Sunday, November 11, 2007
Amid the ongoing telecom tangle, Reliance ADAG Chairman Anil Ambani has accused GSM operators of "hoarding" surplus spectrum and sought Prime Minister Manmohan Singh's intervention to ensure that service providers like Vodafone and Bharti Airtel surrender the excess airwaves.
In a scathing attack on GSM players, who are demanding auctioning of spectrum and have moved telecom tribunal TDSAT on new spectrum norms, Ambani said even sector regulator TRAI, fair trade practices watchdog MRTPC as also TDSAT have issued notices to Bharti and Vodafone for "anti-consumer practices".
It is essential that the future of telecom industry is "not undermined by a few vested interest for their narrow personal interests", Ambani said in a letter to Singh days before the Diwali festival.
The letter comes after GSM lobby Cellular Operators Association of India challenged the new policy of allowing dual technology for mobile telephony and new spectrum allocation norms as recommended by telecom engineering centre. ADAG firm Reliance Communications is a key CDMA player and was the first one to apply for GSM spectrum under the new norms.
Ambani asked the government to "see through the motivated agenda of a few existing GSM operators and not succumb to their pressure tactics", and said there should be "a transparent framework for surrender of spectrum in a time-bound manner, wherever not utilised, as per guidelines".
As if supporting communications minister A Raja, who has clarified to Prime Minister the issues relating to spectrum, Ambani opposed the auction of spectrum. He said such a route would benefit a close club of few large existing GSM players who remain free to indulge in anti-consumer practices like cartelisation and price fixation.
Global investment banking firm Merrill Lynch expects portfolio investors will continue to pour money in India and China over the next one year as the two Asian nations are growing at a much faster pace compared to most other countries in the world.
Robust economic growth story has made foreign institutional investors (FIIs) to look at India and China as their favourite investment destinations. India has seen a flow of over $17 billion in the equity market since January.
In future, synergies of the two giants will reward the investors in the two economies which are beginning to combine their expertise for fresh growth potentials, it said.
"Combination of India and China will be powerful moderating influence on global prices of goods and services, stimulating new consumption around the world and demand for Chinese and Indian products," Merrill Lynch's Investment Strategy report said.
"Growth in Asia is likely to be led by India and China because the two economies are getting associated which is driving rapid growth," the study observed.
Indian software developers are also providing the software and design for many of the things being manufactured in China.
Just as China is cornering the market for manufacturers, India is doing the same with services. India plays a crucial role in the global innovation chain with multinationals like Hewlett-Packard and Cisco Systems using teams of software designers and programmers for hardware manufactured in China.
India's services sector account for over half of real GDP growth, enabling it to take a huge leap in catching up with other developing economies.
China and India are forecast to have the strongest growth of around 9 to 11 per cent over the next few years while the regional average is slightly above six per cent.
India's economy is around $1,125 billion as compared to China's $3,250 billion economy.
"In India, FIIs own 21 per cent of the market and 45 per cent of the free float," a report by Merrill Lynch said.
Within Asia, India has the second-strongest growth and the second largest economy after China.
Another reason for the FIIs going bullish on India and China is the fact that elsewhere in the world, there is not much growth expected in near future, with Merrill Lynch's forecast of 1.4 per cent GDP growth for the US next year, 1.0 per cent for Japan and 2.3 per cent for Europe.
Q: Very divergent performances this year from various sectors. A lot of them have not performed in this festivity at all, and a lot of them like capital goods, banks, metals have been tear away performers. Do you see that kind of divergence this year as well? What would be your favourite horses if you just look at themes going into the next one year?
A: Why has it been divergent is because, this market for the last 4,000-5,000 points has been led by the FIIs. The romance with Indian equities was in full bloom for the first half of this year. And then tend to prefer the bigger names, because they can invest serious amount of money in one shot. So, whether it is a Reliance, Reliance Capital, ICICI Bank or Bharti, that was the favoured stock.
As we are well aware, the retail investors have been selling; they have not been convinced of this bull run. But there is evidence that they are now being convinced that this bull run is for real. My sense is that at falls they would be buying the cash shares and B group shares. So, the breadth has started to improve at least anecdotally in the market. So, I would wager that if the market regains its health, if it crosses 20,000, it would be on a burst on stream with good breadth and by good participation in cash shares and by the public investors.
