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Monday, December 29, 2008

Rakesh Jhunjhunwala - on India Economy

The Indian economy will bounce back much faster and more vigorously than most people anticipate. This will be driven by swift upswing in domestic demand, according to Mr Rakesh Jhunjhunwala, equity and investment guru.

“This bounce up will be much faster than other economies. We may potentially hit 10 per cent growth rate even before economies like the US and those in the Europe struggle to achieve even 1 to 1.5 per cent growth,” he said.

Mr Jhunjhunwala said the prices of automobiles, white goods and commodities will be slashed further to help shore up sales and activate local consumption. Measures by the Government and RBI will ease up liquidity.

Speaking on the economic scenario, problems and prospects here late on Friday, he reiterated he continues to be bullish and the issue is about looking at the long-term prospects as these are patches of slowdown. Therefore, this offers opportunities to invest. Banking is one sector to watch out for, he said.

“Interest rates will come down further with the possibility of deposit rates hovering around 6 per cent and lending rates at 9 per cent. This will spur demand,” he added.

“We need fiscal measures which have greater bearing on the economy than merely addressing liquidity issues.”

The rupee will strengthen and possibly go up to Rs 45 versus the dollar. Software sector is “like a joker in the pack”. Unlike general exports, the impact of software exports has greater bearing on the Indian economy as it is also a major job creator.

When asked where to invest now, he said “the market is like harem; one can pick and chose from the plenty of options available.”

Asked about his investment patterns, he said that there is no pattern and advised people not to invest based on tips as it is a truly successful recipe for doom. “Of the 6,000 listed companies, more than 5,500 do not merit consideration. Once you select 500, you will need to narrow down sector wise and pick and choose based on their earning potential.”

“No company is managed by independent directors. Every company is managed by promoters. So when promoters make a mistake, you cannot blame the independent directors,” he said, referring to the recent issue of corporate governance cropping up in the Satyam-Maytas deal.

“Keep aside what the media says on the deal. What the promoters did need to be assessed in different perspective. If the promoters had done a proper valuation and subjected the entire issue for discussion before shareholders, the issue would have been viewed differently.

“If all the credit went to promoters for good things all these years, now why blame the directors.”

Most of the Indian companies have good corporate governance, he added. In fact, several large global corporations, which have well-trained managers as independent directors have had worst issues.

Reliance Petroleum, India Economy, India Valuations

Reliance Petroleum, India Economy, India Valuations

BSE Bulk Deals to Watch - Dec 29 2008

Deal Date Scrip Code Company Client Name Deal Type * Quantity Price **
29/12/2008 532919 ALLIED COMP NEENA KETAN SHAH B 100000 0.50
29/12/2008 531335 CARN NUT ANA SUDHA COMMERCIAL CO. LTD. B 59500 74.50
29/12/2008 531335 CARN NUT ANA PINNACLE TRADES INVESTMENTS S 40000 74.50
29/12/2008 512624 CHANDRIK TRA SURENDERSINGH S 100001 2.81
29/12/2008 526033 CRYSTAL SOFT KAUSHAL NIRANJAN SHAH S 30183 9.10
29/12/2008 531219 POONAM PHARM SWARN GANGA TRADING PVT. LTD. B 50000 2.04
29/12/2008 531646 RFL INTERNAT RUNJAN CONSULTANCY S 26200 1.17
29/12/2008 530821 SRINI SH PRO JYOTHI DORADLA B 80000 20.00
29/12/2008 530821 SRINI SH PRO KANTHARAO UPPALA S 80000 20.00
29/12/2008 532389 VALECHA ENGI SUDHA COMMERCIAL CO. LTD. B 75000 33.25
29/12/2008 522267 VEEJAY LAK E SUDHA COMMERCIAL CO. LTD. B 127000 26.40
29/12/2008 522267 VEEJAY LAK E PINNACLE TRADES INVESTMENTS S 126910 26.40
29/12/2008 531249 WELL PACK PA GANDHI MANISHA NAVNEETLAL B 40000 22.93
29/12/2008 531249 WELL PACK PA SAMIR S SHAH B 40000 23.00

NSE Bulk Deals to Watch - Dec 29 2008

Date,Symbol,Security Name,Client Name,Buy/Sell,Quantity Traded,Trade Price / Wght. Avg. Price,Remarks
29-DEC-2008,HDIL,Housing Development and I,GENUINE STOCK BROKERS PVT LTD,BUY,1731549,125.58,-
29-DEC-2008,SURANATELE,Surana Telecom Ltd.,SURANA TELECOM & POWER LTD,BUY,160025,23.35,-
29-DEC-2008,HDIL,Housing Development and I,GENUINE STOCK BROKERS PVT LTD,SELL,1747499,125.68,-
29-DEC-2008,SATYAMCOMP,Satyam Computers Ltd,IL AND FS TRUST COMPANY LIMITED,SELL,4410000,139.83,-

Post Session Commentary - Dec 29 2008

The Indian market closed on a handsome note tracking the strong opening of the European markets and expectations of second stimulus package by the government to give a boost to the economy and hope of further rate cut by the Central bank due to coming down of inflation figures. Also, the positive US index futures also added to the sentiments. The market also got a support from the index heavy weights like Staym Computers that gained more than 15% to touch an intraday high of Rs 159.60 to finally close at Rs148.25 as the company would consider measures to strengthen the firm''''s governance structure including increasing the size and altering the composition of the board. However, the scrips pared some of its gains on news that two independenet directors of the company have resigned.

The domestic market opened on a weak note tracking the violence in the Middle east along with concerns of corporate earnings. However, market later changed its gears to make a smart bounce back from the initial fall on sustained buying across the counters. The advance tax payments by the Indian corporates fell by 22% to about Rs42, 600 crore during the December quarter over the same period last year. Israeli warplanes pounded the Hamas-ruled Gaza Strip for a third consecutive day and prepared for a possible invasion. The BSE Sensex closed above the 9,500 mark and NSE Nifty closed below 2,900 mark. From the sectoral front, the Bankex, Metal, Oil an d gas and Power indices remained in the lime light as most buying was witnessed from this basket.

Among the Sensex pack 23 stocks ended in red territory and 7 in green. The market breadth was positive as 1289 stocks closed in green while 1095 stocks closed in red and 83 stocks remained unchanged in BSE.

The BSE Sensex closed higher by 204.60 points at 9,533.52 and NSE Nifty ended up by 64.95 points at 2,922.20. The BSE Mid Caps and Small Caps ended with gains of 40.86 points and 22.97 points at 3,147.54 and 3,571.51 respectively. The BSE Sensex touched intraday high of 9,550.40 and intraday low of 9,162.66.

