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Saturday, October 20, 2007
Weekly Technical Analysis
The markets opened on a bearish note as was expected owing to the weekend factor and an overhang of rising crude prices.
Traded volumes remained higher than the recent average and the market breadth was negative as the combined exchange figures were 709 : 3171.
The capitalisation of the breadth was also negative as Rs 5,715 crore : Rs 25,333 crore. The derivatives data for the previous session indicated a 2 per cent decline in net long positions as long positions were shifted to the lower risk options segment.
The indices have closed at the lower end of the intraday range as the bulls were unable to pull the benchmarks above the intraday pivot inflection point of 5,450 which I had advocated yesterday.
The 5065 support was not tested, which is a sign of minor optimism as a violation of this level would have seen fresh selling.
The coming session is likely to witness an intraday range of 5040 on declines and the 5393 level on advances. The pivot for the bulls to defend will be the 5280 level on the Nifty spot as the index will have to keep it's head above this level to give a fighting chance to the bulls.
The outlook for Monday remains that of caution as the overseas cues coupled with high oil prices will impact sentiments. I maintain my earlier advice that small traders must protect their capital in the near term.
P-Notes clampdown leads to more block deals
SEBI’s plan to curb participatory notes (P-notes) from the Indian stock market is sending institutional investors into an overdrive to restructure their shareholding pattern in companies.
The block deals counter on both exchanges saw hectic activity on Friday as entities holding shares in P-notes started to reverse their positions. Market experts said that shares are being transferred from parties holding shares in P-note form to FIIs registered with the market regulator.
Block deals were done in predominantly blue chip shares like Reliance Industries, Bharti Airtel, Hindalco and HDFC. Second line companies with large P-note holding as a percentage of total shares also witnessed hectic activity.
On Monday, SEBI had proposed measures to control anonymous foreign investments through P-notes in the futures and options market which make up about 30% of the money that has flowed into India recently. This had affected market sentiment earlier in the week resulting in market players selling off stocks across the board. The stocks with high P-note components were hit the most.
“If they sell shares in the open market, prices will tank further,” says the head of equities at a domestic brokerage. “The only option they have is transfer shares to a registered FII or some other entity and thus try to cap any more bleeding in share prices,” he says.
He feels that these players may be actually warehousing their shares with a friendly entity. Another investment expert pointed out that entities holding shares for some other players as proxies may have also have played a role in these block deals.
“Some of the players usually warehouse their stocks with obscure entities in the form of P-notes,” he explains. He says that this helps them as these shares remain out of regulator’s bound and can be held secretly for managing the movement in the index or some other purpose.
“However, as prices have fallen significantly, many such proxy players do not want to take the risk of further losses (as chances are that shares will fall further),” he adds. These players then shift the shares to other players who are willing to bear the risks of further losses or even stay invested.
Stocks you can buy this week
Bajaj Auto
CMP: Rs 2,511.65
Target price: Rs 2,549
Merrill Lynch has downgraded Bajaj Auto to neutral rating, and slashed earnings forecasts, after the company unexpectedly cut prices on Platina- a 100cc bike brand- by 12%.
“We are therefore slashing EPS (earnings per share) forecasts by 6% in FY08 (to Rs 120.2) and 10% in FY09 (Rs 131.9), and sum of parts value to Rs 2,549 (compared to earlier 2,871),” the investment bank said in a note to clients. “Bajaj Auto’s strategy to initiate discounts goes against the company’s stated policy of targeting profits, not volumes. We believe that volumes will not compensate, given the model’s much weaker franchise compared to competition (Hero Honda’s CD-Deluxe, which has also cut prices),” it added.
Concor
CMP: Rs 1,865
Target price: NA
ASK Securities is positive on Container Corporation of India (Concor) citing major market share in the railway logistics business and strong financial position.
“While we take cognisance of Concor’s strong balance sheet, its leadership status and most importantly its domain expertise, the road ahead is tough,” the brokerage said in a unrated note to clients. “Nevertheless, we continue to believe that its robust business model will deliver results, unless the scenario gets altered dramatically. Therefore, the next few quarters would be very critical to monitor so as to identify any signs of reversal,” it added.
HDFC Bank
CMP: Rs 1,357.25
Target price: Rs 1,565
Citigroup has rated HDFC Bank a hold, with a 12-month price target of Rs 1,565, after its second quarter earnings.
“We believe HDFC Bank should be able to generate a premium to its current trading level as it sustains asset growth, consolidates its distribution, leverages off new capital and stabilises its business mix with increased retail returns,” the investment bank said in a note to clients.
