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Saturday, July 18, 2009

Larsen Tourbo, Bajaj Auto, Welspun Gujarat, Zee Entertainment, Polaris Software, Bharti Airtel, Sterlite Industries, India Economy

Larsen Tourbo, Bajaj Auto, Welspun Gujarat, Zee Entertainment, Polaris Software, Bharti Airtel, Sterlite Industries, India Economy



Welspun Gujarat

Welspun Gujarat

India Monsoons

India Monsoons

China's forex reserve tops US$2 trillion

China's foreign exchange reserve swelled at a record pace in the second quarter to top the US$2 trillion milestone for the first time. The reserve rose by a record US$178bn in the second quarter to US$2.132 trillion, the People’s Bank of China said. That dwarfs a US$7.7bn gain in the previous three months. The increase came amid strong signs of economic recovery in China, spurred by the government's stimulus package and a strong growth in bank lending in the first six months of the year. Property and stock prices have also climbed over the last few months. Data released by the central bank today also showed that M2, the broadest measure of money supply, rose by as much as 28.5% in June from the year-earlier period. Separately, China's foreign currency regulator said today that it will ease curbs on outflows of capital. The State Administration of Foreign Exchange will expand the sources of capital Chinese can use to fund outbound spending and let companies send investment funds overseas without prior approval, it said.

US recovering faster than expected: Tim Geithner

The US economy is improving at a much faster pace than had been anticipated, even as aggressive policy measures taken by governments across the globe have thwarted the risk of a much deeper recession, Treasury Secretary Timothy Geithner said. "In the US, the rate of decline in economic activity has slowed, business and consumer confidence has started to improve, housing markets have begun to stabilize, the cost of credit has fallen significantly and credit markets are opening up," Geithner said in a prepared speech in Jeddah, Saudi Arabia. These improvements have been more substantial and have come more quickly than many expected when the Obama administration was designing the stimulus programs in December and January, he said.

Meanwhile, the Federal Reserve raised its economic projections. In "central tendency" forecasts released with the minutes of its June policy meeting, the Fed raised its 2009 and 2010 GDP forecasts, even while saying that the US economy could take up to six years to resume trend growth. GDP for 2009 was pegged at -1.5% to -1.0% against the previous range, from April, of -2.0% to -1.3%. For 2010, growth was forecast at 2.1 to 3.3%, up from 2 to 3% in April.

Delhi Metro flyover crashes...Gammon India shares slide

Shares of Gammon India tumbled 7.5% during the week to Rs149 after a part of an under construction Delhi Metro line collapsed on July 12 which was being constructed by the company. Six people were killed and 15 others injured when an under-construction bridge of the Delhi Metro collapsed. The accident took place at around 5 am last Sunday when a pillar of the bridge caved in near Lady Sriram College in South Delhi's Lajpat Nagar. The Delhi Metro chief E. Sreedharan inspected the site the next day even as clearing operations in the area were underway. Sreedharan, who resigned from the post owning moral responsibility for the mishap, visited the accident site to take stock of the situation. Delhi chief minister Sheila Dikshit rejected his resignation, as the state government sees his continuation necessary for the successful completion of projects related to Delhi Metro ahead of the 2010 Commonwealth Games. The DMRC has set up a four-member committee to examine reasons for the accident and it would submit its report in 10 days. This was the second accident involving the company. In the first incident, Gammon was held responsible for the collapse of a bridge in Hyderabad which claimed two lives in September 2007. Eight pre-fabricated segments of the flyover collapsed after scaffolding caved in on Sept. 9, 2007.

Inflation remains negative for 5th straight week

The annual rate of inflation stood at -1.21% for the week ended July 4, as compared to -1.55% for the previous week June 27, and 12.19% during the corresponding week of the previous year. The Wholesale Price Index (WPI) for "All Commodities" for the week ended July 4, rose by 0.7% to 236.4 from 234.7for the previous week. The Government announced that it had revised inflation in week to May 9 to 1.56% from 0.61%.

The index for Primary Articles group remained unchanged at its previous week’s level of 258.5. The index for 'Food Articles' group declined by 0.2% to 253.6 from 254.0 for the previous week. The index for 'Non-Food Articles' group rose by 0.3% to 237.7 from 237.0 for the previous week.

The index for Fuel, Power and light group rose by 3.1% to 338.2 from 327.9 for the previous week on account of higher prices petrol (10%), high speed diesel oil (7%) and light diesel oil (4%).

The index for Manufactured Products group rose by 0.2% to 206.1 from 205.7 for the previous week. The index for 'Food Products' group rose by 0.5% to 234.0 from 232.8 for the previous week. The index for 'Beverages Tobacco & Tobacco Products' group rose by 0.9% to 304.3 from 301.6 for the previous week.

Hyped Budget, low hopes

Great expectations, but... nemo dat quod non habet (no one can give what he does not have). In the days leading up to the Union Budget, it is fashionable for experts and opinion-makers of all hues to hold forth on what the budget 'ought to be'. This is natural. After all, divining the finance minister's mind, or lobbying openly till it rankles, or making a public display of one's 'expertise' in public finance is an annual indulgence of the financial and business chatterati. This year is all the more exciting as the Congress party has won (quite unexpectedly) the mandate to govern India for another five years in the midst of global financial and economic turmoil. I expect an early start to the budget season of Parliament and a late finish.

