disney Mobile and Tesco Mobile are a few successful examples.
This might work especially well for leading real-estate players such as DLF and Unitech, which have high visibility for their brands and may use this for providing connectivity to their townships. However, this concept is yet to evolve in India and the telecom regulator has asked operators for their opinion on this and is looking at evolving guidelines for the same.
Inorganic growth: The option of acquiring a presence through inorganic growth or acquisition of regional players is a route that is open to all applicants. There are a few regional and relatively small players, such as Shyam Telecom, HFCL Infotel, and Spice Communications, which may not be growing at a rapid pace. These companies (if they are open to stake sale) may offer new players an entry point into the market through the M&A route. Such acquisitions may offer a prospective entrant a readymade subscriber base and spectrum to work with.
Bidding for 3G alone?: A comprehensive policy on 3G services is still awaited from the telecom regulator/DoT. 3G services, at the most basic level enable provision of feature-rich voice, data and video services with a much faster throughput.
In this regard, new players may win licences and choose to focus only on high-end 3G services, if there is an auction for 3G spectrum, and new players are allowed to bid. These are high revenue earning services, though predicting the market for such services in the Indian context is a challenging task.
Investors with a two-three year perspective can retain their exposure in Asahi India Glass. At the current market price of Rs 109, the stock trades at around 36 times its trailing 12 months earnings.
Though the valuations appear stiff, it should be seen in the light of the company’s sedate performance over the last few quarters due to higher input and fixed costs.
But the company’s leadership position in the automotive glass segment, capacity-additions over the last few years and entry into value-added segments such as architectural processed glass, indicate that earnings can scale up significantly over two-three years.
Fresh investments can be considered on signs of higher traction in earnings.Business
The company has three SBUs (Strategic Business Units) — auto glass, float glass and glass solutions. While the auto glass segment brings in 62 per cent of the revenues, the float glass division chips in with 36 per cent.
The company is the market leader in the auto glass segment with 82 per cent market share.
It caters to almost all the OEMs (original equipment manufacturers) in the country including Maruti, Honda Siel, Toyota Kirloskar, Hyundai and General Motors. It also supplies to the domestic after-market apart from exports.
A separate subsidiary, AIS Glass Solutions, was set up in 2004-05 to cater to the demand for architectural glass.
The division produces value-added products such as stronglas, securityglas, acousticglas and insulated glass units. It has a 20 per cent share in the architectural glass market. The company’s integrated glass plant at Roorkee, Uttarakhand, went on stream in January 2007 and makes float glass and other value-added glasses such as reflective glass, mirror, automotive glass and architectural glass.
It has also increased capacity at its existing facilities at Chennai, Taloja and Rewari.Margin Pressures
The operating margins for the June 2007 quarter stood at 32.7 per cent as against 21.7 per cent in the previous quarter.
This rise in margins was not brought about by operational efficiencies but by a foreign exchange gain of around Rs 44 crore on foreign currency loan.
The company’s margins in the last few quarters have been impacted by fluctuations in the price of float glass and increasing power and fuel costs. (Energy costs constitute 30 per cent of the glass cost).
The company plans to mitigate this by focusing on value-added products such as solar control glass, water repellent glass, tinted glass and the architectural glass segment that is backed by a strong surge in construction activity in the country.
Besides, the sustained demand in the passenger car market augurs well for the automotive glass division, as automotive glass gets higher margins than float glass.
The company can use the additional float glass capacity at Roorkee for captive consumption to produce automotive and architectural glass.
This will reduce its exposure to fluctuating float glass prices in the domestic and import markets. This has been a key source of pressure on margins.
Higher interest and depreciation costs due to ongoing capacity expansions have also impacted net profit margins in recent quarters.
With the majority of the capital investments behind it, depreciation costs may stabilise over the next couple of years.
Besides, the Roorkee plant is also expected to offer a 10-12 per cent cost advantage because of a tax holiday, lower power tariff and reduced freight cost.
