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Monday, November 05, 2007
Capital goods boom continues
Sagely wisdom has it that excessive optimism about anything is unhealthy, but this view does not seem to be applicable for stocks in the domestic capital goods sector.
These stocks have dominated the bull market in the past year and may continue to do so, given the immodest expectations from investors about the sector’s ability to deliver steady earnings growth over the next 3-4 years.
Going by the huge amount of investments lined up for India’s infrastructure and order books of these companies, such expectations may be justified. But the question remains “do the existing premium valuations in these shares vis-a-vis the market and the regional peers leave any room for error”?
The answer is probably a “no”. ING Asset Management’s CIO (equities) Paras Adenwala says, “There is too much optimism to the extent that even a small setback could have exaggerated consequences on stocks, given that the sector is over-owned.”
According to analysts, L&T is trading at over 45 times 2008-09 estimated earnings, BHEL at over 30 times 2008-09 estimated earnings and ABB at roughly 34 times 2008-09 estimated earnings. The 30-share Sensex trades at 20-21 times 2008-09 estimated earnings.
Though not strictly comparable, the mania in capital goods stocks is eerily reminiscent of the dotcom era at the start of this century when investors were willing to pay unreasonable valuations for IT companies. Analysts cite there could be possible delays in expansion plans and order execution as most of these companies are functioning at full capacity.
Also, a higher-than-expected decline in margins, arising out of foreign competition, may be a dampener. It is known that the government is trying to rope in Chinese and Korean companies to accelerate India’s infrastructure growth.
Their entry may not be positive for domestic players such as BHEL, L&T and ABB, given their better operational efficiencies. A few months ago, power minister Sushilkumar Shinde said Bhel’s current capacity was not enough to meet the country’s power needs even if it doubles its capacity. Bhel is raising its capacity 2.5 times in the next three years.
Fund managers feel that there will be a gestation period of at least 2-3 years before foreign competitors start catering to the domestic infrastructure story. Despite concerns, Mr Adenwala remains bullish on the sector. “This is probably the only sector with visibility in earnings for at least 3-4 years.”
This is one of the reasons why most fund managers feel premium valuations in these shares are sustainable. Also, no fund manager can afford not to have these stocks in their portfolio, which have risen 125-250% in the past year.
While sceptics may argue that the stocks have become overvalued, cheerleaders point out that earnings of these companies for the latest quarter have matched high expectations that the market had from them.
Analysts estimate that total investments needed over the next 5 years to build India’s creaky infrastructure would be roughly Rs 15,000 crore. Optimists argue that there is no need to be apprehensive about the prospects of these companies, given their plans to expand to other areas of infrastructure development beyond their core strengths.
Market Close: global pressures not ignored this time !
The markets ended in red on account of selling pressure in large caps after it had a weak start following the Global cues in red. Asian indices were in deep trouble after Hang Seng closed down by over 5% (-1526 points) and Shanghai down by 2.5%,Hangseng was down on worries that rules allowing Chinese Investment into Hangseng were delayed. Subprime issues played over the minds of investors which saw selling. Amid the cautious atmosphere value buying was seen in midcaps and small caps indices. Small cap index was up by 1.07% and mid cap index was up by 0.367%. Auto, bank, oil & gas, IT stocks were down .European markets are trading in red too led by worries about the state of the US economy.
Sensex closed lower by 385 points at 19,590 levels. Supporting the indices were gains in Bharti Airtel (+5.60%), Cipla (+1.70%), NTPC (+0.85%), Ambuja Cement (+0.21%) and Ranbaxy (+0.10%). Restricting the gains were the losses in ICICI (-4.74%), ONGC (-3.72%), L&T (-5.27%) ,Maruti Suzuki (-2.58%), and Infosys (-2.53%).
The Capital Goods sector saw major weakness and also the Auto sector . Banks were strong in morning trades but they gave back most gains. However it was a day for the mid caps. The large caps saw contraction in valuations and the mid caps were getting rerated.
Solar Explosives exploded today and was up by (11.1%) at Rs 301. Solar Explosives Ltd has acquired a majority stake in an unlisted Company to further business interest. This acquisition is subject to all regulatory approvals and compliance. Solar explosive provides explosive solutions for mining activities including slurry Explosives. The company undertakes manufacturing of Detonators and Detonator components through its subsidiary. The company is the one of the largest manufacturer of Packaged Explosives in India with a Licensed Capacity of 2 lac tonne Explosives (Bulk and Packaged), 140 Million numbers of Detonators and 20 Million Meters of Detonating Cord. Solar explosive is the market leader with a market share of 25% compared to 15% of Indian Explosive Ltd and 9% of Gulf Oil Corp. Solar has been looking grow inorganically and is in discussion with a couple of companies.We had Wow call on the company and that delivered fantastic gains in just a month.
GEI Industrial System was up by 10% at Rs 138. Net profit of GEI Industrial Systems rose 30.18% to Rs 2.20 Cr against Rs 1.69 Cr for 2nd Qtr 2007 on yoy basis. Sales rose 55.17% to Rs 34.82 Cr against Rs 22.44 Cr for 2nd Qtr 2007 on yoy basis. GEI Industrial Systems (GEI) formerly known as GEI Hamon Industries, is a specialist in heat transfer technology. It designs, engineers and lays condensers and other auxiliary engineering services for power (combined cycle steam- and gas-turbine-based, nuclear, hydroelectric, and gas- and diesel-engine based) plants, petroleum refineries, LNG terminals, petrochemical and chemical plants, oil and gas fields, offshore gas processing platforms, CNG filling station, electrical locomotives, fertiliser plants, metallurgical industry, cement plants and power utilizing equipment.Wow call on GEI was booked partially after it delivered 15% gains in just 2 trading sessions
Technically Speaking: Sensex is now in pullback mode. 19430 is a support of sorts however the big support is at 19200. Advance Decline maintained a balance of 1:1 almost with advances marginally higher than number of decilines The Volumes were good at Rs 9000+ crore for the BSE. Sensex resistance is at 19900 and that would need to be crossed. This week is Diwali and investors are waiting for a big Diwali Gift. The talk ofthe town is that Sensex will do 21000 this week. We have seen such kind of action earlier and such action will not suprise us.
FIIs selling to a tune of Rs 1093 cr
Foreign institutional investors (FIIs) were net sellers of Rs 1,093.16 crore (provisional) today, according to data released by BSE.
While FIIs made gross purchases of Rs 3,851.03 crore, gross sales totalled Rs 4,944.19 crore.
Domestic institutional investors (DIIs) were net buyers of Rs 648.69 crore today. While DIIs made gross purchases of Rs 1,679.43 crore, gross sales totalled Rs 1,030.74 crore.
FIIs were net sellers of Rs 761.40 crore on Friday, November 2, according to data released by Sebi today. While FIIs made gross purchases of Rs 3,322.70 crore, gross sales totalled Rs 4,084.10 crore.
Mutual funds (MFs) were net buyers of Rs 218 crore on Friday. MFs made purchases of Rs 832 crore and sales of Rs 614 crore.
