Monday, December 01, 2008
Markets opened strong Monday and despite staying in the green throughout the morning went into a tailspin mid-afternoon to end deep in the red with a key index shedding more than 250 points to go below the psychologically important 9,000 mark once again.
There was profit booking at the higher levels, analysts said.
The 30-share sensitive index (Sensex) of the Bombay Stock Exchange (BSE) finished at 8,839.87, down 252.85 points or 2.78 percent from its close Friday last week at 9,092.72 points.
The broader-based 50-share S&P CNX Nifty of the National Stock Exchange (NSE), also showed a similar trend and closed at 2,682.90, down 72.2 points or 2.62 percent from its previous close Friday last week at 2,755.10 points.
The BSE midcap index closed at 2,846.47, down 39.29 points or 1.36 percent from its previous close Friday last week at 2,885.76 points.
The BSE smallcap too ended in the red and finished at 3,297.73, down 6.88 points or 0.21 percent from its previous close Friday last week at 3,304.61 points.
Global cues were mixed. The key index of the New York Stock Exchange closed flat Friday and the Nasdaq index closed Friday with a gain of 0.23 percent.
The Nikkei, key index of the Tokyo Stock Exchange ended in the red Monday with a loss of 1.35 percent but the Hang Seng, key index of the Hong Kong Stock Exchange finished with a gain of 1.59 percent.
The domestic market ended the day in red terrain after paring all its initial gains on account of increased selling pressure. Weak sentiments during the last trading hours was added by negative opening of European markets and a further fall in US index futures. Asian markets also pared their initial gains and contributed to pull the domestic bourses lower. Market opened on pleasant note on the expectations of further cut in interest rates and end of the operation to flush out terrorists in Mumbai. Investors also welcomed Prime Minister Manmohan Singh taking charge of the Finance Ministry after P Chidambaram was appointed Home Minister following the resignation of Shivraj Patil. Further market continued the positive trend till afternoon but afterwards failed to sustain the upswing and slaughtered by some profit booking. The statement from the Finance Minister Mr. P. Chidambaram about the slow economic growth has also affected the markets to some extent. Stocks continued to slip stridently till end on weak global cues. NSE Nifty ended below 2,700 mark and BSE Sensex below 8,900 level. From the sectoral front, all indices ended in red and among those, most of the selling was seen in Reality, Auto, Consumer Durables, Bank, Capital Goods, Power and FMCG stocks Midcap and Small cap stocks also remained out of favor.
Among the Sensex pack 24 stocks ended in red territory and 6 in green. The market breadth was negative as 1160 stocks closed in red while 970 stocks closed in green and 65 stocks remained unchanged.
The BSE Sensex closed lower by 252.85 points at 8,839.87 and NSE Nifty ended down by 72.20 points at 2,682.90. The BSE Mid Caps and BSE Small Caps ended with losses of 39.29 and 6.88 points at 2,846.47 and 3,297.73 respectively. The BSE Sensex touched intraday high of 9,326.68 and intraday low of 8,803.34.
Losers from the BSE Sensex pack are DLF Ltd (9.96%), Reliance infra (3.26%), Maruti Suzuki (9.40%), ICICI Bank Ltd (7.21%), Reliance Infra (6.95%), BHEL (6.71%), Ranbaxy Lab (4.96%), ITC Ltd (4.61%), Wipro Ltd (3.90%), Tata Power (3.45%), M&M Ltd (3.37%) and L&T Ltd (3.22%).
Gainers from the BSE Sensex pack are Grasim Industries (1.75%), Tata Steel (1.69%), TCS Ltd (1.06%), Sterlite Industries (0.74%), Reliance Communication Ltd (0.43%) and HJP Associates (0.36%).
The BSE Reality index ended lower by (5.34%) or 83.36 points at 1,477.65. Major losers are DLF Ltd (9.96%), Akruti City (6.15%), Orbit Co (5.17%), Parsvnath (4.39%), Sobah Dev (3.93%) and Housing Dev (3.77%).
The BSE Auto index dropped by (4.64%) or 108.23 points to close at 2,222.33. Losers are Maruti Suzuki (9.40%), Hero Honda Motors (5.69%), Bajaj Auto (4.33%), Cummins Indi (3.85%), Amtek Auto (3.69%) and M&M Ltd (3.37%).