Losers from the BSE Sensex pack are Tata Motors down (4.37%) followed by M&M (3.67%), Maruti Suzuki (2.32%), L&T (0.44%) and Tata Power (0.39%).

Gainers from Sensex are Satyam Computers closed up (9.41%) along with JP Associates (7.26%), Ranbaxy Labs (7.03%) and ICICI Bank (6.35%).

The BSE Bankex index closed with gains of (3.71%) or 193.16 points at 5,404.61. Main gainers are Yes bank (6.85%), ICICI bank (6.35%), IDBI bank (5.73%), Oriental bank (3.91%), Kotak Bank (3.68%) and BOI (3.24%).

The BSE Metal index surged (3.23%) or 159.70 points to close at 5,109.92 as SAIL (10.36%), NMDC (6.14%), Jindal Steel (5.23%), Hind Zinc (4.23%), Welspun Guj SR (3.70%) and Sesa Goa (3.22%) closed in positiveterritory.

The BSE Oil and Gas index ended up by (2.87%) or 169.32 points at 6,078.94. Scrips that gained are Cairn India (7.89%), Essar Oil (4.83%), RPL (4.37%), RNRL (3.29%), HPCL (2.93%) and Reliance Inds (2.91%).

The Power index grew by (2.01%) or 35.07 points at 1,782.06. Pushed it up are GVK Power Inf higher by (7.30%) along with GMR Infra (6.49%), Suzlon Energy (6.34%), Torrent Power (4.33%), Neyvelli Lignite (4.25%), Reliance Infra (3.71%) and Bhel (3.60%).

The Capital Goods index closed higher by (1.24%) or 82.16 points at 6,682.43. Major gainers are Usha Martin (7.34%), Areva (6.64%), Suzlon Energy (6.34%), Walchand Inds (5.64%), Jyoti Structures (4.99%).

The IT index gained (1.14%) or 24.51 points at 2,173.95. Scrips that closed in green are Satyam Comp (9.41%) followed by Aptech (7.08%), NIIT (4.73%), Tech Mahindra (3.08%), Rolta India (1.42%) and Finance Tech (1.14%).

Market snaps four-day losing streak; Satyam vaults

Expectations of a second government stimulus package for the slowing economy and, hopes of further rate cuts by the central bank helped key benchmark indices reverse early losses in what was a volatile trading session. The BSE 30-share Sensex gained 204.60 points or 2.19% at 9533.52, bouncing back from a slide of as much as 1.8% in morning trade.

Recovery in Asian markets from early fall, firm European markets and higher US index futures boosted the sentiment further. The market breadth turned positive in late trade in contrast to a weak breadth earlier in the day.

Volatility was high. Volatility in index heavyweight Reliance Industries (RIL) and Satyam Computer caused volatility in the key benchmark indices. The market dropped in mid-morning trade on concerns over corporate earnings and a flare-up of violence in the Middle East. A strong recovery triggered by rebound in Asian stocks saw the BSE Sensex wipe out its entire losses in early afternoon trade. The recovery proved short-lived as the market weakened again. It once again recovered but once again lost ground shortly. A firm start of European markets aided a sharp rally in mid-afternoon trade.

The market cut gains in late trade as Satyam Computer came sharply off the higher level after it said two more independent directors have resigned. The market surged later as Satyam bounced back again.

European shares advanced today, 29 December 2008 led by energy and metals stocks that tracked firmer commodity prices. Key benchmark indices in UK, Germany and France were up by between 0.95% and 2.11%. Trading in US index futures indicated the Dow could rise 28 points at the opening bell.

Asian shares advanced led in part by resource-related stocks on the back of higher commodity prices. Key benchmark indices in Hang Seng and Singapore were up 1.02% and 1.36%. In Japan, the Nikkei average ended up 0.09%, helped as well by news that three non-life insurers including Mitsui Sumitomo Insurance Group Holdings were in talks to merge.

Earlier in the day, Asian stocks had dropped due to a flare-up of violence in the Middle East. Israeli warplanes pounded the Hamas-ruled Gaza Strip for a third consecutive day on Monday as the Jewish state prepared to launch a possible invasion amid the intensifying clashes between the two sides.

The flare-up of violence in the Middle East stirred worries about energy supply disruptions, boosting crude oil prices. Oil prices rose as much as $2 to nearly $40 a barrel during Asian trade on Monday as investors worried about crude supplies, though crude pared gains later to be up 97 cents at $38.68. Oil markets are ending a manic year in which crude surged to a record at close to $150 a barrel in July before crashing down amid fears about a sharp slowdown in the global economy.

Closer home, the Indian government is reportedly considering another stimulus package to lift slowing growth. The first stimulus package announced early this month mainly involved additional government spending and an across-the-board cut in excise duties.

Meanwhile, a sustained declined in inflation will provide room for the Reserve Bank of India (RBI) to further cut interest rates. Inflation has been falling after it had surged into double digits in early June this year following an increase in state-set retail fuel prices.

But investors in India are bracing for poor Q3 December 2008 results. The government said during trading on Friday, 26 December 2008, advance taxes paid by companies declined 22% to about Rs 42600 crore in the December 2008 quarter over the December 2007 quarter, reflecting economic slowdown. The Indian economy has slowed down after a strong growth in the past three years.

The BSE 30-share Sensex gained 204.60 points or 2.19% at 9533.52. At the day's high of 9,550.40, the Sensex advanced 221.48 points in late trade. The Sensex declined 166.26 points at the day's low of 9,162.66 in mid-morning trade.

The S&P CNX Nifty gained 64.95 points or 2.27% at 2922.20. Nifty January 2009 futures were at 2937.55, at a premium of 15.35 points as compared to the spot closing. Turnover in NSE's futures & options (F&O) segment surged to Rs 33,326.10 crore, from Rs 24,153.90 crore on Friday, 26 December 2008.

The market recovered after last week's steep slide. The BSE Sensex had declined 770.99 points or 7.63% in four trading days to 9,328.92 on 26 December 2008 from a recent high of 10,099.91 on 19 December 2008.

The barometer index is down 10753.47 points or 53% in the calendar year 2008 so far from its close of 20,286.99 on 31 December 2007. It is 11673.25 points or 55.04% below its all-time high of 21,206.77 struck on 10 January 2008.

The market breadth, indicating the overall health of the market, turned positive in late trade, reversing initial weakness. On BSE, shares 1302 advanced as compared with 1091 that declined. 86 shares remained unchanged.

The total turnover on the BSE amounted to Rs 3398 crore as compared to Rs 3,175.04 crore on Friday, 26 December 2008.