Post Market Commentary
The market closed the session on a deep red note on the back of weak Asian markets as well as statement by the Citigroup that it may suffer $11 billion in writing down of losses caused due to subprime. This led to the prevailing of selling pressure across the sectoral indices scrips. The Benchmark index Sensex fell 385.45 points to close at 19,590.78 while Nifty slipped by 85.1 points to close at 5,847.30. The BSE Sensex touched an intraday low of 19,502.45 and high of 20,009.35 during the trading session. Though the Sensex opened on a positive note but all of a sudden lost the grip to trade in red throughout the trading session. The selling pressure again ignites on the later half of the day as the investors tries to sell off their stocks to clear off their positions. BSE Capital goods, Bankex, Metal and Oil & Gas was the most hit as they fall with heavy points. Overall, the market breadth was little strong as 1433 stocks are closed in green while 1321 stocks are closed in red. The BSE Mid Cap and Small Cap closed higher by 54.01 points and 104.59 points at 8,057.81 and 9,847.02 respectively.
The oil and gas index closed lower by 230.89 points at 11,505.54. Pushing it down are ONGC (4.91%), IOCL (2.26%), Reliance industries (1.81%) and CAIRN India (0.96%) closed in red.
The capital goods index fell 334.13 points to close at 20,052.28 as L&T (3.89%), ABB (2.17%), Siemens (2.07%), BHEL (1.91%) and Suzlon energy (1.87%) closed in red.
BSE Metal index slipped by 291.97 points to close at 17,401.69. Leading the losers pack are Jindal saw (4.63%), Sterlite industries (3.46%), Hindalco (2.08%), Tata Steel (1.65%) and SAIL (1.63%).
BSE bankex index decreased by 233.58 points to close at 11,007.95 as ICICI bank (4.49%), Canara bank (3.70%), Kotak bank (2.72%), Union bank (1.28%) and SBI (0.51%) closed lower.
The IT index dropped by 67.51 points to close at 4,567.13. Pushing it lower are Patni computers (2.79%), Infosys (2.72%), Wipro (1.44%) and TCS (0.94%) closed in negative.
Sensex sheds 385 points as US credit worries resurface
Weakness in Asian markets caused by on worries about the credit market triggered by US financial giant Citigroup's announcement that it may suffer up to $11 billion in write-downs for subprime losses, hit domestic bourses today. Weakness persisted almost throughout the day and selling was seen in most sectors. Market breadth was positive.
Reliance Industries declined. Auto, banking, FMCG and metal stocks witnessed selling pressure. Bharti Airtel bounced back after recent sharp fall.
The Sensex lost 385.45 points or 1.93% to 19,590.78. It hit a low of 19,502.45 in late trade. At day’s low of 19,502.45, Sensex had lost 473.78 points.
The broader based S&P CNX Nifty was down 85.1 points or 1.43% to 5,847.30.
The market had opened on a positive note with Sensex crossing 20,000 at the onset of the trading session. It had soon slipped into the red.
The market breadth was positive on BSE: 1,403 scrips advanced as compared to 1,320 that declined while 354 remained unchanged. 4 of the 30 Sensex stocks were trading with gains.
The BSE Mid Cap index rose 0.77% to 8,083.66 and BSE Small Cap index rose 1.05% to 9,845.20. Both these indices outperformed Sensex.
All the sectoral indices on BSE outperformed Sensex. BSE Auto index(down 1.8% to 5,325.59), BSE Bankex (down 1.89% to 11,029.51), BSE Capital Goods index (down 1.47% to 20,087.55), BSE IT index(down 1.41% to 4,569.38), BSE Metal index (down 1.67% to 17,398.26), BSE Oil & Gas index (down 1.76% to 11,530.06) and BSE Realty index (up 0.34% to 10,363.04) outperformed Sensex.
Nifty November 2007 futures were at 5861, at a premium of 13.70 points as compared to spot closing of 5847.30.
BSE clocked a turnover of Rs 9,011 crore, higher than Friday (2 November 2007)'s Rs 8,120 crore.
NSE’s futures & options (F&O) segment turnover was Rs 77,646.90 crore, which was higher than Rs 76,145.01 crore on Friday, 2 November 2007.
Banking majors declined reflecting a weak sentiment on financials elsewhere in Asia on renewed credit worries. BSE Bankex was the major loser among BSE sectoral indices.ICICI Bank (down 4.49% to Rs 1,270.85), HDFC Bank (down 2.32% to Rs 1,718) and State Bank of India (down 0.51% to Rs 2,240.25) edged lower.
FMCG majors also declined. ITC (down 2.34% to Rs 171.25) and Hindustan Unilever (down 1.33% to Rs 193.15) edged lower.
Auto stocks declined across the board. India’s largest truck maker by sales Tata Motors declined 2.07% to Rs 739.55. Tata Group is learnt to be leading the race to buy Land Rover and Jaguar after the second-round bidding in the auction of Ford's British brands closed on Friday, 2 November 2007.
Mahindra & Mahindra (down 1.68% to Rs 742.85), Hero Honda Motors (down 1.56% to Rs 663.90), Maruti Suzuki India (down 2.53% to Rs 995.45) and Bajaj Auto (down 1.18% to Rs 2,394.90) edged lower.
Larsen & Toubro (L&T) declined 3.89% to Rs 4,287.30 after the company said it has entered into a joint venture (JV) agreement with Mitsubishi Heavy Industries (MHI) for setting up a supercritical steam turbine and generator manufacturing facility in the country, with a capital outlay of around Rs 880 crore.
Metal stocks plunged. Sterlite Industries (down 3.46% to Rs 991), Hindalco Industries (down 2.08% to Rs 183.60), Steel Authority of India (down 1.63% to Rs 255.70) and Tata Steel (down 1.65% to Rs 879.10) edged lower.
India's largest private sector entity by market capitalisation and oil refiner Reliance Industries (RIL) declined 1.81% to Rs 2,663.65.
Bharti Airtel, the country's top mobile operator in terms of market share, rose 5.29% to Rs 942.20 on fresh buying after the stock fell more than 11% in the last two sessions on concerns about allocation of additional spectrum.
Satyam Computer Services (up 0.42% to Rs 463.95), NTPC (up 0.87% to Rs 236.80), Cipla (up 1.84% to Rs 176.8076.80) edged higher.
India's largest oil exploration firm by sales ONGC declined 4.91% to Rs 1,299.05 and was the top loser from Sensex pack.
India’s second largest IT services provider by sales Infosys Technologies declined 2.72% to Rs 1,856.35.
Reliance Natural Resources surged 25.74% to Rs 178.55 on reports that the company has responded to the offer made by Reliance Industries to form a team and resolve the KG Basin gas controversy across the table. The stock rose on heavy volume of 7.96 crore shares on BSE. The move follows a recent Bombay High Court order asking both parties to resolve their differences amicably within four months.
Among other side, Shree Digvijay Cement (up 20% to Rs 34.80), and Camlin (up 20% to Rs 224.40) edged higher.
CNI Research (down 30.08% to Rs 13.95), Sarda Plywood Industries (down 11.31% to Rs 29), Disa India (down 10% to Rs 2,182) and Welcast Steels (down 10% to Rs 1,246.45) edged lower.
Reliance Natural Resources clocked the highest volume of 7.96 crore shares on BSE. Reliance Petroleum clocked the second highest volume of 3.17 crore shares. It declined 0.69% to Rs 267.55. Jaiprakash Hydro Power clocked third highest volume of 1.69 crore shares on BSE. The stock rose 10.72% to Rs 90.90.