In terms of the themes, my sense is what I have been saying for the last few years is that we want to focus on domestic consumption stories. Companies insulated from dollar depreciation problems. So, I continue to look at cement, logistics, banking, these are great shares. One basket of stocks that we are recommending to our investors in our brokerage firm, is a lot of these MNC companies is my understanding are going to be privatized over the next year or so. If one looks at a basket of these MNC companies, over a year, they have quite a lot of safety in terms of lack of depreciation. And when the buy would happen, there would be a significant premium to current market prices. So, domestic consumption themes and MNC privatisation stories are two themes we are zeroing in on.
Q: Has anything surprised you as a sectoral performance, as a story and do you think that is going to be the big star to watch out for over the next few months?
A: I think there have been some great calls in this bull market starting 2003, the real estate story, Reliance Group. How it has absolutely dazzled in terms of its performance, the telecom story, it has been a great story. As you have also said it has been a great bull market and these kinds of bull markets produce these kinds of spectacular returns. So, yes a lot of these old hands including me were caught surprised at the vengeance of the real estate move, the vengeance of the Reliance group has moved. And congratulations at the end of the day these managements have delivered for their shareholders. So, yes it has surprised me.
In terms of headline in the future, the trick in the stock market is to buy cheap, buy value, things worth Rs 100 for Rs 25. So, these stocks may not be particularly cheap at this point. But in a mature phase of the bull market momentum begets momentum. So, the big gets bigger. So, it is typical behaviour what happens in the bull market. The leadership breaks away from the pack and dazzles the market with superior returns. I think we are seeing something like that happen.
Q: The way some of the stocks have moved 20-25%, have they rung any alarm bells or not quite? They are just part of any big bull run?
A: It has raised alarms. When the midcap or smallcap stocks went up, we were worried, but they didn’t have an impact on the markets because they were relatively puny at may be 2% of India’s market cap. After these kind of blow-off runs, investors should pause for thought.
Bull markets do not end with retail investors selling their shares. Many bull markets in India has ended when the IPO pipeline faded or when huge sums of money were raised on prices that were not justifiable. I have not seen that kind of frenzy take place in the Indian IPO market. I am sure given time, a lot of corporates will raise upwards of USD 50-100 billion over the next one or two years in India. The Mundra IPO and many such IPOs suggest that there is latent demand for IPOs in this country.
There would be huge IPO offerings and some of them might time the markets. But for now, look at the positives. Liquidity should remain okay. We are seeing direct tax collection shooting ahead of indirect tax collections. The breath of the market and GDP growth are okay. Markets will see a repeat of the violent corrections that we had in 2007. Broadly, the markets will hold. At present, the bull market seems intact.
The Union Cabinet is likely to take a call by November 22 on State Bank of India`s proposed plan to raise about Rs 18,000 crore through a rights issue.
"We have prepared a cabinet note and it will be taken up at the cabinet meeting either on November 15 or November 22," said official sources.
Incidentally, the winter session of parliament is beginning on November 15 and the government will have to get the parliament sanction to subscribe to the issue, which is likely to cost the government about Rs 10,000 crore. The bank is likely to raise Rs 17,000-18,000 crore through the rights issue to meet regulatory requirement and business growth, the sources said.
Although the rights issue would not change the shareholding pattern, the unsubscribe portion of the issue by existing retail shareholders could increase the government share in the country`s biggest lender.
The government`s stake in SBI, which is currently at 59.73%, could go up after the rights issue, if some investors did not take up the offer. Retail investors currently have around 4 % shares in SBI.
As SBI`s share price is currently ruling at over Rs 2,000, some investors, especially retail ones andmay not subscribe to the rights offer. The government`s holding in SBI may go up to 61-62 %, depending on the unsubscribe portion of rights issue, the sources said.
SBI shares closed down Rs 22.15 at Rs 2,162.50 at the end of Muharat trading on Friday against Rs 2,184.65 in the previous day.
SBI chairman O P Bhatt had earlier said that the bank needs not only the growth capital but also the funds for implementation of Basel II norms, which benchmark the quantum of capital that a bank is required to put aside for covering the financial and operational risks.
"The bank requires close to Rs 5,000 crore just for meeting Basel II norms," he had said.
The Reserve Bank of India has asked all banks having overseas operations to be Basel II compliant by March 2008.
"We also need capital for complying with AS15 (accounting standard 15 norms relating to employees statutory dues). Banks like SBI would require between Rs 4,000 crore to Rs 5,000 crore. These two needs (Basel II and AS15) alone would require Rs 10,000 crore," bhatt had said.
According to government estimates, SBI needs to raise around Rs 89,600 crore over the next five years.
SBI has witnessed a 36.04 % rise in net profit at Rs 161.14 crore during the second quarter this fiscal against Rs 118.44 crore in the corresponding period of 2006-07.