The BSE Auto index, down 0.63%, was the lone loser from the BSE sectoral indices. The BSE Realty index (up 0.26%), BSE Consumer Durables index (up 0.57), the BSE Teck index (up 1.97%), the BSE IT index (up 1.14%), the BSE HealthCare index (up 1.08%), the BSE Capital Goods index (up 1.24%), the BSE Power index (up 2.01%), the BSE FMCG index (up 0.22%), and the BSE PSU index (up 1.37%), underperformed the Sensex.

The Bankex (up 3.71%), the BSE Metal index (up 3.23%), and BSE Oil & Gas index (up 2.87%), outperformed the Sensex.

Among the 30-member Sensex pack, 24 advanced while the rest slipped. Ranbaxy (up 8.23% to Rs 234.80), Jaiprakash Associates (up 7.88% to Rs 79.45), and Grasim (up 6.03% to Rs 1260), edged higher.

India's fourth largest IT exporter by sales Satyam Computer Services galloped 10.37% to Rs 149.55 on massive volumes of 3.06 crore shares on hopes of a better corporate governance. The stock saw high volatility in mid-afternoon trade. A sharp slide in the stock was witnessed after the company said two more independent directors have resigned. Just before the announcement in mid-afternoon trade, the stock had jumped 17.78% to Rs 159.60 on hopes of a better corporate governance. The stock moved in a range of Rs 159.60 and Rs 129.55. On 26 December 2008, Satyam had announced the resignation of independent director Mangalam Srinivasan.

Satyam said before trading hours today, 29 December 2008, it has postponed a board meeting set for Monday, 29 December 2008 to 10 January 2009 to mull options beyond just a possible share buyback. The board had been expected to consider a share buyback, after news last week that the outsourcer had been barred from doing business with the World Bank added to its woes.

A media report quoted US-based independent director Vinod Dham as saying the 10 January 2009 board meeting would discuss a change in management, including a possible exit of Satyam's chairman and founder B Ramalinga Raju. It would also discuss appointing a chief executive or even a sale to another entity, the report said. Dham is one of the two independent directors who resigned from the board today, 29 December 2008.

While Satyam soared, other IT pivotals reversed early losses on a weaker rupee. India's second largest IT exporter by sales Infosys rose 0.22% to Rs 1112, off the day's low of Rs 1065. India's fourth largest IT exporter by sales Wipro gained 0.86% to Rs 229, after touching day's low of Rs 214.20. India's largest IT exporter by sales Tata Consultancy Services advanced 1.01% to Rs 476.85, rebounding from low of Rs 460.

Core Projects & Technologies rose 5.15% to Rs 46.95 after the company acquired a US-based company for $20 million. The company made the announcement before market hours today, 29 December 2008.

The rupee was hovering at around 48.49, lower than 48.45/46 a dollar on Friday, 26 December 2008. A weaker rupee boosts operating margins of IT firms as they earn most of their revenues from exports.

Banking shares advanced on speculation falling bond yields and lower rates would accelerate loan growth and profitability. India's largest private sector bank by net profit ICICI Bank rebounded sharply from day's low of Rs 404.60 and settled 5.97% higher to Rs 442.90, on reports it is set to cut interest rates by 50-75 basis points across the board shortly.

India's second largest private sector bank by net profit HDFC Bank gained 2.18% to Rs 993.80. India's biggest bank in terms of total assets and branch network, State Bank of India, vaulted 2.27% to Rs 1272.70.

India's largest private sector company by market capitalization and oil refiner Reliance Industries (RIL) rose 3.22% to Rs 1251, after its unit Reliance Petroleum started processing crude at its 5,80,000 barrels per day refinery last week. The stock swung in a band of Rs 1188 and Rs 1252.60 in volatile trade during the day. Reliance Petroleum was up 4.49%, extending Friday's (26 December 2008)'s gain of 6.3%.

Telecom shares shrugged off reports the government has deferred a global auction of third-generation wireless spectrum by two weeks. India's largest cellular services provider by sales Bharti Airtel gained 3.68% to Rs 712. India's second largest cellular services provider by sales Reliance Communications rose 3.71% to Rs 212.60.

Metal stocks rose as metal prices surged on the London Metal Exchange. Tata Steel (up 1.65% to Rs 215), Steel Authority of India (up 11% to Rs 78.20), and Sterlite Industries (up 3.29% to Rs 257.20), edged higher.

India's largest private sector aluminium maker Hindalco Industries rose 1.34% to Rs 49.20 on reports it may spend about Rs 25,000 crore over the next five years for expanding capacity by as much as three times in aluminium and copper.

Hindustan Zinc jumped 3.97% to Rs 340.20 after the company hiked zinc prices by nearly 3%. The price revision is effective from Thursday (25 December 2008), a company circular said.

India's top power equipment maker by sales Bharat Heavy Electricals jumped 3.68% to Rs 1348 on reports it has bagged a Rs 5,040 crore contract from Jindal Power for setting up 2,400 megawatt power plant in Chhatisgarh.

Real estate shares were mixed amid recent reports property rates are expected to fall by 20-25% as demand has dropped sharply over the past 9-10 months due to high interest rates. Indiabulls Real Estate (down 2.17%), DLF (down 0.13%), slipped. However Unitech (up 6.51%), and Housing Development and Infrastructure (up 1.81%) advanced.

Fall in property prices is expected to hit the margins of developers already hit by the demand slowdown. Additionally, developers are facing a severe cash crunch that is hindering the execution of ongoing projects and grounding new launches.

Auto shares were subdued after the Society of Indian Automobile Manufacturers (SIAM), an industry body for automobile sector, estimated lower sales in December 2008. India's top truck marker by sales Tata Motors slumped 4.40% to Rs 148.75 and was the top loser from the Sensex pack. The stock came off the day's low of Rs 144.80

Mahindra & Mahindra (down 3.58% to Rs 256), and Maruti Suzuki India (down 2.14% to Rs 499.80), declined.

SIAM said domestic vehicle sales are likely to fall by over 15% in December 2008 to 6,18,000 units and projected a whopping 25.5% fall in sales in the December 2008 quarter and over 34% slide in sales in the March 2009 quarter.

Aviation stocks gained on fall in jet fuel prices. India's biggest private sector airline by revenue, Jet Airways India rose 2.61% to Rs 190.50 after it slashed basic domestic fares by 15% to 40% with effect from Monday, 29 December 2008. SpiceJet rose 3.63% to Rs 15.69 and Kingfisher Airlines jumped 6.61% to Rs 37.10.

Recently, oil-marketing firms had slashed jet fuel or aviation turbine fuel (ATF) prices by 11%. Jet fuels prices have fallen by over 50% since August 2008 when prices touched a record Rs 71,028.26 per kilolitre. Jet fuels constitute more than 50% of the operating cost for airliners.