Tata Teleservices Maharashtra rose 2.39% to Rs 44.95 and clocked fourth highest volume of 1.55 crore shares on BSE. National Organic Chemical Industries rose 20% to Rs 48.35. On BSE, 1.1 crore shares changed hands in the counter.
Reliance Natural Resources clocked the highest turnover of Rs 1,345.61 crore on BSE. Reliance Petroleum clocked the second highest volume of Rs 868.96 crore. Reliance Industries (Rs 441.22 crore),Reliance Energy (Rs 300.04 crore) and Larsen & Toubro (Rs 213.24 crore) were other major turnover grossers on BSE
European markets, which opened after Indian market, were in the red. France’s CAC 40 (down 1.03% to 5,661.23), Germany’s DAX (down 0.7% to 7,795.38) and UK’s FTSE 100 (down 1.38% to 6,440.70) edged lower.
In Asia, Hang Seng (down 5.01% at 29,942.32), Nikkei (down 1.5% at 16,268.92), Singapore's Straits Times (down 1.21% at 3,670.18) and South Korea's Seoul Composite (down 0.18% at 2,015.76) edged lower. The Hong Kong stock market was the major loser today after Chinese Premier Wen Jiabao said China needed new laws before going ahead with a programme allowing mainland Chinese to invest directly in Hong-Kong-Listed securities. Taiwan's Taiwan Weighted (up 0.38% at 9,308.60) edged higher.
US stocks eked out a small gain on Friday, 2 November 2007, following strong October 2007 jobs data, pushing the blue-chip Dow and technology-laden Nasdaq Composite Index modestly higher. The crucial US jobs report showed payrolls surged in October at twice the expected rate, suggesting the world's biggest economy was strong enough to handle a deep housing slump without falling into recession
Market slumps on weak global cues
The market went into a correction mode and remained in the negative territory all through the session. Weak global markets and rising crude prices weighed on the sentiment. Despite resuming 33 points above its previous close, the Sensex went into a major correction mode on account of selling in heavyweights, banks, information technology, and oil stocks. The index slipped below 19,600 mark by afternoon and a strong bout of selling towards the close saw the Sensex touch the day's low of 19,502. However, select buying towards the close saw the Sensex pare some losses and end the session at 19,591, down 1.93% or 385 points, while the Nifty shed 85 points or 1.43% and closed at 5,847.
The market breadth was positive. Of the 2,812 stocks traded on the Bombay Stock Exchange (BSE), 1,433 stocks advanced, 1,321 stocks declined, and 58 stocks ended unchanged. Among the sectoral indices the BSE Bankex index shed 2.08% at 11,008, while the BSE Oil & Gas index declined 1.97% at 11,506. The BSE CD index and the BSE Realty were only gainers and moved up around 0.5%.
Select heavyweights declined sharply on strong selling pressure. ONGC tanked 4.91% at Rs1,299, ICICI Bank dropped 4.49% at Rs1,271, L&T fell 3.89% at Rs4,287, Infosys shed 2.72% at Rs1,856, Maruti Suzuki lost 2.53% at Rs995, ACC declined 2.36% at Rs1,008, ITC dipped 2.34% at Rs171 and HDFC Bank slumped by 2.32% at Rs1,718. Among the select gainers Bharti Airtel advanced by 5.29% at Rs942, Cipla added 1.84% at Rs177, while NTPC and Satyam Computer closed with marginal gains.
Over 7.96 crore Reliance Natural Resources shares changed hands on the BSE followed by Reliance Petroleum (3.17 crore shares), JP Hydro (1.69 crore shares), Tata Teleservices (1.54 crore shares) and NOCIL (1.10 crore shares).
Value-wise Reliance Natural Resources registered a turnover of Rs1,345 crore on the BSE followed by Reliance Petroleum (Rs868 crore), Reliance Industries (Rs440 crore), Reliance Energy (Rs299 crore) and L&T (Rs213 crore).
Morning Call - Nov 5 2007
Market Grape Wine :
In House :
Nifty at a supp of 5901 and 5845 with resis at 6010 and 6060
Positive opening expected with volumes to remain low for the week
Intra day: Buy Reliance above 2713 with a TGT of 2756 and a SL of 2690
Buy Grasim above 3781 with a TGT of 3945 and a SL of 3739
F&O: Buy sterlite above 1046 with a TGT of 1090 and a SL of 1020
Delivery calls: PTC and Fintech
Out House :
Markets at a support of 19595 & 19449 levels with resistance at 20122 & 20242 levels .
Buy : RIL
Buy : REL
Buy : Petronet bullet
Buy : IBullsFinanace bullet
Buy : JpAsso
Buy : Primesecurities bullet
Buy : Centextile
Buy : ONGC
Dark Horse : ABAN , GeShipping , REL, JpAsso , IBulls , ONGC , LNGPetronet & SBIN
Bullet for the Day : REL & Primesecurities with stop loss .
BSE Bullet : LokHsng
Market may drift lower on weak Asian equities
The market may edge lower tracking weakness in Asian stocks caused by on worries about the credit market after US financial giant Citigroup said it may suffer up to $11 billion in write-downs for subprime losses. For a while now, domestic markets have been taking cues from Asian markets.
A slowdown in FII inflow at the fag end of last month and at the onset of this month may cap upside. FIIs bought shares worth a net Rs 228 crore on Wednesday 31 October 2007, followed by an inflow of Rs 180.60 crore on Thursday, 1 November 2007.
The Q2 September 2007 results of India Inc.were decent to strong which means that strong fundamentals would support Indian equities at declines. Mutual funds are said to be sitting on a strong cash pile of about Rs 14000 crore and they may step up buying if and when there is a steep correction on the bourses.
Key benchmark indices in Hong Kong, Japan, South Korea, Singapore and Taiwan were down by between 0.73% to 2.3%. The Hong Kong stock market was the major loser today after Chinese Premier Wen Jiabao said China needed new laws before going ahead with a programme allowing mainland Chinese to invest directly in Hong-Kong-Listed securities
On Wall Street, stocks eked out a small gain on Friday, 2 November 2007, following strong October 2007 jobs data, pushing the blue-chip Dow and technology-laden Nasdaq Composite Index modestly higher. The crucial US jobs report showed payrolls surged in October at twice the expected rate, suggesting the world's biggest economy was strong enough to handle a deep housing slump without falling into recession.
The Indian market had surged on Friday, 2 November 2007, in what was an intra-day turnaround. Sensex rose 252 points or 1.28% to settle at 19,976.23, after an initial sharp fall during the day. As per provisional data, FIIs sold shares worth a net Rs 1230.86 crore on Friday, 2 November 2007 on that day. Domestic institutions had bought shares worth a net Rs 444.74 crore on that day.
Market likely to remain edgy
The market is likely to see some choppy trading on the back of weak Asian indices in current trades. However, gains in the US markets, surging FII investments and bullish trend may help market to add gains. But, rise in oil prices may put some pressure on investors' sentiment. Among the domestic indices the Nifty could taste 6000 level on the upside and has a strong support at 5700 levels. The Sensex has a strong support at 19000 and has a resistance at 20500 levels.
US indices saw a late-session rally to finish modestly higher on Friday. While the Dow Jones moved up by 27 points at 13595, the Nasdaq moved up by 16 points to close at 2810.
Crude oil prices advanced further, with the Nymex light crude oil for December delivery gaining by $2.44 cents to close at $95.93 a barrel. In the commodity space, the Comex gold for December delivery gained $14.80 to settle at $808.50 an ounce.