“We remain positive on the bank’s prospects and management’s ability to deliver, but in the near term the stock’s performance could be moderated by high valuations relative to ROE (return on equity) and peers, uncertainty on interest rates, and competitive pricing environment,” it added.
TCS
CMP: Rs 1106.75
Target price: Rs 1,230
Morgan Stanley has rated TCS an “equalweight”, with a price target of Rs 1,230 based on price to earnings (P/E) ratio of 21 times 2008-09 estimated earnings. The investment bank feels concerns over the impact of the rupee’s appreciation on the IT services sector and a possible US slowdown already reflects in the stock, reducing the likelihood of a sharp fall. “Given its client base and management expertise, our bias is positive for the stock,” Morgan Stanley said in a note to clients.
“TCS has historically grown faster than companies in the broad market (BSE Sensex) and has consequently traded at varying premiums. Our estimates assume a P/E discount of 10% to Infosys going forward, which is also towards the average end of its historical trading range,” it added.
Patel Engineering
CMP: Rs 639.25
Target price: Rs 992
Enam Securities has rated Patel Engineering an “outperformer” with a price target of Rs 992. “At CMP, adjusted for value of real estate and BOT (build operate transfer) investments of Rs 607 per share, the core business is available at just 2.1 times FY08E EV/ EBIDTA (enterprise value/earnings before interest, tax and depreciation & amortisation),” the brokerage said in a note to clients.
At the time when the company released the report, Patel shares were at Rs 654. “We value PEL’s real estate (roughly 1,000 crore) at Rs 35 billion (Rs 3,500 crore) or Rs 591 per share in our base case estimate,” the note added.
Man Industries
Target Price: Rs 188
CMP: Rs 118.35
IDBI Capital Markets has initiated coverage on Man Industries with a 12-month price target of Rs 188 citing robust outlook for the pipes industry and stronger order book position. “As a result of increased hydrocarbon E&P (exploration and production) activities and continued rise in the crude prices has set a long-term demand for steel pipes both in domestic and overseas markets.
Well-timed capacity expansion makes the company comparable to its peers in terms of the capacities in domestic market,” the brokerage said in a note. “Robust order book of Rs 22 billion (Rs 2,200 crore), to be executable in 12-15 months, which is 1.9x its FY07 sales, provides a near term revenue visibility. This clearly indicates the ability of the company to get huge orders from the Oil and Gas behemoths amidst tough competition,” it added.
Why India will continue to attract inflows
The finance minister said it all when he acknowledged that the Securities and Exchange Board of India’s move to phase out participatory notes (PNs) was part and parcel of the government’s attempt to moderate the pace of capital inflows. The steps against PNs have little to do with ascertaining their place of origin or to make the flows more transparent, but have everything to do with easing the inexorable upward pressure on the rupee caused by an avalanche of dollars landing on our shores.
It’s hurting exports, creating a big headache for the Reserve Bank of India, and threatens to throw people in the textiles industry and in small-scale industries out of their jobs; so the government will do everything possible to limit these inflows. First they tried lowering interest rates on non-resident Indian deposits, then they tried limiting external commercial borrowings and now they’re trying to plug inflows through PNs.
Will they succeed? They could, in the short run, because the move coincides with the tapering off of the first heady rush of capital fleeing the badlands of the US credit markets for a more salubrious home in emerging markets. Of course, if the US Federal Reserve goes in for another rate cut at the end of October, inflows may once again accelerate.
It’s no coincidence that the International Monetary Fund’s (IMF) World Economic Outlook contains lots of advice to developing nations on how to live with large capital inflows. Gross capital inflows to emerging markets, in dollar terms, are now higher than in the mid-1990s, just before the Asian crisis. The figure is not so high on a net basis, but it’s still pretty large. So what else can the government do to curb inflows? Well, it can learn from what Chile did in the 1990s or what Thailand, Colombia and Argentina have done more recently, and mandate setting aside a portion of short-term inflows in interest-free reserves, which basically amounts to a tax on inflows.
What’s the risk? IMF says: “Experience suggests that such measures tend to have a diminishing impact over time, as ways are found to elude the controls, and can, if sustained, also have negative consequences for financial system development.” Or the government could adopt measures aimed at cooling down overheated equity and property markets, such as China’s recent increase in stamp duty on stock market transactions and Singapore’s increased property redevelopment charge. IMF also points out that countries have used fiscal incentives to offset some of the implications of exchange rate appreciation, such as Brazil’s introduction of import tariffs on certain sectors. In India, the commerce ministry’s rather inadequate sops to exporters would also fall in this category.