Total income rose by 33.42 %to Rs 1,365.82 crore during the quarter ended September 30, 2007 from Rs 1,023.73 crore in the second quarter last fiscal.
Investors worried over the recent bear attack on the bourses can look forward to a rewarding month ahead as returns have been mostly better post-Diwali compared to the one-month period till the festival of wealth.
If this historic trend charted by the market barometer Sensex in the one-month period before and after Diwali holds true this year also, then the market would reclaim yet again its 20,000-point milestone in the next 30 days.
According to an analysis of historic patterns recorded by the Sensex since 2000, the 30-share barometer index has posted an average return of 6.85 % in the one-month period after Diwali. This is about five times the average return of 1.46 % in the one-month period prior to Diwali.
If the Sensex manages to grow by this average, it could achieve a level above 20k, from its current level of 18,907.60 points. The index had first crossed 20,000 levels on October 29 and scaled a peak of 20,238.16 on October 30. However, a subsequent downslide on the bourses has brought the index over 1,500 points away from its lifetime high.
Notwithstanding a fall of 151 points in Muhurat trading and a five-day downslide, the Sensex still managed to record a gain of 3.43 % in the one-month period till Diwali on November 9, 2007.
The post-Diwali one-month period has always given a positive return for Sensex, while it has been negative twice since 2000 in the prior-Diwali period -- in 2005 and 2000. On other five occasions, the Sensex gained between 3.43 % and 11.75 % in one month prior to Diwali.
Besides, the post-Diwali month has recorded a lower return than the pre-Diwali period only once -- in 2003 when Sensex grew by 11.75 per cent in one month before Diwali and by 1.92 % after Diwali.
The market experts believe that the post-Diwali positive trend gets a boost from the fact that Diwali marks the beginning of a new accounting year for market participants and is similar to the way the western world celebrates Christmas, which heralds fresh buying on the bourses.
In 2000, the Sensex lost 10.44 % in one-month till Diwali, but rose 6.43 % in the following 30 days. In 2005, the Sensex dropped 7.99 % pre-Diwali, but rose 12.59 % post Diwali.
Similarly, in 2001, the BSE-barometer rose 4.59 % in the pre-Diwali period, while in the post-30 days it gained 7.72 %.
In 2002, Sensex rose 1.95 % pre-diwali, against a much higher 7.35 % post Diwali. In 2004 and 2006, the one-month returns in pre-Diwali periods were 5.06 % and 3.76 % respectively, while post-Diwali periods gave higher returns of 5.1 % and 6.9 %.
India is set to become the world’s third largest oil importer after the US and China before 2025, according to the International Energy Agency (IEA).
While India’s importance as an exporter of refined oil products would increase on the back of planned investments in this space, the energy needs would propel India to overtake Japan as the third largest net importer of oil before 2025.
India is ranked fourth in terms of oil imports. According to the ‘World Energy Outlook 2007´ report published by IEA, rapid economic development in China and India would push up the global energy demand.
In addition, the growing demand from the two Asian nations would also bring major economic benefits to the rest of the world.
“Economic expansion in China and India is generating opportunities for other countries to export to them, while increasing other countries’ access to a wider range of competitively priced imported products and services.”
“But growing exports from China and India also increase competitive pressures on other countries, leading to structural adjustments, particularly in countries with competing export industries,” IEA noted.
Dominated by fossil fuels, India and China would account for 45% of the world’s energy needs in 2030.
The markets slipped last week on the back of weakness in the global markets. Major Asian indices, like the Hang Seng and Nikkei, were down over 5.5% each at 28,783 and 15,583, respectively. The Shanghai Composite index plunged 8% to 5315.
The Sensex ended in red right through last week, and dropped 5.3% (1,068 points) to 18,908. The index moved in a range of 1,272 points from an opening high of 20,009 to an intra-week low of 18,737.
Last week, we had mentioned that the index may consolidate and test its near-term support of 18,660. The index is close to its support level and in case the support fails to hold, which seems quite possible, it may take a sharper dip towards its major support area of 17,300-17,000.
The sentiment, however, is likely to remain bullish as long as the Sensex stays above the key support level.
This week, the Sensex is likely to face resistance around 19,400-19,550-19700, and find support around 18,420-18,270-18,120.
The NSE Nifty moved in a range of 342 points - a high of 5957 and a low of 5615 - before settling with a loss of 4.5% (269 points) at 5663. In the process, the index briefly dipped below the 5675 support level.
The next significant support level for the Nifty is around 5425 below which the index may drop to the 5000 level.
This week, the index may face resistance around 5795-5835-5875 and find support around 5530-5490-5450.