Pre Market Watch
Indian market is likely to have a negative opening, as the Asian markets are trading in red territory. On Friday, the benchmark index Sensex ended up with the gain of 251.88 points at 19,976.23, whereas Nifty closed with a gain of 65.95 points at 5,932.40. We expect that the market will trade in negative zone during the day.
On Friday, the US markets ended marginally higher as the Dow Jones Industrial Average (DJIA) ended 27.23 points up to close at 13,595.10. Further the NASDAQ Composite & S&P 500 (SPX) index moved up by 15.55 points & 1.21 points at 2,810.38 & 1,509.65 respectively.
Indian ADRs ended mixed. In telecommunication sector, VSNL & MTNL surged 3.68% & 2.82% respectively. Further in Banking sector ICICI bank & HDFC bank increased by 3.64% & 0.62%. In Technology sector, Patni Computers decreased by (10.47%), along with Satyam by (0.20%), whereas Infosys and Wipro moved up by 1.40% and 0.49% respectively.
The major stock markets in Asia are trading weak. Hang Seng is trading in red with a loss of 209.94 points at 30,258.40. Along with this, Japan''s Nikkei is trading 154.84 points down at 16,362.64. Singapore''s Straits Times index is also trading lower by 14.81 points at 3,700.51, whereas Seoul Composite lost 6.72 points to trade at 2,012.62.
On Friday, the FIIs were net buyers as the gross equity purchased was Rs.5179.40 (in crores), and the gross debt purchased was Rs.49.60 (in crores) as against the gross equity sold was Rs.4998.80 (in crores) and the gross debt sold was nil. The net investment of equity was Rs.180.60 (in crores) and the net debt investment was Rs.49.60 (in crores).
Today, Nifty has support at 5,750 and resistance at 6,050 and BSE Sensex has support at 19,550 and resistance at 20,100.
Stock Picks
Stocks with +ve bias: SBI, Punj Lloyd, Infosys & Divis Lab
Stocks for short term Delivery: Petronet LNG,
Stocks for Investment: Maruti, Aditya Birla Nuo, JP Associates & Shivvani Oil
Credit related upheaval in market send indices lower
Nasdaq manages to score little gains in a week when Citigroup plays the spoilt sport
A strong start ended in a lackluster mode in the US Market for the week ending on Friday, 2 November, 2007. Federal Reserve’s key decision on interest rate remained the focal point during the week. High crude oil prices, a few misses on the earning front and renewed mess in the financial sector led to quite a roller coaster ride in the stock market during the week.
The Federal Open Market Committee gave the market what it wanted when it decided to cut the fed funds rate and discount rates by 25 basis points each to 4.5% and 5% respectively. Though stocks took some time to react, they rallied after the rate cut.
But led by the Financial sector which led to a huge sell-off in the market on Thursday, 1 November, 2007, indices, barring Nasdaq, closed lower for the week. The loss came despite indices closing higher on Friday, 2 November, led by a modestly strong employment report from the Labor Department.
The Dow Jones Industrial Average lost 211 points for the week. Tech - heavy Nasdaq gained 6.2 points. S&P 500 lost 25.6 points.
Microsoft, Apple and Google were the main reasons for Nasdaq’s gains. Google crossed the $700 mark for the first time ever during the week. Apple gained on solid numbers from its Leopard operating system sales. Verizon shares were up on reports that the company was in talks with Google to come out with a product against Apple’s iPhone.
After Merrill Lynch, it was Citigroup’s turn this week to lead the subprime mess rally. But Merrill Lynch too continued to be in the headlines. The subprime story once again started after CIBC World Market downgraded Citigroup. Estimates that the company will have to raise more than $30 billion by either selling assets, cutting its dividend or raising capital imparted a sense of feeling that all in still not so well in the financial market.
Merrill Lynch also fell and continued to be in the news after its chief executive Stan O’Neal resigned. Also on Friday, 2 November, Deutsche Securities downgraded Merrill Lynch to Hold from Buy amid its concerns that new write-downs of the company for collateralized debt obligations could approach $10 billion.
All financial stocks – Citigroup, AIG, JP Morgan and American Express ended considerably lower for the week spurring of a huge sell-off both on Thursday, 1 November and Friday, 2 November.
On the earnings front, Dow component Verizon beat market expectations. On the other hand, cereal maker Kellogs reported earnings beating estimates but issued FY 2008 guidance that was below expectations. P&G missed on meeting Wall Street estimates and it started a huge sell-off in the market on Tuesday, 30 October.
Another important Dow component which failed to keep up to Wall Street’s expectations was Exxon Mobil. The company announced that third-quarter income fell 10% as the rising cost of oil raised expenses. It was the worst drop in profit for the company in three years and the company could not get comparative better price for its products.
Among major economic news hitting the market during the week, the Labor Department reported on Friday that non-farm payrolls rose 166,000 in October (against an expected increase of 80,000). The September increase in payrolls was revised slightly lower, but it did not negate the strong October gain. The unemployment rate remained at a low 4.7%.
Also, the Conference Board's reading on consumer confidence fell to 95.6 for October from 99.8 in September, amid record oil prices and persisting weakness in the housing market. This was against a consensus estimate which called for an increase to 99 or 100.
Third quarter real GDP rose at a 3.9% annual rate. Also good news came from the fact that GDP deflator (inflation measure) was up at just a 0.8% annual rate in the quarter. The figures were quite surprising in nature given the nature of housing slump and sub prime mess market has witnessed this quarter.
The only economic news that led to some metal stocks losing ground was the Institute of Supply Management. The ISM data showed that manufacturing in USA expanded at its slowest pace since March because of tight credit conditions and a housing downturn. The dollar fell against most of its rival currencies. The Institute for Supply Management's factory index fell to 50.9, against an expectation of 51.5.
Executive Summary
For the week, indices ended mixed. Dow and S&P 500 slipped while Nasdaq was almost unchanged. DJIx closed down by 1.6% and S&P 500 closed down by 1.7%. Nasdaq gained a paltry 0.2%. Credit-related upheaval in the financial market once again spurted sell-off in the market. P&G and Exxon Mobil were two big Dow names that reported below-expected earnings during the week.
Crude for December delivery gained $2.44 to a record close of $95.93 a barrel, while the benchmark gold contract rallied to close above $800 at their highest level in nearly 28 years, finishing up $14.80 to end at $808.50 an ounce.
For the year, Dow is up by 9.1%, Nasdaq is up by 16.4% and S&P 500 is up by 6.4%.
Crude takes a giant leap
Crude prices are just $3 away from touching the $100 mark
Crude-oil future prices for sweet light crude for December delivery which had ended at $91.86/bbl last week (26 October) finished $4.07 (4.4%) higher this week (02 November) at $95.93/bbl. Prices shot up thrice during the week due to a variety of reasons.
Oil rose on Monday, 29 October, after Mexico's state-owned Petroleos Mexicanos, one of the largest crude suppliers to the U.S, said that it halted production owing to bad weather. Then on Wednesday, 31 October, unexpected drop in crude inventories taking fuel inventories to two-year low level sent crude prices to a new all time high closing above $94/barrel for the first time ever.
On Friday, 1 November, prices increased $2.44 (2.6%) to close at $95.93/ barrel. Prices increased after traders speculated that demand for oil will increase after Labor Department’s report showed U.S. employment grew more than expected last month.