The BSE Consumer Durables index lost (4.47%) or 80.18 points to close at 1,713.39. Major losers are Titan Ind (6.86%), Videocon Ind (3.67%), Blue Star L (3.23%) and Gitanjali GE (0.79%).
The BSE Bank index ended lower by 3.87%) or 179.58 points at 4,465.82 as ICICI Bank Ltd (7.21%), Bank of Baroda (4.71%), Kotak Bank (4.55%), Yes Bank (4.24%), Indus Ind Bank (3.90%), Canara (3.87%) and Bank of India (3.85%) ended in negative territory.
The BSE Capital Goods index dropped by (3.79%) or 241.91 points to close at 6,145.41. Losers are BHEL (6.71%), ABB Ltd (3.96%), Elecon Eng C (3.61%), Praj Indus (3.54%) and L&T Ltd (3.22%).
The BSE Power index lost (3.78%) or 61.63 points to close at 1,570.06. Losers are Reliance Infra (6.95%), BHEL (6.71%), Suzlon Energy (5.28%), ABB Ltd (3.96%), Tata Power (3.45%) and GVK Power (2.48%).
The market saw high volatility during the day, as stocks gyrated between either sides of the zones throughout the session with the Sensex witnessing the intra-day swing of 524 points. The market opened higher, buoyed by overnight gains in the US markets, but pared early gains as investors' sentiment turned cautious as the Sensex neared its intra-day high of 9,327 points. Thereafter, sustained selling in frontline, realty and auto stocks saw the Sensex enter into the negative territory. After displaying some range-bound moves, the market plunged deep into the red on heavy selling towards the close to touch the day's low of 8,803. The Sensex finally closed the session at 8,840, down 253 points. The Nifty closed at 2,683, down 72 points.
The breadth of the market was negative. Of the 2,195 stocks traded on the BSE, 1,160 stocks declined, whereas 970 stocks advanced. Sixty five stocks ended unchanged. Among the sectoral indices, BSE Realty shed 5.34%, BSE Auto declined 4.64% and BSE CD was down 4.47%.
Selective buying helped the index overcome its losses. Grasim Industries gained 1.75% at Rs904.80, Tata Steel advanced 1.69% at Rs153.50 and Tata Consultancy Services added 1.06% at Rs563.95. Sterlite Industries, Reliance Communications and JP Associates notched up steady gains.
Selling was evident in select heavyweights. DLF dropped 9.96% at Rs178.50, Maruti Suzuki India declined 9.40% at Rs485.50, ICICI Bank tumbled 7.21% at Rs326.05, Reliance Infrastructure shed 7.21% at Rs467, BHEL dipped 6.71% at Rs1,2669.95, Ranbaxy Laboratories was down 4.96% at Rs198.45 and ITC shed 4.61% at Rs165.50.
Over 2.51 crore shares of Unitech changed hands on the BSE followed by Suzlon Energy (0.94 crore shares), GVK Power & Infrastructure (92.52 lakh shares), Reliance Natural Resources Ltd (63.91 lakh shares) and ITC (46.21 lakh shares).
Investors with a more than a one-year horizon can consider adding the Axis Bank stock to their portfolio.
The bank’s stock has been beaten down amidst concerns about asset quality and a slowdown in advances growth, but we believe these concerns are overdone.
We reiterate a ‘buy’ on the stock considering the bank’s high proportion of investment grade advances, apart from superior net interest margins and potential for growth in core fee income.
At the current market price of Rs 406, the Axis Bank stock is trading at 10.3 times its trailing 12-month earnings and 1.5 times its September 30 book value. This is well below the bank’s peak valuation of 43 times earnings and 5 times book value.
Historically, Axis Bank has been among the top performers in the banking space. The net profit has grown at 40 per cent compounded annually in last 4 years.
The first half saw net profit growth of 82 per cent, helped primarily by net interest income growth of 71 per cent. Fee income for Axis Bank now covers more than 90 per cent of the operating expenses.
Net interest margin at 3.43 per cent has slightly moderated, but remains high relative to peers and is helped by a high proportion of low cost deposits.
Points of concern
The bank’s exposure to commercial real estate (9 per cent), textiles (6.5 per cent) and gems and jewellery (2.5 per cent) could be the key points of concern on asset quality. However, with 84 per cent of the corporate advances and 78 per cent of SME advances being investment rated, the advances book appears fairly protected.