The Nifty Moving Average Convergence Divergence (MACD) is bearish since it is trading above its 'signal line'. The MACD is calculated by subtracting the 26-day exponential moving average (EMA) from the 12-day EMA. A nine-day EMA of the MACD, called the signal line, functions as a trigger for buy and sell signals.
The Indian stocks are perched at uncomfortable levels and if the global cues continue to remain weak, there could be further selling in the domestic markets. The weak closing on Muharat day suggests that the ongoing correction might continue, amid volatility. Friday’s close far below the opening levels, accompanied with low volumes, was also an indication that bears were making their presence felt. The market has already corrected by 7 per cent from its all-time high. But since the near-term trend looks weak, a pull-back may attract further profit booking.
The stock market has given 50 per cent returns in Samvat 2063, as has been the trend in the last three years. But the market is lately showing signs of some nervousness as foreign investors have got into a sell mode since the Sebi proposed to regulate participatory notes (P-notes). Since 17th October, the FIIs have been net sellers in the cash market to the tune of 2.3 billion dollars. The domestic institutions have supported the market during this period, buying shares worth $1.35 billion. Foreign investors have reasons to sell as valuations appear to be rich. Asian markets in general have received strong inflows as they have been perceived as safe investment heavens. The resultant rise has made historical valuation irrelevant.
A Citi group report has said that Asia is now the most expensive region. It is trading at a P/E premium of 29 per cent to the developed world and 14 per cent against the general emerging markets. On a PV (price to book value) basis though, Asia is at a moderate discount against the general emerging markets despite the recent selling by foreign funds in the Indian market.
The Indian and Korean specific country funds attracted inflows worth $1.6 billion in the last four weeks, almost double the inflows into the Hong Kong and China funds. This would translate into buying at lower levels. Despite pressing sales, the FIIs were not eager to take money out due to the rupee appreciation, according to banking circles. “Hedge funds are selling as they need to have cash to pay dividend to their investors,” said an FII broker. The impact of sub-prime crisis is showing in the September quarter results of US-based hedge funds, thereby forcing them to book profits.
The crude oil prices, which are at a sniffing distance of the $100 mark, are expected to affect corporate bottom-lines as the prices of many industrial raw materials and intermediates have started moving up. Imports have already become costlier and domestic companies have started raising the prices of their products. Petrochemicals, polymers, chemicals and solvents and furnace oil prices are moving up. The government is under pressure to revise prices of petrol and diesel, which will make transport costlier. Globally, the Asian and US markets have been correcting for some time due to the high crude oil prices and re-emergence of the sub-prime crisis. Once stability returns, foreign money waiting in the wings is bound to enter the Indian markets. Hence, the global factors hold the key to a recovery back home.
The market is bullish above the level of 5,750 on Nifty futures. One could get bullish confirmation only if the Nifty futures close above 5,750. The market would weaken below 5,650. Kamlesh Langote, VFMDirect, said that today’s breakdown below yesterday’s low is not a good sign.
The next immediate support exists at 5,500, where considerable put writing exists. However, a truncated session such as today’s, marked by low volumes, could give wrong break-downs/break-outs and hence Monday’s session would be crucial.
Stock-specific action was seen in National Aluminium, Gail, Neyveli Lignite, Federal Bank, Bajaj Hindustan, Power Finance, GMR Infrastructure and Oswal Chemicals last week, with the prices of November futures moving up by over 10 per cent accompanied with a sharp increase in open interest.
Bajaj Hindustan November futures closed at 218.55, up 14.8 per cent, while the OI increased by 2.3 million shares or 42.2 per cent.
Federal Bank futures surged 15.9 per cent, while the OI increased by 31.6 per cent.
GMR futures closed 13 per cent up and the OI increased by 22.8 per cent.
The firming up in open interest, coupled with the appreciation in stock futures by over 10 per cent, points towards further bullishness in the above mentioned stocks.
An investment can be considered in the stock of PVR Ltd, one of the country’s larger multiplex chains. The stock trades at 18 times its estimated financial year 2008 per-share earnings and at about 12-13 times estimated financial year 2009 earnings, assuming conservatively that growth rates will halve from historic levels.
PVR appears quite capable of delivering such growth rates, given its aggressive plans to add screens, its superior track record in execution and a healthy film production pipeline that will ensure steady content supply. It’s own foray into co-production and other businesses also holds promise.
PVR reported a 40 per cent growth in revenues to Rs 116 crore and 80 per cent growth in net profits in the first half of the financial year 2008 A significant driver of margin expansion in recent quarters has been the waiver of entertainment tax for some of its multiplex properties. However, we expect PVR to maintain its margins. With 23 multiplexes or 89 screens under the PVR Cinemas circuit, it is likely to add 37 screens over the next three quarters. It has a particularly strong presence in Delhi and the NCR regions, which means it has access to premium real estate.