As per the weekly inventory report by the Energy Department, U.S. commercial crude oil inventories, fell by 3.9 million barrels to 312.7 million barrels in the week ending 26 October, the lowest since October 2005. Market was expecting a build up of 1.25 million barrel in crude inventories. Refinery capacity utilization fell sharply by 0.9% to 86.2%.
Also, the EIA reported that gasoline supplies rose by 1.3 million barrels to 195.1 million barrels in the latest week, down from last year's 206.4 million, while distillate stocks, which include heading oil, diesel and jet fuel, grew by 800,000 barrels to 135.3 million barrels, down from 144.1 million of the same period in last year.
OPEC has said previously that a falling dollar justified higher prices because oil- producing countries sell crude oil in dollars and often buy goods in euros.
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.
Daily Trading Calls
Nifty (5932) Sup 5860 Res 5993
Buy CESC (587) SL 581
Target 598, 602
Buy ICICI Bank (1333) SL1320 Target 1362, 1367
Buy Sterlite (1032) SL 1022 Target 1058, 1065
Sell M&M (755) SL 761
Target 744, 740
Sell Tata Chem (315) SL 320 Target 307, 304
Crackers and celebrations
Stop worrying about the potholes in the road and celebrate the journey!
Though officially Diwali festivities begin today, on the bourses the festive spirit has been underway for quite some time now. Last week, the Sensex crossed the 20k mark and the Nifty breached 6,000. Concerns keep bursting like loud crackers time and again. First there was the subprime mess in the US, which was followed by a smart pullback. Then came the P-Note scare. Last week, the policy announcements from the RBI and then from the Fed also did little to upset the apple cart, so to speak. The bulls have survived the bumpy ride of the past three months and seem to be in the driver's seat, thanks to the non-stop foreign capital inflows. Having said that, the same appears to have tapered off a little in the past few days. So, if the trend continues for a while, the market will react and we will have a long-overdue but a healthy consolidation/correction. Still, we wouldn't press the panic button, as the 'India Shining' story remains solid. Short-term blips apart, one should consider taking the longer, and more fruitful journey. Those who dare to tread this path should stay put in quality stocks and capitalise on any downside to buy more. Others should lock in gains as the ride has turned choppy and will remain so amid the lack of any specific catalysts. Today, we see a weak opening due to a sharp fall in Asian indices, especially the Hang Seng. Thereafter the market will turn volatile.
US stocks ended a volatile trading session on Friday with modest gains as investors weighed a surprisingly strong October jobs report and an unexpected rise in factory orders against ongoing credit-related turmoil in the financial sector.
Citigroup said its CEO Charles Prince is stepping down after the largest US bank warned of as much as $11bn of additional writedowns on subprime mortgages and related securities, on top of more than $6bn of charges reported for the third quarter.
The Dow Jones Industrial Average climbed 27.2 points to 13,595.10, but ended with a 1.5% loss for the week. The broader S&P 500 index closed up 1.25 points at 1,509.69, but ended with a weekly loss of 1.6%. The Nasdaq rose 15.55 points to 2,810.38, leaving it virtually unchanged from the prior week's close.
The US economy created 166,000 jobs in October, helping investors brush aside lingering fears over weakness in the housing and credit sectors. The growth in non-farm payrolls was the best since May. The unemployment rate held steady at 4.7%.
In commodities trading, crude-oil and gold futures both rallied on Friday. Light, sweet crude for December delivery gained $2.44 to a record close of $95.93 per barrel, while the benchmark gold contract rallied to close above $800 at their highest level in nearly 28 years, finishing up $14.80 to end at $808.50 an ounce.
Across the Atlantic, banks led the top FTSE 100 index in London into the red amid nagging worries that the recent credit market crisis may not yet be over. The FTSE 100 index closed 0.8%, or 55.50 points lower, at 6,530.60. Other European markets also closed down, though they came off lows after the release of stronger-than-expected US jobs data.
In emerging markets, the Bovespa in Brazil tumbled by close to 2% at 64,050 while the IPC index in Mexico fell by over 2% to 30,806. The RTS index in Russia gained 0.4% at 2228 and the ISE National-30 index in Turkey gave up 1.2% at 72,304.
Asian markets were mostly down this morning on renewed concerns about the extent of strain in US housing sector and its implications on the world's largest economy.
Mitsubishi UFJ Financial and National Australia Bank declined after Citigroup said it will increase writedowns by as much as $11bn on its mortgage-related investments and Deutsche Bank estimated Merrill Lynch will have to write off another $10bn on subprime-linked assets.
BHP Billiton slipped after copper had the biggest weekly loss in two months. Inpex Holdings gained after crude oil prices ended last week at a new lifetime high.
PetroChina, which raised $8.9bn in the world's biggest IPO this year, passed Exxon Mobil as the world's largest company by market value after surging on its trading debut in Shanghai.
The Morgan Stanley Capital International Asia Pacific Index lost 0.6% to 167.47 as of 11:06 a.m. in Tokyo, having slipped 2.2% on Nov. 2 from a record close. Financial shares were the biggest drag among the benchmark's 10 industry groups.
Japan's Nikkei 225 Stock Average declined 0.9% to 16,362.64. Hong Kong's Hang Seng Index lost 1.2%, the region's biggest drop, after comments by China's Premier Wen Jiabao suggested the nation may delay a plan to allow mainland investors buy Hong Kong shares.
China, Malaysia, Indonesia and the Philippines were the region's only markets to advance.
Volatility to prevail
After opening lower by more than 400 points in the opening trades the benchmark Sensex recouped all its losses and closed 251 points or 1.28% higher shrugging off all the negative cues from the International markets. The recovery was led by the index heavyweights like SBI, HDFC, Reliance Energy and ONGC.
Almost all the BSE sectoral indices ended in positive terrain towards the end of the session. The Bankex index was the top gainer, the index gained 3.5%. Others like Capital Good, FMCG and Realty indices followed suit
Finally, the 30-share Sensex gained 251 points to close at 19,976. Nifty index gained 65 points to close at 5,932.
Ranbaxy edged higher 0.6% to Rs438. The company announced that it received tentative approval from the US FDA to make and sell the hypertension tablets, Valsartan. The scrip touched an intra-day high of Rs441 and a low of Rs422 and recorded volumes of over 6,00,000 shares on NSE.
Shobha Developers ended flat at Rs925. According to reports the company has ventures into Pune residential market. The scrip touched an intra-day high of Rs929 and a low of Rs914 and recorded volumes of over 10,000 shares on NSE.
Suzlon Energy was up 0.3% to Rs1968. Reports stated that the company planned to export its products to 40 countries from present 14 countries over the next five years including locations like South Korea, South Africa and the emerging markets. The scrip touched an intra-day high of Rs1974 and a low of Rs1910 and recorded volumes of over 2,00,000 shares on NSE.
L&T gained 1% to Rs4461 after reports stated that the company secured Rs55.5bn order to build new integrated passenger terminal at
M&M slipped 1.4% to Rs754. The company announced that it has formed a Joint Venture with International Truck & Engine. The scrip touched an intra-day high of Rs819 and a low of Rs746 and recorded volumes of over 5,00,000 shares on NSE.
Tata Motors gained 1% to Rs754 after the company reported a total sale of 49,354 vehicles (including exports) for the month of October 2007, a growth of 13% compared to 43,743 vehicles sold in October last year.