The NPAs of the bank are currently among the lowest in the industry, with net NPA/advances at 0.43 per cent; this may remain superior to that of other banks even in the event of slippages. The capital adequacy ratio is at comfortable 12.2 per cent.
The key risks to earnings arise from a possible slowdown in SME and retail advances in coming quarters, even as the bank makes a conscious attempt to go slow on such advances. There is also the possibility of slippages in credit card, personal loan and other retail segments, in line with peers. But this may be addressed by the bank lowering lending rates in the coming months.
A write-back of provisions on the bond portfolio may help improve profitability over the next quarter. Though the bank has to provide for the future slippages, the lowering of standard asset provisioning by the Reserve Bank of India will help it in limiting the NPA provisioning.
The Bajaj Auto stock has fallen by about 40 per cent since the beginning of this month .
Better financial performance by its peer Hero Honda, a huge 50 per cent year-on-year drop in domestic two-wheeler sales in October, lacklustre three-wheeler performance and the company’s plans to cut production have weighed down the stock.
At the current market price of Rs 321, the stock trades at a price-to-earnings ratio of about 6.5 times its expected FY-09 earnings vis-À-vis Hero Honda’s valuation of 13 times. With the economy losing steam and production targets being scaled down, the medium term triggers for the stock are limited. But, investors with a three-to-four year perspective can hold on to their existing investments as a widening product portfolio, robust export growth, cost rationalisation measures and higher realisations from a better mix, inspire confidence about the company’s earnings prospects .
The company has been facing challenging times since early 2007. For the year ended March 2008, it posted a 20 per cent decline in overall domestic volumes, thanks to the slowdown in the two-wheeler segment and a tightening of credit availability due to stiff interest rates. For the April-October 2008 period too, the overall domestic volumes fell by about 12 per cent.
Higher segment bikes
What holds promise for the company over the long-term is its focus on: One, the executive and premium segment bikes and, two, the smaller tonnage three-wheelers.
It already has a stronghold in the premium segment with its ‘Pulsar’ range of bikes. This has also spruced up its portfolio in the executive segment. It currently holds a near 50 per cent market share in the 125 cc plus segment.
A variant of the 125cc, Platina was launched ahead of the festive season. Before end-March 2009, the company will also launch two more bikes on the DTSi platform.
Besides, beginning 2010, Bajaj will also roll out bikes through its joint venture with Austrian sports bike manufacturer, KTM.
Exports to boost growth
Product launches may help Bajaj protect its turf in the local markets, but considering the pause in domestic sales, exports are expected to aid growth in the interim period. For the first seven months of the year, two-wheeler exports have grown by about 40 per cent year-on-year.
From about six lakh units in FY-08, the company expects to sell about 8.5 lakh units in the export markets in FY-09 and about 10 lakh units by FY-10.
A well-diversified clientele across West and South Asia, Africa and Latin America which are relatively less affected by the slowdown, the tie-up with Kawasaki to distribute its products in the ASEAN region and plans to foray into the European markets through KTM’s network, bodes well for volume growth on this front.
Scope for higher entry-level volumes
An increasing shift in consumer preferences from entry-level bikes to executive and premium bikes was witnessed last year. In line with this, Bajaj Auto shifted focus and has been concentrating on selling bigger, higher-margin bikes.
But volumes of Hero Honda, the market leader in the entry segment for the April- October 2008 period suggests a reversal of this trend in this period. The company has recorded a 15 per cent growth in sales in 75-125cc bikes while Bajaj showed a decline in this category .
Of course, the entry segment offers thinner margins. But a revival in this segment indicates that this segment offers the prospect of better volume growth now.
Since this demand is expected to have come from the rural segment, Bajaj can use its specialist rural dealerships to regain some of the lost market share in this category.
For the half-year ended September 2008, sales grew by a modest 9 per cent Y-oY. A large part of this growth has come from the increase in demand for and improved realisations from the sale of high-end bikes. Besides, the company’s focus on exports, given the slowdown in the domestic markets, has also aided growth.
Price hikes, softening commodity prices and improved realisations from a better product mix, led to operating margins expanding to 13.5 per cent.
For the first half, the company’s profits have fallen by about 17 per cent on a Y-o-Y basis (fall of 4 per cent in Q1 and 28 per cent in Q2).