Satyam Computer Services was the turnover topper on BSE with turnover of Rs 451.36 crore followed by Reliance Industries (Rs 234.53 crore), Reliance Infrastructure (Rs 171.54 crore), Reliance Capital (Rs 166.45 crore) and DLF (Rs 161.83 crore).

Satyam Computer Services also topped volume chart on BSE clocking volume of 3.07 crore shares followed by Unitech (2.74 crore), Suzlon Energy (1.68 crore), Reliance Natural Resources (1.26 crore) and Cals Refineries (1.05 crore).

New Delhi Television rose 2.93% to Rs 114 on reports Shah Rukh Khan-promoted Red Chillies Entertainment will produce a comedy sitcom, Ghar Ke Baat, for NDTV Imagine. New Delhi Television holds 82.05% in NDTV Imagine, a general entertainment channel.

Kirloskar Brothers rose 1.86% to Rs 82 despite the company shutting its production unit in Madhya Pradesh from 25 December 2008 to 4 January 2009 to avoid excess inventory. The company made this announcement before trading hours today, 29 December 2008.

Crude recovers partially

Prices drop by more than 11% for the week

Crude prices rose for the first time last week on Friday, 26 December, 2008. Prices rose as traders thought that the previous sessions' 10% drop due to a strong dollar was just overdone.

On Friday, crude-oil futures for light sweet crude for February delivery closed at $37.71/barrel (higher by $2.36 or 6.7%) on the New York Mercantile Exchange. Prices reached a high of $147 on 11 July but have dropped almost 74% since then. For the week, prices ended lower by 11%. For this year in 2008, crude prices have dropped 60%.

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 also reported earlier in the week that total U.S. crude-oil stockpiles, excluding those in the Strategic Petroleum Reserve, fell for the first week in three, down 3.1 million barrels to 318.2 million for the week ended 19 December, 2008. Market was looking a weekly increase of 1.5 million barrels.

EIA also reported that gasoline supplies rose by 3.3 million barrels in the latest week, while distillate stocks increased 1.8 million barrels. Total supplies of petroleum products, including gasoline and heating oil, have averaged about 19.8 million barrels a day over the last four-week period, down by 4.2% compared to the similar period last year. Also last week, refineries ran at 84.7% of their operable capacity, up slightly from the prior week.

OPEC President Chakib Khelil said over last weekend that that the cartel is willing to further reduce output as much as necessary to stabilize oil prices.

After a meeting in Oran, Algeria, the Organization of the Petroleum Exporting Countries agreed to cut 4.2 million barrels a day from its actual September production level of 29.045 million barrels a day on 17 December, 2008. The production cut is effective on 1 January, 2009. Excluding previously announced cuts, OPEC will actually cut its daily production by 2.2 million barrels from current levels. That constitutes its biggest production cut ever.

Against this background, January reformulated gasoline rose 6.4% to 84.40 cents a gallon. January heating oil gained 3.9% to $1.245 a gallon.

Natural gas for January delivery fell 1.4% to $5.826 per million British thermal units.

Market seen opening lower on negative global cues

Key benchmark indices are likely open lower mirroring negative global cues. However optimism about the government's second fiscal stimulus package soon and the central bank's further rate cut to ease the ongoing liquidity crunch may cushion sharp fall.

Trading may turn remain lacklustre amid the ongoing holiday season and festivities across the world, which is likely to impact trading volumes at the bourses.

Mutual funds sold shares worth Rs 6.95 crore while foreign institutional investors (FIIs) were net sellers worth Rs 344.91 crore on Friday, 26 December 2008, according to provisional data on NSE.

Most Asian markets were trading lower on concern that intensifying recessions worldwide will hurt corporate profits. China's Shanghai Composite was down 1.26% or 23.41 points at 1,828.10, Hong Kong's Hang Seng plunged 1.36% or 193.03 points at 13,991.11, Japan's Nikkei slipped 0.805 or 69.58 points at 8,669.94, South Korea's Seoul Composite fell 2.80% or 31.25 points at 1,086.61 and Taiwan's Taiwan Weighted declined 0.80% or 35.26 points at 4,389.82. However, Singapore's Straits Times was up 0.70% or 12.03 points at 1,737.67.

US markets ended lower on Friday, 26 December 2008 after the Big Three automakers had their debt ratings cut despite the bailout package unveiled by White House last week. The Dow Jones Industrial Average slipped 59.42 points, or 0.7%, to 8,519.69 after sliding over 200 points in intra-day trade. The Standard & Poor's 500 Index slipped 16.25 points or 1.8% to 871.63 and the Nasdaq Composite Index slid 31.97 points, or 2%, to 1,532.35.

US light, sweet crude gained $1.77 to $39.48 today, 29 December 2008 after weekend violence flared between Israel and Hamas, reminding traders of the geopolitical risk to crude supplies from the Middle East.

Pre Session Commentary - Dec 29 2008

Today the markets are expected to open in red with negative bias, as most of the Asian markets seen marginally down. In addition the SGX Nifty has also opened in red pretty much in line with the Asian Markets. The last leap in the year 2008 is ending with a thin volume in many markets. The markets are desperately waiting for some cues like Second Stimulus package and rate cut to see some direction.

On Friday, the markets ended the day with a sharp fall as the tensions over the geo political issues raised possibility of a war. The marginal fall in the inflation numbers was also rained down. On the other hand, the bleak outlook over the second stimulus package and possible rate cut is getting deferred day by day. The markets were trading in negative zone on the concerns over the global economic outlook. The volume in the F&O segment is getting thinner and was down by 40% on Friday. Sensex and Nifty lost 2.51% and 1.24%. Capital Goods, Bankex, Metal, Oil & Gas, IT, Realty and Auto conceded lose of 2.95%, 2.99%, 2.77%, 1.78%, 3.92%, 3.82% and 1.72% respectively. However, the markets are expected to trade range bound over the day, as volume are expected to remain thin.

The BSE Sensex closed lower by 239.80 points at 9,328.92 and NSE Nifty ended low by 59.60 points at 2,857.25. The BSE Mid Caps and Small Caps ended with loss of 38.92 points and 51.66 points at 3,106.68 and 3,548.54 respectively. The BSE Sensex touched intraday high of 9,706.38 and intraday low of 9,294.98

On Friday, the US markets closed in green. Stocks inched higher in thin volume on Friday as energy shares rose alongside oil and General Motors climbed after its financing arm qualified for government funds, helping it stave off potential bankruptcy. However, the markets missed with a Santa Claus rally. Crude oil futures for the month of February delivery grew $2.36 to $37.71 per barrel on New York Mercantile Exchange. Despite the gain, oil finished the week down 11%. The crude futures rose Friday for the first time in four days after the UAE, the third-biggest oil producer in OPEC said it would reduce output to comply with OPEC’s supply curbs. Further the bargain hunting of contracts by the traders after a sharp slide in the previous session also added to the rally.