Forays into other regions might come at relatively lower rental costs. PVR now claims to account for at least 10 per cent of domestic theatrical revenues. Shorter film runs have resulted in a higher distributor share, but PVR has so far managed to maintain this share at about 30 per cent of gross ticket sales. It also has a favourable revenue mix, with only 60 per cent of its revenues coming from box office sales.
About 20 per cent of its revenue is derived from sale of food and beverages.
The company’s subsidiary PVR Pictures has gained traction in the distribution business. PVR is also foraying into food courts business through a joint venture with the Dabur group.
Use of the joint venture route and the measured pace of expansion into new areas lend confidence. We, however, have not factored in any gains from these businesses.
Investors with a two-three year perspective can buy the stock of Nicholas Piramal India (NPIL). After cementing its position in the branded formulations business– its top10 brands and lifestyle products contribute over 50 per cent of formulations portfolio sales–NPIL forayed into the international market not through costly intellectual property rights (IPR) tussles but through partnerships with “Big Pharma”. These relationships have begun to bear fruit.
The custom manufacturing (CMG) business, grew 22 per cent to Rs 340 crore in Q2 FY-08. CMG revenues from Indian facilities, in particular, increased over three-fold to Rs 70 crore, as shipments for a supply contract with a big pharma company commenced.
A five-year formulations contract with a Fortune 500 company is set to commence from third quarter and another contract for anti-glaucoma active pharmaceutical ingredients is already underway with Allergan Inc. NPIL is set to clock peak sales of $30 million per year from both these contracts.
Numerous contracts to be executed in the next two years give NPIL admirable earnings visibility. At the current market price of Rs 301, Nicholas Piramal trades at 16 times its likely FY-09 per share earnings.
Custom manufacturing model
NPIL has, till date, invested Rs 900 crore to transform itself into a full-service custom manufacturing organisation. Its strong early stage capabilities provide a strong value proposition to shift active pharmaceutical ingredients (API) and dosage-form manufacturing to NPIL. Notably, its strategy to stay away from conflicting customer intellectual property rights (IPR) has enabled a comfortable equation with western innovator companies.
With the help of its global outsourcing strategy, NPIL sources cheap raw material from China and uses its US FDA-approved Indian facilities spread across Hyderabad, Pithampur, Digwal, among others, as manufacturing hubs. While raw material costs are a bit higher in India, conversion costs are significantly lower.
This helps NPIL post higher margins than its other facilities. Its US and UK units form the last end of the value chain helping with sales and distribution, apart from R&D expertise-led innovation at Avecia Pharma and Morpeth in the UK. Fixed costs are already covered and with Indian assets making a higher contribution to revenues, profitability is likely to improve.
There has also been a significant rise in NPIL’s global contract manufacturing and research business with molecules in pre-clinical and clinical trials (PDS) in the last six months. There are now 17 molecules in Phase-III compared to 12 in the second half of 2007. Sixty three molecules are in Phase-II as against just 44 six months ago. Encouraging data in some molecules will mean commercialisation that will give NPIL a boost. This is inline with the company’s strategy of trying to build a strong PDS pipeline, which would ultimately lead to contracts eventually on the Pharmaceutical Manufacturing Services.
Formulations and Pathlabs
Apart from its CMG business, strong foothold in the domestic formulations (finished dosages) market will see the company acquire momentum.
While the June quarter was a bad one for NPIL’s top selling cough syrup, Phensedyl, September has seen the situation normalise as the company has received enough quantities of Codeine — the most important ingredient for Phensedyl. Some recovery is expected in the rest of the year for the company’s best brand.
Nicholas has also continuously launched products (11 in the last three months) that could go in a long way in de-risking its portfolio. Products launched in the last two years have managed to garner 8 per cent of Q2 FY-08 formulations sales.
Revenues from its Pathlabs segment (Wellspring) grew 72 per cent to Rs 31 crore in the September quarter.
While the segment by itself has contributed just 3 per cent of sales in FY-07, the acquisition of Jankharia Imaging (Mumbai) has helped it deliver an all-encompassing range of high-end health imaging in Wellspring’s plans.
NPIL recently announced the demerger of its Research and Development unit dealing with new drugs, with effect from April 1, 2007. Recognising that innovative research entails a higher risk profile than its core business nature, the division has been hived off. Shareholders will get one share of the research outfit for every 10 held in NPIL.