Investors with a three-four year perspective can consider buying the stock of Carborundum Universal (CUMI), a leading player in the abrasives and industrial ceramics space. CUMI’s capacity expansion, growing focus on export market and its venture into new businesses are likely to help it scale up future revenues.
However, given the company’s plan to partly fund its acquisitions and capital expansion through debt, earnings over the next couple of years may witness some pressure.
It could take over two-three years for CUMI to enjoy the full benefit of its acquisitions and capex, thus underscoring the importance of a long-term perspective on the stock.
At current market price of Rs 163, the stock trades at about 14 times its likely FY09 per share earnings. Investors may accumulate the stock in lots given the volatility in the broad markets.Expanding capacities and markets
CUMI’s prospects appear promising in view of the buoyant demand trends in its user industries such as fabrication, construction, auto, auto components and OEMs (original equipment manufacturers).
Besides, factors such as increased focus by government on infrastructure and a likely increase in outsourcing to Indian component manufacturers could also keep the demand for refractories/abrasives upbeat.
CUMI, with its planned expansion in capacities, appears well-placed to meet such an increase in demand. It has lined up a capital investment of about Rs 120-130 crore to expand capacity in its super refractories, abrasives and ceramics division.
Further, contributions may also flow in from its joint venture in China, which has capacity to produce about 3,000 tonnes bonded abrasives and is expected to commence commercial production from the third quarter of FY08.
Capacity of the industrial ceramics division is also set to increase to 5,200 tonnes from the current 3,000 tonnes. Nevertheless, it may be noted that effective contributions from the increased capacities are likely from financial year 2008-09 only.
Leveraging on the advantage of a low-cost manufacturing base in India and China, CUMI plans to set up marketing presence in Europe, the US and South-East Asia through subsidiaries or strategic partners.
This appears tactical given the increasing demand for abrasives and ceramics in the target markets, where CUMI’s cost advantage could help give it a competitive edge over local players.
The management expects renewed focus on these markets to improve export revenue contribution from the current levels of about 22 per cent to about 40 per cent in two-three years.New initiatives
CUMI recently announced its plan to enter the power tools business. This venture holds significant potential, considering the industry estimates, which peg the worldwide power tools market at about $12 billion and the Indian market at about Rs 400 crore. Besides, with companies such as Bosch growing more than 70 per cent in the last two years, this foray could add significantly to CUMI’s markets.
Additionally, since CUMI already supplies consumables to the power tool industry (30 per cent of the power tool price), it will make the transition to an integrated player in the sector.
CUMI’s presence in Silicon Carbide powder and bio ceramics space also holds promise. Notably, with the recent acquisition of VAW, a Russian manufacturer of silicon carbide (SiC) grain and bonded abrasive, CUMI has become the second largest producer of SiC.
This is significant since SiC is used in manufacturing abrasives and in powdered form is used for cutting polysilicon into thin wafers, a critical step for manufacturing photovoltaic cells. With only a few manufacturers of high quality SiC powder, this could help CUMI vault into the big league.Financials
For the quarter ended June 2007, CUMI reported a 23 per cent growth in revenues. However, lower margins, higher interest cost and depreciation led to a 12 per cent drop in earnings.
Operating margins dipped by about 1.4 percentage points to 17.3 per cent on the back of increased raw material costs.
Going forward, this pressure could ease in the light of the shift in focus to products enjoying higher margin and on export markets, over a two-three year time frame.
On a segmental basis, abrasives contributed to about 64 per cent of the total revenues, while ceramics (19 per cent) and electrominerals (17 per cent) contributed the rest. This apart, any slowdown in capex and an unexpected rupee fluctuation could affect CUMI’s earnings.
Besides, increase in sourcing of abrasives from the Indian counterparts of its competitors could also pose a risk to CUMI.
Investors can consider booking profit in Indiabulls Real Estate, as the stock’s current valuation appears to capture a good proportion of the potential earnings growth over the next couple of years.