The Dow Jones Industrial Average (DJIA) closed up with 47.07 points at 8,515.55, NASDAQ index improved by 5.34 points at 1,530.24 and the S&P 500 (SPX) also closed higher by 4.65 points to close at 872.80 points.

Indian ADRs ended weak. In technology sector, Infosys lost by 3.94% while Wipro plunged by 3.49% whereas Satyam that surged by 3.80% and Patni Computers closing low by 0.91%. In banking sector ICICI Bank dropped by 4.38%, HDFC Bank fell by 3.27%. In telecommunication sector, Tata Communication dropped by 4.75%, while MTNL declined by 9.30%.

Today the major stock markets in Asia opened weak. The Shanghai Composite is trading low by 17.92 at 1,833.59, Hang Seng is low by 112.94 points at 14,071.20 Further Japan''s Nikkei is lower by 69.58. points at 8,669.94, Taiwan weighted low by 35.89 points at 4,390.78 and Singapore’s Strait Times is up by 12.08 points at 1,737.69.

The FIIs on Friday stood as net sellers in equity and net buyer in debt. Gross equity purchased stood at Rs 1,095.00 Crore and gross debt purchased stood at Rs 951.70 Crore, while the gross equity sold stood at Rs 1,213.50 Crore and gross debt sold stood at Rs 175.10 Crore. Therefore, the net investment of equity and debt reported were Rs (118.50) Crore and Rs 776.60 Crore respectively.

On Friday, Indian Rupee closed at 48.44/45 a dollar, fell by more than 0.80% as compared to Wednesday''s close of 48.07/08. The Indian benchmark indices gave up their gains after reacting to minor fall in inflation numbers and fear of geo political issues.

On BSE, total number of shares traded were 26.37 Crore and total turnover stood at Rs 3,175.40 Crore. On NSE, total number of shares traded were 52.93 Crore and total turnover was Rs 7,247.83 Crore.

Top traded volumes on NSE Nifty – Unitech with 46635945 shares, Suzlon Energy with total volume traded 35082057 shares, Reliance Petro with 34419422 shares, Satyam with 25488062 shares, followed by DLF with 13351822 shares.

On NSE Future and Options, total number of contracts traded in index futures was 548479 with a total turnover of Rs 7330.93 Crore. Along with this total number of contracts traded in stock futures were 658805 with a total turnover of Rs 7023.38 Crore. Total numbers of contracts for index options were 595715 with a total turnover of Rs 9061.71 Crore and total numbers of contracts for stock options were 60347 and notional turnover was Rs 737.87 Crore.

Today, Nifty would have a support at 2,767 and resistance at 2,920 and BSE Sensex has support at 9,142 and resistance at 9,524.

SGX Nifty Live Update - Dec 29 2008

SGX Nifty currently at 2,845.0 and is trading -34.0 points

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Daily Trading Calls - Dec 29 2008

Nifty (2857) Sup 2805 Res 2900

Sell Cromp Greaves (130) SL 133 Target 124, 123

Sell BHEL (1300) SL 1321
Target 1259, 1249

Sell Infosys (1109) 1125
Target 1077, 1066

Sell REL Capital (516) SL 521 Target 506, 504

Buy Cummins (197) SL 193
Target 204, 206

Daily News Roundup - Dec 29 2008

Jubilant Organosys to buy back US$253mn FCCBs.(BS)

Suzlon Energy says it has no plans to revive its Rs18bn rights issue, for which the Cabinet Committee on Economic Affairs gave its approval.(BL)

Ceat to temporarily shut down Mumbai, Nashik plants.(ET)

Coal India is set to import coal from Indonesia, US, Mozambique and Australia to meet the country’s increasing demand for the dry fuel, says the Minister of State for Coal.(FE)

Tata Sons and NTT DoCoMo have postponed their open offer for picking up 20% stake in Tata Teleservices (Maharashtra).(BL)

Oil Ministry turned down Reliance Petroleum request to export LPG from its newly commissioned refinery at Jamnagar in Gujarat.(BS)

Wockhardt plans to raise Rs5bn through a redeemable preference share offering.(ET)

Unitech says that its deal to sell a majority stake in its telecom venture-Unitech Wireless-to Norway’s Telenor is expected to close next month.(BL)

Chairman of Kingfisher Airlines says company's plans to raise US$400mn are on track.(FE)

IOC puts petrochem project on hold, to focus on refinery.(ET)

Geetanjali Gems to invest Rs30bn in three jewellery SEZs.(ET)

Tatas get extra land for manufacturing Nano at Uttarakhand.(ET)

Jindal Power to raise Rs70bn.(BS)

Hyundai India said it is cutting production from three-shift to two from next week following a slump in demand.(FE)

GM India cuts production by 10%.(TOI)

Satyam Computer Services has postponed its board meeting; meeting could be scheduled for January 19, 2009.(BS)

Satyam Computer may get a strategic investor.(DNA)

Jet Airways cut fares by 15-40%.(ET)

ACC may shut more plants if demand fails to pick up.(BS)

HDFC Bank raises Rs17bn through a private placement of unsecured non-convertible bonds.(BS)

ICICI Bank to cut interest rates by 50-75bps across the board.(ET)

Core Projects to acquire Priceton’s K12 for Rs1.25bn.(ET)

UTI MF to divest 26% stake.(Mint)

Unitech plans to set up two product specific SEZs in Haryana. (DNA)

Tata Power subsidiary signs a power purchase agreement with Spice Energy Group to buy 2,000MW power project. (ET)

Air India may cut fares from mid-January 2009.(BL)

ONGC, GAIL in JV to supply gas to China.(TOI)

Annual WPI-based inflation has dipped to a nine-month low of 6.61% for the week ended December 13.(BL)

Centre’s advance tax collections for the December 15 installment recorded a 22% YoY decline to Rs426bn.(BL)

Foreign exchange reserves increased by US$3.6bn to touch US$254bn for the week ended December 19.(BL)

Wireless subscribers base grow 50% in April-Nov.(ET)

3G spectrum auction is likely to be postponed by at least a few weeks, says DoT.(BS)

Steel Industry asks government to raise import duty as part of the stimulus package.(ET)

RBI put on hold proposal mooted by finance ministry and SEBI seeking to allow FII investment in IDRs.(ET)

Bulls losing strength!

We all have strength enough to endure the misfortunes of others.