The new company will be listed by June-July 2008. With a strong pipeline of four products under clinical trials and nine additional ones undergoing pre-clinical tests, the new company’s R&D pipeline targets a potential market size of $48.5 billion.
The new company’s lead oncology molecule P-276 continues to do well in the clinic as extended phase I/II study carried out in Canada and India progress. If all goes well, the drug could be launched by 2011.
Investors with a one-two year perspective can consider buying the shares of KPIT Cummins Infosystems, given its reasonable business prospects and valuation.
At the current market price (Rs 103), the stock trades at 14 times its estimated 2007-08 earnings. This estimate takes into account the 12-15 per cent price increase on new contracts to be effected from January 1 next year, but conservatively assumes that the company may not meet its guidance this year.
At this valuation, KPIT trades at a discount to Tier-2 players such as Hexaware, iGate and MindTree. If the company achieves its guidance, the valuation would be more attractive. Apprehension on revenue and margin pressures arising from the rupee appreciation, the sub-prime crisis and the possibility of a US slowdown tend to affect Tier-2 companies significantly because of their considerable dependence on the US and BFSI (banking, financial services and insurance) verticals.
But it is here that a player like KPIT can be a reasonable bet. KPIT Cummins has a differently focussed business model compared to other Tier-2 players and derives less than nine per cent of its revenues from the BFSI segment.
The company derives over three-fourths of its revenues from manufacturing, auto electronics, and semiconductor solutions clientele. Business Intelligence solutions is another key area for KPIT. KPIT has hedged $36.8 million, about 25 per cent of its revenues, at Rs 42.6 to the dollar.
New engagements: Increasingly, KPIT is focussing on bagging multi-million, multi-year deals rather than smaller engagements. This has some healthy facets to it. Most of these engagements are from OEMs in the automotive, semiconductor and manufacturing sectors as well as others.
New deals and existing engagements are increasingly coming in from the Asia-Pacific and European clients, thus expanding the company’s geographical footprint. The manufacturing and automotive sectors are seeing robust growth in both these regions, especially in the Asia-Pacific region.
Auto electronics may play a key role in fulfilling the rising safety requirements and increasing sophistication in car manufacturing.
In this context, KPIT’s engagements with car OEMs and suppliers offers possibilities to enlarge the existing business and bag new contracts. This may also help KPIT decrease its dependence on the US from the present 56 per cent, thus reducing currency risks.
Expertise and business partnerships: Business Intelligence solutions is an area that has contributed increasingly to revenues. Being a high-margin service, it is good for realisations. This works through (implementation) partnership with leading players in this space such as Business Objects.
This vertical has also helped the company cross-sell services and achieve better client-mining. KPIT also has a partnership for implementing enterprise software with players such as SAP and Oracle. Many of the multi-million dollar deals are coming in because of such partnerships.
The company has also formed a JV with Symbio, in China, which may help serve global customers with Chinese presence.
Operating metrics: The onshore-offsite mix is seeing an increase in the offshore component. Onsite revenues carry high costs compared to offshore revenues and, hence, this mix change may be healthy for the company’s margin. Fixed-price billing, as a percentage of total revenues, is increasing slowly.
This would enable the company in better resource planning and deployment as well as its hedging strategies. Repeat business at 90 per cent appears healthy, indicating better execution capabilities. Employee utilisation in offshore locations, is at a reasonable 70.5 per cent and the company has indicated that it would further increase this to enable better volume growth.
KPIT Cummins does carry some client-concentration risk as the top 10 customers account for over 72 per cent of revenues. Attrition at a high 21 per cent also creates execution risks.
These apart, KPIT is working in areas such as semiconductors and auto-electronics that require the company to be on top of the game in terms of adaptability to keep pace with the rapidly evolving technologies and changing customer requirements. This may pose quality and technology challenges. Any significant slowdown in the US may also pose client side risks.
We all know that there are three kinds of trend: up trend, down trend and sideways trend. The ancient Japanese discovered candlestick patterns that signal the onset of these trends. In our previous columns, we dealt with both bullish and bearish reversal patterns.
However, there are distinct candlestick patterns, which are considered as neutral or indecisive patterns. The most common among these is the doji pattern. When the opening price and the closing price of a stock are almost equal, the candlestick pattern is known as doji. The body of these patterns is just a small horizontal line. The shadows or wicks can, however, be of varying length. A doji line with long upper and lower shadows indicates substantial indecision on the part of market participation.
Doji line with long lower shadow and no upper shadow is called a dragonfly doji candlestick. This pattern is believed to have bullish implications. It is formed when the security falls lower during the trading session but recovers all the losses and closes near the day’s high, which is also its opening level; denoting bargain hunting at lower levels.