The domestic market continues to be sluggish, due to the high interest rate regime, continuing to affect retails. The scrip touched an intra-day high of Rs759 and a low of Rs725 and recorded volumes of over 6,00,000 shares on NSE.
RPL gained 3.2% to Rs269. Chevron owns 5% stake in the company and further has option to buy 24%. The scrip touched an intra-day high of Rs274 and a low of Rs246 and recorded volumes of over 70,00,00,000 shares on NSE.
Ambuja Cement edged higher 0.8% to Rs145. The company declared its October sales at 1.48mn tons (up 3.4%) and output at 1.51mn tons (up 4.8%). The scrip touched an intra-day high of Rs145 and a low of Rs141 and recorded volumes of over 14,00,000 shares on NSE.
ACC slipped 1.8% to Rs1033. The company announced its cement production for the month of October, 2007 was up 4.8% to 1.76mn tones. The scrip touched an intra-day high of Rs1050 and a low of Rs1010 and recorded volumes of over 3,00,000 shares on NSE.
Apar Industries surged 2.5% to Rs257 after the company declared that they would sell Polymer unit for Rs1.11bn. The scrip touched an intra-day high of Rs280 and a low of Rs252 and recorded volumes of over 53,000 shares on NSE.
Stocks in News:
Decision on fuel prices likely soon; marginal hike in retail prices, excise duty cuts and import duty cut on crude likely options
Power Grid Corporation secures Rs42bn mega transmission project
RCom and Vodafone Essar, amongst others, could get more spectrum for expansion as they have already paid license fees
Pidilite to invest Rs4.5bn to set up a manufacturing unit in Gujarat
Financial Technologies identifies three partners to offload 16% stake in MCX
Apollo Hospitals would invest Rs8bn in two years to add 1,600 beds
Reliance Industries has contracted an ultra deepwater drillship Deepwater Pacific 1 from Transocean for US$935mn
Daimler has withdrawn its interest to acquire a strategic stake in Eicher Motors
SAIL and Rashtriya Ispat Nigam have hiked steel prices for third consecutive month
SBI has received government approval for its Rights Issue
GTL Infrastructure would invest Rs68bn to set up 25,000 shared telecom towers
Wockhardt Hospitals may raise Rs10bn to increase its network to 30 hospitals
The Government may approve capital restructuring of UCO Bank; bank may issue FPO of Rs2.5bn
BEML may set up JV with overseas partner to make high end boggies
PE giant Blackstone may invest Rs50bn in Hotel Leela
The Government proposes to allow 49% foreign investment in public sector oil refineries, in commodity exchanges and in Credit Information Companies
Power generation shortfall was 74% of the target in H1 FY08
New Mining policy likely to be announced by December; may allow higher FDI in the sector
Portfolio investments by FIIs in real estate companies should not be counted as part of FDI, according to Commerce Ministry
Fertilizer subsidy reform may cost an additional Rs12bn in FY08
The DoT rejects Law Ministry suggestion for GoM to handle applications for allotment of telecom licenses
The Tata group may participate in the Rs500bn dedicated freight corridor project; may set up a JV with Mitsubishi Corp.
Domestic drug makers have agreed to withdraw 120 combination drugs totaling over 270 brands worth Rs10bn from the market
FII Investment Trend:
FIIs were net sellers of Rs12.31bn (provisional) in the cash segment on Friday while the local institutions pumped in Rs4.45bn.
In the F&O segment, FIIs were net buyers of Rs13.8bn.
On Thursday, FIIs were net buyers of only Rs1.81bn in the cash segment. Mutual Funds were net sellers of Rs3.58bn on the same day.
Major Bulk Deals:
Clearwater Capital has picked up Alps Industries; Kotak Mahindra UK has bought Tera Software.
Upper Circuit:
Godrej Industries, Adhunik Metaliks, Nocil, GTC Industries, Deep Industries, Goldstone Tech, Goldiam International, Zandu Pharma, McNally Bharat, Prakash Industries and Ferro Alloys.
Lower Circuit:Shree Precoated Steel and Marathon Nextgen
FIIs sell in futures & options segment
The Foreign Institutional Investors (FIIs) were net sellers to the tune of Rs 1,379.53 crore in the futures & options segment on Friday.
According to data released by the NSE, FIIs were net sellers of index futures to the tune of Rs 723.40 crore and bought index options worth Rs 38.46 crore. They were net sellers of stock futures to the tune of Rs 683.82 crore and sold stock options worth Rs 10.77 crore
Retail investors exiting the market
Promoters have raised their holdings in India’s top companies in the quarter ended September 2007 whereas household investors continued to reduce their direct exposure to equities for a fifth straight quarter.
According to Morgan Stanley, as per the ownership data for India’s top stocks, households have been buyers of these top companies stocks in only six out of the past 26 quarters. In contrast, FIIs have been buyers in 17 out of the past 26 quarters. Observers say this would suggest that retail investors haven’t really participated in a big way in the huge stock market rally in the past few months as the BSE index crosses the 20,000 mark.
This data also shows that institutional investors were marginal net sellers of these stocks after buying them in the previous quarter. Institutional investors, including domestic mutual funds, foreign investors and local institutions, reduced their stake in these 75 companies by 20 basis points.
Following this quarter’s data, FII holdings in India’s top companies are now about 120 basis points off the high hit two years ago. Just like the previous 10 quarters, bulk of the FII inflows during the quarter ended September went into stocks outside the top 75 with a surge into small- and mid-cap stocks. The flows into the stocks outside the top names aggregated to a whopping $8.4 billion, the best ever and 82% higher than in the previous quarter, says Morgan Stanley.
FIIs continue to occupy the position of the second largest investors in the country after controlling stakeholders.Domestic investors were distinctly less enthusiastic about buying stocks during the quarter ended September with domestic mutual funds and households selling stocks. Domestic households have been shifting their direct ownership of stocks into owning equities via mutual funds. They reduced their stake by 37 basis points, taking the cumulative reduction to 8.7% since 2001.
Via ET
Stocks you can buy this week
Everest Kanto
Research: CLSA
Rating: Buy
CMP: Rs 277
CLSA has initiated a coverage on Everest Kanto with a ‘buy’ recommendation and a 12-month target price of Rs 306. Everest Kanto Cylinders manufactures high-pressure cylinders for CNG and industrial applications. Present in geographies that are slated to see exciting growth (especially in CNG segment) and higher-realisation markets than India, profitable growth opportunity looms ahead. It augurs well for the company that the fastest growing market (Iran) is also the highest realisation market ($315/unit vs $240/unit in India). Everest Kanto has a long standing sourcing relationship with Tenaris. This, along with approvals in 16 countries and two decades of manufacturing experience, makes it one of the best-poised players to cash in on the opportunity. The company is pursuing aggressive expansion plans in its Gandhidham facility and is setting up a greenfield plant in China at an attractive capital cost. Even after assuming a hike in raw material costs from current levels, it’s slated to see a compound annual growth rate (CAGR) of 39% and 44% in sales and EPS.