Misfortune seems to have dominated most events, places and persons this year. Just three days to go before the curtains come down on what has been a disastrous year for world markets. The Indian market is down over 50%, that too after hitting all-time highs in early January (a year best forgotten for bulls). We will of course not go into the details of what exactly went wrong this year, as it is already well articulated by now.

Today, we see the key indices opening in the red again, though not by much. Things could improve during the week after last week's 7% drop. Asian markets are mostly down this morning, led by South Korea's Kospi. Crude oil is up over 4% at around $39 per barrel. US stocks closed marginally higher on Friday while European markets were shut for Christmas holidays.

Satyam will be in the limelight as it has deferred its Board meeting. There is talk of the promoters facing margin calls on pledged shares. Also, the IT major could be a takeover target or at least the top management may have to go following the terrible events of the past couple of weeks. ICICI Bank is said to be ready to lower rates by up to 75 bps. PSU banks will also be in action in the wake of the sharp dip in bond yields.

Top airlines like Jet Airways and Kingfisher may also grab some attention after slashing fares and claims of a breakeven this year. Core Projects and Rolta are believed to be closing in on acquisitions. Ajanta Pharma could be under pressure as it has lost a trademark case to US-based Alcon. Tata Power is set to buy the entire 2,000 MW output from Chennai-based Spice Energy.

We expect the market to be lackluster and sideways. Investors are likely to remain on the sidelines for the next few days given that companies will soon start announcing quarterly results. Some news is also awaited on the next round of fiscal stimulus and the anticipated rate cuts by the RBI. The central bank is scheduled to undertake a quarterly review of its annual policy at the end of the month. Softening of Indo-Pak tension is seen as a positive. On the whole, earnings will be a key focus area. More than 20% drop in advance tax numbers for the October-December quarter spooked the sentiment on Friday.

One only hopes that the bulls will be much better off in 2009 than the year that is just set to pass us by. Some recovery is expected in the second half in terms of improvement in micro as well as macro economic fundamentals. Corporate earnings over the next few quarters will hinge on how fast the economic scenario changes (for the better that is). Right now all is in the realm of speculation. Lots of uncertainties still loom large over the world markets. However, a lot of bad news is already built into the stock prices and investors are just looking for light at the end of the tunnel. Hopefully it won't be that of a speeding train (read more bad news).

US stocks ended higher on Friday in thin trading, led by gains in energy shares as crude oil prices advanced. Retailers were also in focus amid reports of a dismal Christmas shopping season.

The Dow Jones Industrial Average rose 47 points to 8,515, with 17 of its 30 components gaining ground, led by the likes of Alcoa, Exxon Mobil and Coca-Cola. Shares of General Motors (GM) led gainers among blue chips, rising 13%.

The Federal Reserve approved the request by its finance arm, GMAC, to become a bank holding company and become eligible for financing under the US Treasury Department's US$700bn Troubled Asset Relief Program.

The S&P 500 index added 7.4 points to 872, while the Nasdaq Composite index advanced 5.3 points to 1,530.

For the week, the Dow dipped 0.7%, the S&P lost 1.6% and the Nasdaq fell 2.2%.

The energy sector led the gains on the S&P, rising 2%, as crude oil prices recovered some ground. Among other gaining sectors, were telecom (up 2%) and materials up (1.8%).

So far in 2008, the Dow has lost 35.8%, while the S&P, weighed down by financials, is down 40.6% and the Nasdaq is down 42.3%.

Trading volume was very light on Friday, with 516mn shares changing hands on the New York Stock Exchange and 218mn on the Nasdaq. Advancing issues topped decliners 3 to 1 on the NYSE, and 15 to 11 on the Nasdaq.

Total retail sales dropped 5.5% to 8% for November and December, according to MasterCard's SpendingPulse. The 40% drop in the price of gasoline compared with December 2007 accounted for almost half of the decline.

Excluding gasoline, total sales were down 2% to 4% this holiday season from the same period in 2007. said that the 2008 holiday season had finished as its best ever, in spite of grim results across much of the overall sector.

Crude prices gained 6.7% to US$37.71 a barrel, lifting the energy sector, after a four-session drop and a 33% drop thus far in December.

The US dollar traded little changed, with poor retail sales doing little to further push the greenback's mid-December stabilization. The dollar index, which measures the currency versus six major counterparts stood at 80.89, virtually unchanged on the day.

Treasurys were slightly higher, with 10-year-note yields falling on evidence of poor retail sales, serving as a focus amid thin post-holiday trading. Ten-year yields fell 2 basis points to 2.18%.

Investors will return on Monday for the final few trading days of the year. Trading is expected to be choppy, with the market closed on Thursday and many market participants on vacation. But investors will have a few economic reports to digest.

The S&P/Case-Shiller Home Price Index, a manufacturing survey for the Chicago region, and a reading of consumer confidence, all are due on Tuesday.

Wednesday brings weekly jobless-claims data, an update on mortgage applications and crude oil inventories. Markets will be shut on Thursday, and no economic data will be released on New Year's Day. On Friday, a survey of the national manufacturing sector is likely to be closely watched.

In corporate news, two of the nation's top automakers, GM and Chrysler will take possession on Monday of the first part of the $13.4bn in emergency loans from the government.

London and other European markets were closed for Christmas holidays on Friday.

In the emerging markets, the Bovespa in Brazil was up 1% at 36,864 while the Bolsa index in Mexico gained 0.8% at 22,515. The RTS index in Russia was down 1.7% to 644 while the ISE National 30 index in Turkey climbed 1.7% to 34,618.

Indian stock market ended the Christmas week with losses on account of the growing tension between India and Pakistan. Markets also witnessed trading volumes were low not only in India but also across the globe, with many participants choosing to extend the Christmas vacation.

The BSE benchmark Sensex ended at 9,328 losing 239 points and the NSE Nifty index ended at 2,857 losing 59 points.

All the BSE Sectoral indices ended in the red with BSE Consumer Durable index (down 6%), BSE Realty index (down 5%), BSE Bankex index (down 4%) and BSE Capital Goods index (down 3.6%).

Reliance Petroleum gained by 6% to Rs84 as reports stated that the company's 29mn tons export refinery goes on stream. The scrip touched intra-day high of Rs89.45 and low of Rs82 and recorded volume of over 1,00,00,000 shares on BSE.

Reliance Infrastructure fell 6% to Rs542. According to reports, company emerged as the sole bidder for NHAI’s Eastern Peripheral Expressway project, entailing an investment of Rs27bn.The scrip touched intra-day high of Rs604 and low of Rs528 and recorded volume of over 21,00,000 shares on BSE.

Bharat Forge declined by 4% to Rs78. According to reports, company is planning to cut output and put its expansion on fast track. The scrip touched intra-day high of Rs84.95 and low of Rs78 and recorded volume of over 1,00,000 shares on BSE.