Gravestone doji pattern is the opposite of dragonfly doji pattern. In this pattern the upper shadow is longer and there is no lower shadow. The implication of gravestone doji is bearish. This pattern is formed when a bout of selling is experienced at intra-day high and the stock wipes out all its gains to close near the day’s low. Gravestone doji is yet another example of the colourful terminology used by the Japanese. This pattern marks the end (death) of an uptrend.
The candlesticks, which have a small bodies with long upper and lower shadows are called spinning tops. The colour of the body is not important in this pattern. These candlestick patterns occur on days of indecisiveness. Not much inference can be drawn from these patterns, except that the security is pausing or moving sideways.
The razzle-dazzle of Diwali left Dalal Street untouched this year as the Sensex recorded a negative weekly close; the second in the last three months. This sulky mood is a trifle worrisome. But we need to remember that the Sensex has gained 46 per cent in the last three months. One can’t blame the investors for taking some of those gains off the table to spend on Diwali revelry.
Volumes petered off towards the end of the week reflecting investors’ disinterest. FIIs too have taken their foot off the accelerator; turning net sellers this month in both cash as well as derivative segment.
There are disturbing signals emanating from the derivative segment. Despite the open interest nudging Rs 1,00,000 crore mark, the Nifty put call ratio is extremely low at around 1.1. This could be due to excessive optimism or due to the absence of external participants taking directional calls or hedging at higher levels. Whatever be the cause, our markets are rendered vulnerable without the protective cover of these short positions.
The gentle slide witnessed last week made the Sensex fall to an intra week low of 18737, below our trend deciding level of 19066. The first two session of next week are crucial for determining the short-term trend. The bulls need to stage a bounce from these levels if the momentum has to be maintained. A fall below 18700 would mean that the Sensex is slipping in to a medium-term down trend.
The momentum indicators too signal that the Sensex needs to fall a little further to turn the medium-term trend downwards. A bounce from current levels will result in the resumption of the exhilarating rally in the index.
It is too early to label the correction that began from the peak at 20238. The magnitude and the time of this move will help us decide if the Sensex is correcting the move from 13780 or the move that began much earlier, at 12316. Either way, the Sensex is expected to remain volatile within the 17000 to 22000 range in the medium term as the last phase of the move from June 2006 completes itself.
Investors ought to watch out for the support in the band between 18800 and 19100 next week. A reversal from this band will make the Sensex rally towards 19310 and then 19664. Traders should wait for a move beyond the second resistance before making fresh purchases. A fall below 18800 will mean that the Sensex is heading towards 18342 and then 17861.
To sum up, though the short-term trend is down, the outlook will turn explicitly negative only when the Sensex falls below 18700. But investors are advised to stay on the sidelines and desist from making fresh purchases until index’ trajectory becomes apparent. It is imperative to reduce positions in stock futures as the derivative segment is getting overheated.Nifty (5663.2)
Nifty too drifted lower to an intra-week low of 5614. The short-term support indicated last week, at 5664, has not been breached convincingly. So the short-term outlook for the index stays positive. A bounce from the support band between 5600 and 5650 can make the Nifty rise higher to 5766 or 5860 next week.
Traders can initiate short positions if the Nifty fails to rise above the first resistance. Our medium term range for the Nifty is between 5000 and 6500. Fall below 5600 can make the Nifty drift lower towards the zone between 5050 and 5150 in the medium term. Swing traders can watch out for buying opportunity in this band.Global Cues It was a defining week for the Dow Jones Industrial Average. The 4 per cent fall in the index has turned the medium-term trend downward. It is now obvious that the DJIA is charting the third leg of the correction that began in August. That brings the support at 12500 to the fore again. Fall below this level would mean that a more serious correction is in progress. The Nasdaq Composite Index launched in to a medium-term down trend last week. Other global markets too witnessed some profit booking. CBOE VIX index is near a two-month high indicating the resurfacing of the fears that had pulled the markets lower in August
Investors can bid for the initial public offering from Edelweiss Capital at the cut-off price. A good track record of growth, a balanced business model with a focus on institutional clients, and a superior margin profile make Edelweiss Capital a quality exposure to the Indian financial services sector, which is in the take-off phase. The offer, which is being made in the price band of Rs 725-825, values the company at 34-38 times the likely earnings for FY-08. This assumes that Edelweiss will sustain its income growth of the first five months for the full year and manage an operating profit margin in line with its three year trend.