Sobha Developers
Research: Morgan Stanley
Rating: Overweight
CMP: Rs 926
Morgan Stanley has reiterated an ‘overweight’ rating on Sobha Developers (SDL) on strong fundamentals and reasonable valuations. SDL reported FQ208 results — ahead of expectations: sales were up 2% YoY (up 24% QoQ), which led to a 51% rise in net profit to Rs 56.2 crore. The performance was driven by its ongoing projects in Bangalore and Trissur and SDL’s contractual business. Forthcoming projects pipeline gives a good scale-up as well as earnings growth visibility. A good portion of the projects is in new markets, including Pune, Coimbatore, Mysore and Chennai, which should de-risk earnings. Out of the total land cost of Rs 2,370 crore, the company has paid Rs 1,430 crore. The balance is estimated to be paid over the next one-and-a-half to two years, according to SDL. Its net debt-to-equity ratio, as of September 30, ’07 is 1.15. The stock is trading at a 15% discount to Morgan Stanley’s forward NAV and 20x F09 EPSe.
Raymond
Research: Citigroup
Rating: Buy
CMP: Rs 353
Revenues grew 9% YoY driven by branded retailing, while EBITDA fell 36% and earnings before taxes declined (Rs 39.6 crore) 63% YoY — primarily due to increased denim losses and woollen fabric JV. However, this was better than Q1 earnings (Rs 2.7 crore). Standalone results are not comparable due to the de-merger of the denim division in August ’06. The 50:50 denim JV losses increased to Rs 30.4 crore in Q2 (vs Rs 13.3 crore in Q1) with revenues down 9% QoQ. High cotton prices, an appreciating rupee, high overheads in the US and EU plants are the key reasons for the losses. Raymond is taking initiatives to improve utilisations, enrich the product mix, but this is unlikely to reduce near-term losses materially. Muted growth was due to store additions and promotion of recently launched women’s range in Park Avenue and Colorplus. Profitability will improve in the second half (H2), as new stores begin to contribute to earnings. Fabric revenues were up 6% YoY, while PBIT was down 20% YoY, margins also improved to 18% against 5% in Q1. There’s an upside to the stock at 7.7x EV/EBITDA for FY09E, with a high potential to unlock value of real estate assets.
Redington
Research: Lehman Brothers
Rating: Buy
CMP: Rs 345
Lehman Brothers has initiated a coverage on Redington with an investment rating of ‘overweight’. Redington is the second-largest IT distributor in India and the largest IT distributor in the Middle East. It posted revenue CAGR of 50% for FY05-07. The momentum in revenue growth will continue, driven by increased penetration of IT products in both India and the Middle East. The company’s operating history is impressive, with bad debts averaging 0.08% of sales during the past five years and inventory write-downs in the 0.03% area. At current market price, the stock is trading at a P/E of 15.6x FY09E EPS of Rs 23.5. The 12-month forward price target is Rs 455, implying potential upside of 24% from the current share price. At the current market price, the stock trades at a forward P/E of 15.5x its FY09E EPS of Rs 23.5 and a price-to-book value ratio of 3.2 on its FY09E BV of Rs 114.3/share. The stock is inexpensive at current levels and compares favourably with global peers given its higher growth prospects.
Divi’s Lab
Research: Merrill Lynch
Rating: Buy
CMP: Rs 1,738
Merrill Lynch has upgraded Divi’s Laboratories to ‘buy’ on strong results. The FY08E and FY09E EPS are higher by 73% and 106% respectively and the target price of Rs 2,250/share includes Rs 2,050/share for the base business and Rs 200/share for carotenoids, which implies 30% upside from current levels. Divi’s sharp margin surprise is driven by high CMS contribution which is expected to grow to 65% of revenues by FY09E against the current ~50%. Merrill Lynch forecasts a 48% EPS CAGR (FY07-10E) on the back of a 37% CAGR in revenue (FY07-10E) and tax benefits. Divi’s’ likely launch of eight nutraceutical products under the ‘Vivital’ brand is expected to start generating revenues from Q3 onwards and estimate scale-up to at least $40-45 million p.a. over the next three years. Divi’s clearly has the first mover advantage to capture a significant share of pharma outsourcing by innovator companies. Despite the stock’s significant relative outperformance over the past six months, the strong earnings momentum and take-off of the nutraceuticals business will likely drive further outperformance.
SBI
Research: UBS
Rating: Buy
CMP: Rs 2,252
SBI’S net profit at Rs 1,600 crore in Q2 FY08 grew 36% YoY and 13% QoQ, around 17% higher than consensus and estimates. The stronger-than-expected growth was driven by higher trading gains and write-back of loan loss provisions against expectations of a provisioning charge. While net profit was strong, there was pressure on net interest margin (NIM) and declining provisioning cover. Net interest income (NII) grew 6% YoY and declined 10% QoQ. Fees were healthy, up 12% YoY and 7% QoQ but growth has decelerated. Provisioning cover declined to 45%. The management has guided towards an improvement in both NIMs and loan growth in H2 FY08. While Q2 was mixed, the stock may hold up due to management’s focus on new growth areas like the launch of general insurance and private equity. The management hopes to raise at least Rs10,000 crore as fresh equity by March ’08. Excluding the value of non-bank subsidiaries, SBI is trading at 1.7x P/BV FY09E.
McKinsey - Indian consumer to spend Rs 200 per day
The Indian consumer will spend over Rs200 a day on average by the year 2025, steered by a ten-fold increase in the country’s middle class population and a three-fold jump in household income during this period.
According to a study by the McKinsey Global Institute, the aggregate consumer spending could more than quadruple to Rs70 trillion by 2025, from about Rs17 trillion in 2005.
“The dramatic growth in India’s middle class, from 50 million to 583 million people, will power this growth,” the international consultancy major said in a new study.
India’s rapid economic growth has set the stage for fundamental change among its consumers. The same energy that lifted hundreds of millions of Indians out of poverty is creating a massive middle class centred in the cities... If India continues its recent growth, average household incomes will triple over the next two decades and it will become the fifth largest consumer economy by 2025, up from 12th now.
McKinsey said that by 2025, the country’s middle class would grow from about 5% of the population to more than 40%, which, along with rising private income, would drive a sharp surge in consumer spending.
Taking into account the estimated consumer population in the age-group of 15-64 years, which is expected to rise to 950 million by 2025, the spending per consumer would rise to about Rs74,310 a year, over Rs6,000 a month or Rs206 a day.
Considering the population of the same age-group at about 700 million in 2005, McKinsey’s consumer spending estimate for that year would be about Rs24,300 per person in a year, about Rs2,000 a month or just about Rs67 a day.
Middle-class families are those with disposable income between Rs1-2 lakh a year.
The forecast is based on 7.3% annual GDP growth assumption for next two decades, McKinsey said, adding this was reasonable if economic reforms continues.
Private consumption has already played a key role in India’s growth than it has in that of other developing countries, the international consultancy major said.
In 2005, private spending of Rs17 trillion accounted for 62% of India’s GDP, which is closer to the developed economies like the US (70%) and Japan (57%) than to China (37%) and other fast-growing emerging markets in Asia.
McKinsey said that the consumers’ spending in years to come would also shift substantially from the informal economy (economic activities that is neither taxed nor monitored by government) to the more efficient formal economy of organized businesses and “that transition would lower prices and further boost demand”.
The study warned, however, that “neither incumbents nor attackers will have an easy time” as bureaucratic hurdles and well-recognized infrastructure shortcomings would “frustrate many strategies.”
Besides, the spending would be spread across hundreds of millions of households, many with very modest income and high sensitivity to price and value, it noted.
A number of domestic and multinational companies are already competing in the market and the challenges would force companies to be more dynamic to adapt the rapidly changing needs and incomes of the consumers.