Reliance Power slipped 3% to Rs114. The company is raising around Rs115bn via syndicated loans, and US$500-600mn through ECBs to finance its upcoming UMPP at Sasan in Gujarat, reports stated. The scrip touched intra-day high of Rs121.70 and low of Rs113.90 and recorded volume of over 18,00,000 shares on BSE.

Weekly Technicals - Dec 29 2008

Weekly Technicals - Dec 29 2008

Morning Note - Dec 29 2008

Morning Note - Dec 29 2008

Technical Trends - Dec 29 2008

Technical Trends - Dec 29 2008

BGR Energy Systems

BGR Energy Systems, an engineering procurement and construction (EPC) player in the power sector, has bagged some of its biggest orders in the last two quarters, assuaging concerns about slowing order flow suggested by key macro indicators.

If order flow is not a problem, has the company been able to fund its projects given the massive size of the projects and the still tight liquidity scenario? It appears so, given BGR’s recent announcement that it has tied up credit lines for the Rs 3,100-crore Tamil Nadu State Electricity Board project, one of its bigger orders.

Healthy growth in revenue and earnings, strong order-book and execution track record differentiate BGR Energy from a good number of mid-cap companies that have succumbed to the pressure of testing macro-economic times. For a sector that caters to the perennially deficit power industry, BGR’s earnings potential too remains unaltered.

The sharp de-rating that the stock has undergone, along with some mid-cap companies, therefore, appears overdone.

We reiterate a buy on the stock of BGR Energy Systems. At the current market price of Rs 141 BGR trades at about eight times its expected earnings for FY10.

No dearth of orders

From Rs 3,200 crore in early June, BGR’s order-book has grown to Rs 10,590 crore now (seven times FY-08 sales). Besides the fact that BGR is in an industry that holds tremendous potential, the fact that most of its recent orders are from the Government could be the reason for its steady order intake.

The last two quarters were significant as they marked the beginning of the company’s stride into large power projects of over 500 MW, as a full fledged EPC player — supplying equipment and undertaking the balance-of-plant works.

It is noteworthy that the company competed with BHEL and won the last two large EPC power projects awarded by the Tamil Nadu and Rajasthan State electricity boards. There is little doubt, given the superior qualification of BHEL, that this project would have been won on the back of aggressive pricing.

However, BGR can have an edge over other EPC players for the following reasons: For one, the company’s strength and qualification in the BoP space provide it with a techno-commercial edge.

Two, BGR’s capability to manufacture over 50 per cent of components (required for a project) in-house also adds economies arising from backward integration. BGR has been scouting for technology transfers for Boiler Turbine and Generator (BTG) — the key equipment in a power plant — and has so far only tied up with Chinese players for the supply of equipment for the recently won projects. Given the close scrutiny that Chinese equipment are subject to in recent times, this could pose some risk until BGR successfully ventures into acquiring technology for BTG.

The company has made progress in technology transfer in another area; it has recently tied up with an Italian company for condensate polisher plants that help high pressure steam generators in thermal power stations improve efficiency of the unit.
Steady credit line

BGR’s massive projects have managed to receive funding at a time when bankers have been exercising caution in funding new projects. The company’s Rs 2,105 crore of fund and non-fund based requirement for its Tamil Nadu power project received good response from over five banks.

At an interest rate of 12.25 per cent, funding costs may soon decline with the recent cuts in prime lending rates of banks. The company has stated that the funding of the Rajasthan project too is likely to be completed in a month’s time.

While comfortably meeting its working-capital requirements at an average borrowing cost of 11 per cent, the company has been discreet in its spending on new facilities. It has been going slow on new facilities in Mundra SEZ as well as assemblies in China.

BGR has managed to maintain its operating profit margins in the 10 per cent range despite steep hike in raw material costs and a high proportion of fixed price contracts. Locking into input prices through bulk buying appears to have helped.

However, the benefit of the current decline in commodities is likely to be reflected only in projects executed the next year. This could aid some margin expansion.

The lock-in period for shares held by institutional investors (such as Citigroup) in BGR is over. Should these investors exit, this could trigger some selling pressure in the stock. However, given the strong prospects, investors can view this as a buying opportunity.


Investors with low-risk appetite can consider the Power Finance Corporation (PFC) stock, as the stock is trading at attractive valuations after being beaten down in the stock market crash. With markets in a corrective phase, investors should buy in small lots to take advantage of price declines. Stable Net Interest Margin, high demand for credit, government guarantees for its loans and lower risk weights assigned to the company (20 per cent of capital) place it in a better position than other NBFCs and banks.

At the current market price of Rs 123, the stock is trading at 1.6 times its September-end book value and 11.3 times its trailing one-year earnings. That is at a substantial premium to the nearest competitor — Rural Electrification Corporation (seven times). PFC’s larger balance sheet with high quality advances and stronger focus on the power generation sector make it a better investment option.
Business overview

PFC is a leader in power financing, with a 20 per cent market share. To meet India’s growing energy demand, the government has ambitious plans of adding 92,000 MW by 2012. Current installed capacity is 147 GW (1 GW=1000MW). More than Rs 10,31,600 crore investments is estimated to be required in the power sector during the Eleventh Five Year plan. PFC as a chief financier, a nodal agency and consultant to power generators will be one of the key players to tap into this opportunity. PFC lends to central government PSUs such as NTPC, NHPC, PGCL, Neyveli Lignite, state electricity boards and to private sector power generators as well as transmission and distribution players.

Low operating costs (4 per cent of operating profits in first half of the year), diversified incremental disbursals, ability to source funds in a tough market at lower rates and minimal regulatory intervention in its business are some of key competitive advantages that PFC has over peers in the financial services business.


The advances book of the company has been growing at 19 per cent CAGR in the last five years. In the first half of 2008-09, profit growth was at a modest 6 per cent though net interest income grew at 23 per cent.

NII growth was driven by a 24 per cent growth in advances and a stable NIM. Profit growth would have been higher if not for the forex loss (Rs 97 crore against Rs 12 crore profit in 2008) on foreign borrowing, which constitutes 5 per cent (part of which is not hedged) of the total borrowing.

But a stable rupee may help reverse these losses. Going forward, PFC appears capable of sustaining its margins as interest rates decline, as disbursals gain pace.