The benefit of better operating margins has failed to reflect in the profits, due to the recognition of VRS expenses for the workers of the Akurdi plant to the extent of Rs 61 crore during the second quarter.
While this one-time expense may hold back profits temporarily, given the rich product portfolio, favourable export environment and ongoing cost control initiatives, the profits picture may be better in the near-to-medium term.
Investors can consider reducing exposure to the stock of ABB on rallies linked to the broad markets. Disappointing revenue growth for three consecutive quarters, pressure on profit margins, decline in revenue growth in its key segments and slowing order intake are suggestive of the company yielding to macro economic pressures. The slowdown in capex spending of many key client sectors, also suggests a slowdown.
While we are positive about the long-term business potential in the segments in which ABB operates, the medium-term picture appears less inspiring due to the reasons stated above.
At Rs 438, ABB’s price-earnings multiple of 20 times its annualised earnings for CY-2008 exaggerates the earnings potential over the next 6-12 months. Investors in ABB may lose out on superior opportunities in stocks such as Larsen & Toubro or BHEL, which provide better earnings visibility at attractive valuations over the medium-term.
Brakes to relentless growth
For the third-quarter ended September 2008, ABB’s sales were 10 per cent higher than a year ago numbers. The sales growth for the first and second quarters stood at 17 per cent and 15 per cent respectively. The company has attributed the a slowdown in revenue growth to projects with longer execution cycle. While ABB is prone to lumpiness in in revenues, the growth this time around, appears to be the slowest for the company in the last few years. This, coupled with the mild decline in revenues in some key segments, pressure on margins and decline in net profits, cast doubt on the earnings growth prospects.
Recurring net profits for the September quarter fell by over 20 per cent, adjusted for forex gains. Even as lower revenue growth led to a decline in operating profits, operating profit margins (OPM) took a hit on account of higher input prices and certain projects not reaching the ‘profit accounting’ stage. Absence of price escalation clauses in some projects dragged OPMs to 8.8 per cent in the September quarter, from 12.6 per cent a year ago. Interestingly, this is among the lowest OPMs for the company in the last eight quarters. The company had clocked over a 11 per cent OPM in the first two quarters of March and June when revenue growth had been moderate.
While ABB could gain some breather on the raw material cost front with commodity prices cooling down significantly, the management has indicated that this may not provide sustained relief as it may have to resort to product price cuts. Such a move may also be be inevitable to boost volumes on the back of a weakening capex spending by industries.
ABB’s power systems segment, a key revenue driver, has seen a mild dip in the September quarter. MNC players such as ABB and Siemens have depended primarily on large orders with superior margins to support growth. As a move to diversify itself and capitalise on the largely volume-driven Indian market, ABB has commissioned a new plant in 2008 to gain market share in small transformers. While profitability on the venture could be thin, it could be compensated by strong volumes, given ABB’s superior technology.
In the automation segment, while revenue from automation products grew at a healthy pace, process automation remained stagnant. Profits from both these segments were also under pressure. Capex spending in sectors such as cement, steel and oil and gas were key triggers for the automation division’s growth. With commodity prices trending downwards, a slowdown or postponement of spending in these sectors could result in lower order inflows for the division.
Order inflows for the September quarter were 13 per cent higher at Rs 1,889 crore. This has been, however, the slowest growth in the last couple of years now.
Although, there has been a delay in a spending in key power reform programmes such as Accelerated Power Distribution and Reform Programme (APDRP), the opportunity in this area nevertheless remains. While order inflows in the next couple of quarters could be more tempered, an increase in Government spending and revival of corporate spending (on lower interest rates) could revive ABB’s order kitty.
The probability of higher order inflows from export markets too appears low in the near term. ABB’s export market has so far contributed only about 10 per cent to its revenues. While its parent has been planning to utilise the Indian unit as a global outsourcing hub, these plans may take time to implement with the global economic slowdown slowly morphing into a recessionary trend.
Despite ABB being one of the few cash-rich engineering companies, its management has aired concerns over funding issues .
The company is reportedly surveying various options, including fixed deposits, to meet working-capital requirements. This could increase borrowing costs for a virtually zero debt company.
Precious metals register good gains for the week
Bullion metals ended mixed on Friday, 28 November, 2008. Gold prices rose but silver prices dropped. But gold prices registered good gains for the week. Gold prices firmed up due to the weak dollar.