At the higher end of the price band, the asking price values Edelweiss at a premium to Motilal Oswal Financial Services and Religare Enterprises (based on its offer price), but at a discount to firms such as IndiaInfoline. Though these valuations appear expensive on an absolute basis, they are justified by the scorching pace of growth managed by Edelweiss since inception, its less risky business mix and the scalability offered by businesses such as wealth management, financing and asset management, which are recent additions to its portfolio.Different business mix
Edelweiss Capital’s core operations are investment banking, asset management and portfolio management services, which are housed in the parent company. However, like other financial services companies, Edelweiss Capital too has a range of subsidiaries engaged in private client and institutional broking, advisory and wealth management services (all housed in Edelweiss Securities, a 100 per cent arm), as well as insurance broking and financing businesses. Most of these, save for the insurance broking arm, are 100 per cent subsidiaries, whose financials reflect in the company’s consolidated numbers.
Fee-based income arising from investment banking services and brokerage from advisory/trading services for institutional clients, have accounted for between 55 and 63 per cent of the company’s total income over the past three years, while trading/arbitrage and treasury income have accounted for much of the rest. Edelweiss’ reliance on investment banking and institutional advisory services for its income makes its business less volume-driven than that of peers such as Religare — which are more focused on retail equity broking services.
The growth in fee income for Edelweiss would hinge indirectly on buoyant equity market conditions and healthy levels of M&A and fund-raising activity by Indian companies. But unlike equity broking targeted at retail clients, the business is not vulnerable to blips in transaction volumes in the equity markets caused by short-term market volatility. Regulatory risks would also be relatively lower in engagements with institutional investors as compared to retail investors.
The different business mix also appears responsible for Edelweiss enjoying a superior operating profit margin compared to similar sized peers in the financial services space. The company’s OPM has consistently hovered above 50 per cent for the past four years, while the best performers within its peer group have only managed 30-35 per cent. This superior margin profile has allowed the company greater cushion to handle a spike in financing costs in recent times.
Edelweiss has managed to bag mandates for a reasonable number of mid-sized IPOs over the past year (Cinemax, Meghmani Organics, Orbit Corporation), has dabbled in private equity and real estate advisory, and has a portfolio of 150 clients for its institutional equities business. While competition in the investment banking business is intense with large international firms and a host of boutique investment banks vying for a share of the pie, the buoyancy in fund raising by mid and small sized firms through the equities and convertibles route offer potential for an entrenched player such as Edelweiss to scale up fee-based income.
That fee and brokerage income for Edelweiss has risen over four-fold from Rs 42 crore in FY-05 to over Rs 137 crore, in the first five months of FY-08, with steady growth from year to year, suggests that it has been successful in bagging a steady stream of mandates for its investment banking business. Contributions from the investment banking business however, may be lumpy and may make for considerable variation in performance between quarters.Treasury gains
The substantial contribution made by treasury operations, however, appears to be a weak spot in the company’s financials. Treasury gains over the past three years have been driven by a steady expansion in the company’s surplus funds, which have contributed to a swelling investment book. However, these surplus funds may have to be ploughed back into the business as the company scales up its nascent businesses and expands its presence in more capital-intensive segments such as wholesale financing.
This would substantially shrink the treasury income from current levels. Profit contributions from Edelweiss’ recent forays such as wealth management and asset management, as well as a rise in fee-based income, could make up for the reduced treasury contributions. That the company’s treasury has been conservatively managed, relying more on arbitrage and debt returns, rather than the stock markets, is a comforting factor on this score.Financials
Overall, Edelweiss’ consolidated operations are comparable in scale to companies such as Motilal Oswal, Indiainfoline and Religare, with a total income of Rs 371 crore in FY-07. Like its peers, Edelweiss has seen a substantial scaling up of revenues this fiscal, with a total income of Rs 284 crore in the first five months of FY-08 alone. With net profits (after minority interests) of Rs 109 crore and Rs 80.9 crore in FY-07 and FY-08 (five months to August) respectively, the company ranks higher than the others on profitability. The company’s profits for FY-07 would translate into per share earnings of Rs.15 on the post-offer equity base. Our earnings estimate for FY-08 suggests a likely per share earnings of Rs.20-22 for the year.
Offer details: Edelweiss Capital is offering 83.8 lakh shares at a price band of Rs 725-825 (face value of Rs.5) through this book-built initial public offering. The promoter holding will stand at 34.98 per cent of the post-offer capital, while institutional investors and employees (through ESOPs) will hold another 54.7 per cent.
The offer proceeds will be deployed mainly towards enhancing margin limits to be maintained with the exchanges, opening of additional offices, IT investments and prepayment of loans.