McKinsey also sees a shift in spending power from the countryside to the cities, thus placing a bulk of India’s private consumption within easier reach of major companies.
“Today, 57% of private spending is spread across rural areas, but by 2025 cities will command 62% of the country’s spending power,” McKinsey said.
Via Mint
Expect a volatile week
Markets may stay volatile this week, as investors could limit activity to assess the impact of the US Fed indicating that further rate cuts are unlikely on foreign fund flows. With the second quarter earnings of companies showing signs of a slowdown and oil prices hovering just below $100 per barrel, investors are uncertain about how long the recent rally would last.
A section of the market does see some slowdown in foreign fund inflows in the near-term, as absence of further rate cuts would make “carry trade” less attractive in a market that is already expensive. Also, curbs on participatory notes may further slow such inflows into India.
Carry trade involves borrowing in countries with lower rates and a weakening currency and investing the proceeds in high-yielding assets elsewhere, for higher returns. Analysts partly attribute the glut of foreign institutional
inflow into emerging markets, especially India, to this trade, which gained significance after the 0.5% cut by the US Fed in its benchmark rate.
Foreign funds have net invested $8 billion in October alone after the first Fed rate cut on September 18. So far this year, these funds have poured in over $17 billion into Indian equities, which is way above the highest-ever annual foreign inflow of roughly $11 billion in 2005.
But with the Fed chairman making cautionary statements on inflation after another 0.25% rate cut last week, investors believe that the Fed is unlikely to trim rates further. The healthier-than-expected US job report — one of the most closely watched economic data — on Friday will give lesser leeway for the US central bank to cut rates further, analysts said.
Meanwhile, bulls in the US market got the news they were waiting for on Friday when the October jobs report turned out to be better than expected. The data fuelled some opening gains, which was, however, quickly relegated to an afterthought amid renewed concerns about the financial sector’s prospects. The Dow ended 0.2% higher at 13,595 points on Friday.
Oil futures added to the positives late Friday when the British Foreign Office said the UN Security Council agreed to draft a new sanctions resolution, which could be passed in November, if Iran’s cooperation with the International Atomic Energy Agency does not improve. Investors worry that any conflict between the West and Iran would disrupt oil supplies from the Middle East. Light, sweet crude for December delivery rose $2.44 to settle at a record $95.93 a barrel on the New York Mercantile Exchange.
Back home, oil marketing companies’ shares may rise on expectations that the government will announce a hike in oil product prices soon, especially with global oil prices showing no signs of easing. Global oil prices have risen close to 50% since the past year, but oil companies have been unable to raise prices due to political compulsions.
Analysts feel shares of software companies could rebound slightly this week, as the stronger US job data suggests that the economy may not be in that bad a shape as was expected after the subprime crisis. These companies derive a major share of their revenues from the US. These shares have been the biggest laggards in the past sixmonths, as the rapid rise in the rupee against the dollar threatened to hit their earnings and margins.
Via ET
More rally ahead
| The Nifty is likely to consolidate at current levels, with an upward bias. |
| The market shot up on Monday and range-traded for the rest of the week. The Nifty closed at 5932 points for a gain of 4.04 per cent, briefly crossing above the 6000-level. The Sensex was up 3.81 per cent at 19976 points after hitting 20,000 plus. |
| The Defty rose 4.38 per cent as the rupee strengthened yet again after the RBI announced a marginally tighter monetary policy. The Nifty Junior was up 3.2 per cent. |
| Breadth was positive and volumes were fairly high except on Friday. The CNX Midcap gained 1.79 per cent while the BSE 500 was ahead by 3.92 per cent. |
| FIIs were net buyers as they appeared to have absorbed the implications of clarified participatory notes policy but mutual funds remained net sellers. |
| The Bank Nifty delivered an extraordinary gain of 9.6 per cent on a relief rally after the credit policy. The CNX IT was about the only sectoral loser, down 1.65 per cent. |
| Outlook: Consolidation within the broad range of 5700-6000 seems to be the current pattern. Look for closes outside this zone to set the next trend. Friday's trading pattern ended strong so, there is some reason to presume an upside is more likely. But it may not come immediately. |
| Rationale: The market is swinging through an unusually high range of almost 200 Nifty points per day. Diwali usually tends to be bearish because retail and operator volumes dwindle but the FIIs are still net buyers and they have the resources to keep the market buoyant. The next upwards breakout would set a target of about 6300 Nifty. |
| Counter-view: Friday's trading session was open to several conflicting interpretations. Prices moved up through the session – that's bullish. Volumes were very low – bearish. The high-low range was wider than the immediate previous sessions – indicative of a potential breakout. Trading was spotty – many counters were "under-traded" (relatively low no. of trades as well as low volumes) – this suggests more range-trading. |
| Bulls & bears: The big gainers were banking stocks, which saw in a strong relief rally after the RBI held rates unchanged. Banking heavyweights SBI, HDFC Bank, Bank of Baroda and ICICI Bank contributed a lot to overall index gains. Other major gainers were L&T, ONGC, Tata Power, Biocon. |
| The big losers were telecom stocks with market leader Bharti Airtel taking a special hammering. Hero Honda also took a beating as did several other auto stocks. As mentioned above, IT stocks lost ground until Friday. However, Tata Motors and TCS both looked as though they had bottomed out. |
| MICRO TECHNICALS |
| BIOCON Current Price: 564 Target Price: 585 |
| The stock has made a promising looking breakout on high volumes. Keep a stop at 545 and go long. The minimum target is 585 and the likelier target is 600. Book partial profits in the 580-plus zone and consider keeping a delivery position. The long-term trend may have changed for the better. |
| HDFC BANK Current Price: 1770 Target Price: 1850 |
| The credit policy sparked a sector-wide rally but HDFC Bank was one of the most promising performers. Keep a stop at 1740 and go long. There is a significant downside risk due to the almost-vertical rise. The target is likely to be 1850. |
| ONGC Current Price: 1366 Target Price: 1435 |
| There has been a breakout in the past three sessions with decent but not extraordinary volumes. The target would be a minimum 1435 and perhaps a great deal more. Consider booking partial profits at 1435 and holding a delivery position through the next eight-ten weeks. Keep a stop at 1330. |
| RNRL Current Price: 141.9 Target Price: NA |
| The stock shot up 40 per cent in a week on a sharp volume expansion. It's impossible to set a target with this formation. Set a trailing stop at 130 and go long. Move the stop up 5 units for every 5 unit move. Unfortunately the move has come so fast that there is a lack of support and you have to set a wide stop. |
| TATA POWER Current Price: 1304 Target Price: 1400 |
| The stock has made an apparent breakout but this has come on low volumes, which makes it less likely to fulfil optimistic target projections. However there is a target of 1400-plus so and very good support at 1260 so it's worth going long. Keep a stop at 1250 and go long. |
Weekly Recommendations
Birla Ericsson Optical Ltd
Ispat Industries Ltd
MRO-TEK Ltd
NIIT Technologies Ltd
Sanghvi Movers Ltd
Tainwala Chemicals & Plastics (India) Ltd
XPRO India Ltd
Aplab Ltd
Insecticides India Ltd
Khaitan Chemicals & Fertilizers Ltd
KRBL Ltd
NIIT Technologies Ltd
Sanghvi Movers Ltd
Universal Cables Ltd
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