The more important question is: why the rush of money to countries like India? There are several reasons. One of them is increased global liquidity. Now global liquidity can mean lots of different things, which is why the discussion about it in the World Economic Outlook report is very helpful. One way of looking at liquidity is to consider it as a function of monetary policy. It can then be measured by considering either real interest rates or by focusing on quantitative factors such as money supply or the build-up of foreign exchange reserves. Monetary policy, which had been very loose, was being slowly tightened until the credit crunch hit the developed markets. IMF says that “notwithstanding the reversion to a neutral monetary policy stance in the United States and the euro area, real long-term interest rates on government securities in advanced economies have remained low compared with their historical average”. If the money supply plus forex reserves measure is used, “global liquidity shows elevated growth rates until very recently”.
But the IMF report also talks of another kind of liquidity—market liquidity. It says that the liquidity of global equity markets has also increased substantially since the mid-1990s, with the rise in emerging markets being particularly impressive. True, this market liquidity is cyclical, with ebbs and flows, “but the cycle is only weakly related to movements in real policy rates and is unrelated to quantitative measures of the global monetary policy stance, suggesting that secular factors underlie improvements in global market liquidity”. In short, the improvement in global market liquidity is the result not just of cyclical factors, but also of structural ones. Globalization, securitization, derivatives and financial deepening have all contributed to this market liquidity. This, says IMF, is “strongly suggestive of an implied historical decrease in liquidity premiums, likely contributing to the overall decline in risk premium”. What this means is that higher market liquidity can reduce the risk associated with a given asset portfolio. As a result, a larger portion of investors’ wealth may be invested in “risky” assets, in spite of risk tolerance remaining at the same level. Put another way, the widening, maturing and deepening of capital markets has led to greater liquidity that has reduced the risk premium. This is particularly true of emerging markets and it has made them more attractive investments. The other reason for the huge inflows into the Indian market is best brought out by one statistic: India, China and Russia accounted for one-half of global growth in the past one year. Look at IMF’s forecasts of growth next year: the US is expected to grow 1.9% in 2008, the euro area 2.1%, Japan 1.7% and Britain 2.3%, while the forecast for China is 10% and India 8.4%. When you combine high growth and a reduced risk premium, the choice for investors couldn’t be clearer.
Via Mint
DoT makes it tougher for cos to get spectrum
| Minimum subscriber criterion enhanced. The department of telecom (DoT) today announced a set of rules for granting telecom licences and allocating spectrum that is likely to impact GSM-technology service providers like Bharti Airtel and Vodafone Essar, among others. DoT’s new policy accepts the recommendations of the Telecom Regulatory Authority of India (Trai) on enhancing the minimum number of subscribers required by existing operators to qualify for additional spectrum. However, the final norms in this regard will be decided by DoT after it receives a report from the Telecom Engineering Centre. This implies that GSM operators will now have to first increase their user base to qualify for additional spectrum, a process that would take a few years and delay expansion plans. The policy has also delinked the unified access service licence (UASL) from spectrum allocation, which effectively raises the bar on this front. Several service providers have been waiting since January 2006 and 46 companies had applied for licences on the assumption that they would automatically be granted spectrum if their applications were approved. Crucially, DoT has also upheld the policy that mobile licences are technology-neutral – implying that any operator can use either GSM or CDMA equipment to run networks. This move mainly benefits Reliance Communications, which was granted the dual-use right late on Thursday night. The company today paid the mandatory Rs 1,650-odd crore and joined the queue of operators seeking spectrum. In addition, DoT said that state-owned Bharat Sanchar Nigam Ltd and Mahanagar Telephone Nigam Ltd could also use alternative technology to run mobile services (both operators mainly use GSM). However, unlike the private operators, these two companies will not have to pay the entry (or licence) fee for the switch-over. The department also said it would issue guidelines on mergers and acquisition later. However, it will not hike the minimum threshold equity level of 10 per cent to the 20 per cent, recommended by Trai. |
| WIRED UP |
| Spectrum delinked from licence; all eligible applicants to be granted LoI and asked to pay entry fee. No guarantee they will get mobile spectrum Telecom Engineering Centre to finalise enhanced user base criteria Excess spectrum to be surrendered, especially where user base is lower than required New merger and acquisition norms to be issued later, to be different from Trai view |
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