Investors who received the stock after the company was demerged from Indiabulls Financial Services and listed would have been rewarded well as the stock has now doubled from its Day 1 close of Rs 325 in March 2007.
While the ambitious plans of Indiabulls Real Estate may hold the potential to turn in returns over the long term, we see little scope for any fundamentally-backed upside at this juncture, given that the company is yet to complete execution of any of its projects.
Also, the company has been massively expanding its equity; commensurate earnings growth is unlikely in the near term.
Further, as the listed space now has a good number of real-estate players trading at relatively reasonable valuations, backed by strong execution skills, investments can be considered in superior plays with better earnings visibility.
Background: Indiabulls Real Estate is the demerged real-estate arm of Indiabulls Financial Services. The promoter stake, as of June 2007, stood at 31 per cent.
The company has presence in projects in the residential and commercial segments and has plans to develop special economic zones.
The company has 4,031 acres of fully-owned land and 8,000 acres of land for which agreements have been signed, in Mumbai, Chennai and the National Capital Region.
Of the above, projects are planned/ongoing in about 1,400 acres.
These projects would be executed through the company’s real-estate subsidiaries and associates. The company is yet to book any revenue from its planned projects.Plans in lucrative markets
The location of Indiabulls Real Estate’s planned commercial projects are in Tier-I cities that face a strong demand for office space, notably Mumbai.
The company won the lucrative mill lands of Jupiter and Elphinstone through a special purpose vehicle with a 40-percent stake in each project.
These lands, which are to be developed into office spaces (of 3.5 million square feet of lease area), are expected to be ready for tenancy by 2008; revenue from these projects might start flowing in from FY-2009.
As Indiabulls Real Estate’s present strategy is to ‘develop and sell’, it is likely that the company would sell its complete stake once there is full occupancy. This would mean that these projects may not serve as regular income streams.
The lease model in this case would have been lucrative as it could have enjoyed peak rentals, given the shortage in office space in the region.
However, the sale of stake may be warranted as the company needs to infuse cash for its other projects.
The other planned projects include integrated housing in the Northern Capital Region, Chennai and the Mumbai Metropolitan Region. These projects that have not yet reached the launch stage may well take five-six years to execute and sell.
Further, with well-entrenched players such as Unitech and Hiranandani, the company may require strong marketing as its brand recognition is limited compared to its peers.
The three special economic zones to be developed by the company should be viewed with caution.
For one, with little execution skills in the real-estate development business, the company plans to develop the SEZs on its own, even as established players prefer co-developers.
Two, some of the planned SEZs such as the Raigarh one may not find it easy to get the right tenants.
Although this SEZ plans to capitalise on the upcoming Rewa Port and Mumbai trans-harbour link, it may face competition from Reliance’s Navi Mumbai SEZ planned in the locality.
Given the long gestation period for completion of SEZs and further time needed to get tenants and break-even, we are not factoring in any earnings contribution from the SEZs in the medium-term.
Hence, of the total projects, Jupiter mill and Elphinstone may be the only ones that could significantly add to the earnings stream in the near future.Too much expansion
The company has been on an equity expansion mode since its listing. It recently announced plans to issue 4.3-crore preferential warrants to its promoters to raise about Rs 2,322 crore.
This, together with earlier issues, would result in an equity expansion of 30 per cent on conversion of warrants.
Given the limited earnings visibility over the next couple of years, the massive equity expansion bears the risk of earnings dilution.
The issue of warrants to promoters at a sizeable discount to the market price does not lend confidence on the governance aspect.
On the business expansion front, the company plans to seek members’ approval to invest or lend Rs 1,000 crore to Indiabulls Wholesale Services.
This suggests that the company may be looking at utilising the funds towards its proposed retail foray. This apart, it has also joined the bandwagon of real-estate companies applying for telecom licence.
With sizeable projects in hand, huge funding requirement and limited track record, the company’s foray into new businesses diffuses focus from its primary business, which is itself in a nascent stage.
This also poses the risk of diversion of resources from its existing business.BL