In recent quarters, PFC managed to maintain Net Interest Margin and spreads above 3.7 and 2 per cent, respectively. Though the longer “reset” periods on PFC’s loans led to lower NIMs in a rising interest rate scenario, they may actually help retain the NIMs in a falling interest rate scenario.
Loan mix

The loans extended by PFC to the state government entities now constitute 75 per cent of the loan book, having come down from 77 per cent in FY08. Though the state electricity boards are making losses, the loans given by PFC are relatively insulated from these losses as separate government guarantees and escrow accounts are maintained to shield PFC from the risks in lending to SEBs. While Central government entities account for a good portion of PFC’s new funds sanctioned, it is the State entities that continue to get the major part of disbursals. In the first half of 2008-09, PFC’s outstanding disbursal/sanction ratio fell to 33 per cent. The asset quality of PFC’s book is very high with NPA being as low as 0.02 per cent, though 46 per cent of the advances book is unsecured.

In order to fund its lending activities, PFC borrows mainly through bond issues and from the banking system.

Though the company does not have access to a low-cost fund base such as banks, PFC’s high credit rating, equivalent to sovereign rating overseas, enables it to source funds at lower costs.

PFC’s NBFC status may help it benefit from any revision of bank limits for lending to NBFCs.
Growth prospects

Given the gap between sanctions and disbursals, PFC has substantial room to grow advances. Loans sanctioned and yet to be disbursed stand at Rs 1,13,467 crore as on September 30, in addition to the new funding requirements.

With many players wanting to enter power equipment, this sector too offers substantial potential, given the ongoing funds crunch.

Unlike banks and other NBFCs, PFC need not invest in low-yielding securities to meet regulatory requirements; this helps lift the overall yield on assets.

PFC has a 16.6 per cent stake in the newly set up Power Exchange, and this may also add to the other income of PFC. PFC has already exceeded its credit offtake target for the year.
Risks and concerns

The prospects for PFC hinge to a large extent on the pace of progress in capital projects in the power sector. Delays in capital spends in the sector or a postponement or scaling down of power projects may lead to slower growth for PFC. Project delays could also force defaults or delayed payments, which may lead to lower asset quality.

Delays in awarding bids under the Ultra Mega Power Projects, for which PFC acts as nodal agency, will deprive it of fees and also represent opportunity lost for funding.

Wealth Creation 2008

Wealth Creation 2008

Currency Forecast - Dec 29 2008

Currency Forecast - Dec 29 2008

Zee News

Zee News

Weekly Market Outlook - Dec 29 2008

Weekly Market Outlook - Dec 29 2008

Indian Banks

Indian Banks

Regional Banks

Regional Banks

United Spirits

United Spirits

Iron Ore Sector

Iron Ore Sector

Steel Sector Report

Steel Sector Report

Weekly Watch - Dec 29 2008

Weekly Watch - Dec 29 2008

Bharat Electronics

Bharat Electronics

Shoppers’ Stop

Shoppers’ Stop, a premium retailer with a pan-India presence, has seen a deteriorating financial performance in recent quarters. Currently priced at Rs. 174.7, this stock is unlikely to deliver in the coming quarters. While holding the stock for a period of two years may be considered, further exposure can be avoided.

On the basis of enterprise value, Shoppers’ Stop trades at 0.6 times its trailing 12 month sales, among the lowest in the retail space. Similarly, market capitalisation is 0.5 times its trailing sales, the ratio, again among the lowest peers.

Shopper’s Stop is present in 12 cities across product segments totalling a store area of more than 1.65 million square feet. It covers apparel, books, accessories, toddler care, food and beverage, airport retail, large format stores, family entertainment, e-tailing and cosmetics.
Slowing growth

Despite its diversified presence, Shoppers’ Stop has been grappling with a slowdown. Slowing footfalls in the existing stores with the possibility of a delayed turnaround in new segments may make the coming year a challenging one for this premium retailer.

Same-store sales growth slowed to 7 per cent for the first half of FY-09, from an annual 20 per cent across formats in FY-08. While transaction size moved up 9 per cent for H1FY-09, volumes actually declined 3 per cent, indicating that the improvement may have been on account of a higher contribution from the ‘luxury’ segment. Apparel sales, usually offering higher margins, have increased to about 62 per cent of sales for H1FY-09 over 59 per cent for the same period last year.
Customer entry

Customer entry, though up by a marginal 1 per cent in H1FY-09, dropped 6 per cent in Q2FY-09. On the bright side, conversion of footfalls into sales improved on a quarterly basis. More than 70 per cent of sales at Shoppers’ Stop come through its loyalty program, First Citizens Club. While being an important measure of customer loyalty and brand strength, it could be a signal that only serious shoppers are entering stores and the company could lose out on impulse shoppers.

Reduced footfalls is a problem most retailers are battling. In a scenario of caution in spending, value retailers score over premium retailers. Given the premium brand image created by Shoppers’ Stop, branching out into value brands may not be a feasible long-term strategy.

However, lack of adequate competition in the near future will continue to give an edge to Shoppers’ Stop. Luxury brands currently entering the market via joint ventures may still take time to get established.

In terms of financial performance, the past two quarters have been bad, with the company suffering losses due to surge in costs. For example, lease rentals have soared 60 per cent in a single year. A jump in interest cost on account of increased short-term borrowing is another cause for concern as there is low cover for interest.

Margins have, thus, taken quite a beating. Operating profit margins fell below two per cent in H1FY-09 from 5.5 per cent of the same period last year. However, there was a sizeable one-time expenditure relating to branding exercises and a logo change. Reassessment of depreciation resulted in higher charges, squeezing annual profits before tax (PBT) margins by 4 percentage points and turning quarterly profits negative. A prolonged discount sale period further depressed margins.

Compounding these woes, shrinkage (merchandise lost during transit or to pilferage) increased on a half-yearly basis from 0.24 to 0.56 per cent of retail sales. Consolidated, the company is on a loss even at the operating level due to new retailing forays. Only the apparel, cosmetic and toddler care segmentsare profitable.

Expenses are likely to remain high for the coming quarters. Softening of rentals may be seen only in the next financial year since some properties have location advantage where rentals may not be drastically negotiable.

Segments such as HyperCITY, airport retail, family entertainment centres, food and beverage outlets, will remain loss-making as they are recent endeavours. While the prospects for these businesses are bright, a sizeable scale of operations and expansion is required before they turn profitable. This is expected to take about three to four quarters yet. Additions to Shoppers’ Stop department stores too will generate profits after a few quarters of operations.

With the IPO capital exhausted, debt funded expansion. The debt-equity ratio is relatively healthy at 0.48 times, a position not enjoyed by most retailers. There may be a rights issue in the next quarter which will finance expansion. The scale of the issue has been reduced to Rs 300 crore from Rs 500 crore, with the time period scaled back to 2.5 years from three-four years.

However, with market conditions likely to remain hostile in 2009 and failure of large rights offer to attract sufficient subscription in recent months, pushing through the rights offer may prove a challenge. That suggests that financing costs may remain a drag on margins for a few more quarters.