On Friday, Comex Gold for December delivery rose $7.7 (1%) to close at $816.2 an ounce on the New York Mercantile Exchange. On 17 March, 2008 prices had skyrocketed to a high of $1,034/ounce. But prices have dropped significantly (21%) since then. For the week, gold prices ended higher by 3.1%. For the month of November, gold prices ended higher by 14%.
Prior to this, for the month of October, gold had ended lower by 18%. It was the biggest percentage loss for gold since February, 1983.
This year, gold prices have lost 2.2% till date. Futures have averaged $882 in 2008. The dollar index has gained 9% this year. For the third quarter ended September, 2008, gold prices ended lower by 5.1%. It was the first quarterly loss for the yellow metal since the second quarter in FY 2007. Prior to that, the yellow metal ended second quarter with a marginal gain of 0.7%. For first quarter prices gained 10.7%.
On Friday, Comex silver futures for December delivery fell 5 cents (0.5%) to $10.22 an ounce. For the week, silver gained 7.5%. For the month of November, silver prices gained 5%. Till date, silver has lost 28% this year.
For the month of October, silver had slipped by 20%. Silver had ended month and quarter of September 2008 with a loss of 10%. For the second quarter, it had gained a paltry 1.4%. Silver had gained 16% in Q1. The metal also had gained for seven straight years.
Generally, a stronger dollar pressures demand for dollar-denominated commodities, such as crude oil and gold, which become more expensive for holders of other currencies and also vice versa. Losses in equity markets also force traders to sell gold.
We recommend a buy in C & C Constructions from a short-term trading perspective. It is evident from the charts of C & C Constructions that it had been on a medium-term downtrend from its September high of Rs 184 to October low of Rs 71 (52-week low). The stock almost tumbled 60 per cent from this peak to 52-week low. However, the stock reversed direction from its 52 week low, triggered by the positive divergence in the daily relative strength index (RSI). The stock has been on a medium-term uptrend since October low.
During early November, the stock conclusively penetrated the medium-term down trendline and breached the 21-day moving average. The daily RSI is rising in the neutral region towards the bullish zone. The stock is currently hovering around the support level at Rs 100. We are bullish on the stock from a short-term perspective.
We anticipate the stock to move upward until it hits our price target of Rs 116 in the upcoming trading sessions. Traders with short-term perspective can buy the stock while maintaining a stop-loss at Rs 98.
Crude prices register weekly gain for first time in a month
Crude prices ended little lower on Friday, 28 November, 2008. But prices ended with sufficient gains for the week. Crude prices pared all its earlier losses for the day and ended almost flat for the day after Energy department reported a build up in crude and gasoline inventories for last week on last Wednesday, 26 November, 2008.
On Friday, crude-oil futures for light sweet crude for January delivery closed at $54.43/barrel (lower by $0.01 or 0.05%) on the New York Mercantile Exchange. During intra day trading prices had dropped to a low of $51.5. Prices reached a high of $147 on 11 July but have dropped almost 63% since then. For the week, prices rose by 9%, the first weekly gain in a month. For this year in 2008, crude prices have dropped 45%.
For the month of November, crude prices ended lower by 19.7%. Before this, for the month of October, 2008, crude prices had ended lower by 32.6%, the biggest monthly drop since 1983.
The EIA reported last Wednesday that crude inventories rose 7.3 million barrels to stand at 320.8 million barrels in the week ended 21 November, 2008. U.S. refineries operated at 86.2% of their operable capacity last week, up from the previous week's 84.9%.
EIA had also reported that U.S. gasoline supplies rose by 1.9 million barrels in the latest week, while distillate stocks, which include heating oil and diesel, fell by 200,000 barrels. The EIA also reported that demand for motor gasoline has averaged about 9 million barrels a day over the last four weeks, down 2.8% from the same period a year ago. Meanwhile, distillate fuel demand has averaged 4 million barrels a day, down by 2.2%, and jet fuel demand fell 18%.
For the third quarter of the year crude prices ended lower by 28%. This was the biggest quarterly drop since 1991. Before that, crude prices had gained 38% in the second quarter of this year. It was the biggest quarterly increase in nine years. For the month of September, prices registered drop of 13%.
Against this background, reformulated gasoline for January delivery ended slightly higher at $1.2096 a gallon. January heating oil fell 2% to $1.7271 a gallon.
January natural gas tumbled 5.4% to $6.51 per million British thermal units.