More chatter is not necessarily better chatter. While the appetite for revolutionary budget measures is understandably higher in the post-election euphoria, I am not sure whether this budget will usher in much of a revolution beyond creative accounting in public finance. The greatest problems (the ballooning government debt and a persistent fiscal deficit) and the greatest imperatives (welfare, subsidies and infrastructure creation) are pulling the government finances in opposite directions. Sadly, the former may eventually win even as the current budget addresses the latter. Simply put, the government has a 'structural' or 'balance sheet' kind of a problem, while we await the cheap and counter-cyclical thrills on the profit-and-loss or revenue front.

Almost all the governments of the top 20 economies in the world are facing financial challenges, mostly centering on the re-financing of failed banks. But for many of them, this is a one-time burden that will affect public finances adversely for a year or two. In India's case, things are different. The government has always been profligate and its recent sins have been luckily countered by strong tax revenues as the 'India story' played out over most of this decade. In just over a year of fiscal stress and economic upheaval, this veil of modesty has been ripped apart.

Public debt as in March 2009 is estimated to be over 75% of the country's GDP, and almost four times the annual revenue inflows of the government. The interest on public (or government) debt consumed 31.6% of revenue receipts in FY08; it rose to over 34% in FY09 and will get worse from now on as revenue sags and debt balloons. Expect a figure of around 38% for FY10e. The government is literally on a debt treadmill.

The revenue inflows for the government are not likely to increase significantly anytime soon given that the economic growth in India is taking a breather, unless tax rates are upped (yes, the unthinkable might be forced upon us, not in this budget perhaps, but soon enough). So let's rule out any easing of tax rates which have a major effect on the aggregate tax collection. There might be some tax sops for individuals, such as an increase in deductibles for home loans, tax-exempt bank deposits, etc, but these are likely to be measures intended for hiding the lack of material tax breaks. The implementation of VAT is already running into political and bureaucratic problems (what pragmatic measure doesn't in this blessed country?), while service tax might be increased to 12% again with wider 'coverage'. This is because a uniform GST is still at least a budget away.

On the expenditure side, the finance minister is under tremendous pressure to increase the welfare/subsidy spend. True, many subsidies are not reaching the intended recipients. However, this is not reason enough to cut PDS allocations, minimum support prices for foodgrain procurement, health, education and fertiliser subsidies. As for populist programmes, let's be realistic. A government that has been voted back to power on the strength of the NREGS (by any count, a positive contributor), the Sixth Pay Commission hikes and farmer loan write-offs, is surely going to preserve (if not pump up) subsidies.

It's on this basis that decontrol of petrol, diesel and LPG prices is also a probable non-starter, just as it has been all these years. Similarly, there is an urgent need to invest heavily in infrastructure creation and provide large budgetary support/allocation for irrigation schemes, highways, power plants, urban infrastructure, railways and ports. Does any government have the gall to cut back on the spend in this category?

As for the budget day (the actual deficit at the end of the year is usually worse), my back-of-the-envelope guess is that the real fiscal deficit for financial year 2010, including some invisible items that the government often sweeps aside, will probably be a shade under Rs 5 lakh crore a truly toxic figure when you consider that it is about 50% of the total budget and over 11% of the GDP. Obviously, the government will have to resort to a mix of PSU divestments, increased borrowings and printing (monetising) this amount over the year. Each option is fraught with financial danger and moral hazards.

Divestment is sensible if you can sell the loss-making units. Selling stakes in the profitable PSUs is akin to selling the family silver to fund wayward and footloose progeny. It also requires support from a reluctant DMK and Trinamool Congress. Monetising will bring back the ghost of inflation (it has been benign so far because of the high base effects from last year and soft oil prices, but both these factors can wear off soon). That leaves borrowing, which is theoretically easy as government paper is backed by a sovereign guarantee.

This time, though, it's different. The net incremental borrowings during the year (about Rs 3.5 lakh crore, increasing at 60% CAGR over FY08-10) will take government debt to over 80% of the GDP and weaken the rupee. This will also crowd out private sector borrowings and drive up interest rates. As a result, banks' bond holdings will deflate and put pressure on corporate profits and the stock market PE multiples. Where does that leave the investors in Indian stocks? Not in wonderland, I'm afraid.

Dipen Sheth is Vice-President, Institutional Equities, BRICS Securities Ltd.

Power IPOs to flood street in coming weeks

Adani Power Ltd., a power project development company promoted by Adani Enterprises Ltd., plans to tap the capital markets on July 28 with an initial public offering (IPO) of 301,652,031 equity shares of Rs 10 each at a price to be decided through the book-building process. The IPO closes on July 31. The price range is likely to be Rs100-110. At this range, the company will be raising anywhere between Rs33bn to Rs37bn. The Adani Power IPO announcement lifted the shares of Adani Enterprises, the holding company of the diversified Adani group.

Indiabulls Real Estate said its wholly-owned power subsidiary Indiabulls Power (formerly Sophia Power Co.) filed a draft red herring prospectus with the capital market regulator SEBI for an initial public offer (IPO). According to media reports, Indiabulls Power is planning to raise Rs15bn through the IPO to fund its future projects. However, the company did not provide any further details related to the draft offer.

Sterlite Industries, part of the London-listed Vedanta Resources, on July 15 raised US$1.5bn (about Rs72bn at current exchange rates) through an American Depository Shares (ADS) issue. The Anil Agarwal-controlled company said that the funds raised would be used to part-finance its power generation plans and other planned capex programmes. Sterlite’s power plans are being built through wholly-owned subsidiary Sterlite Energy, which is building two commercial power plants - a 2,400 MW plant at Jharsuguda in Orissa and another 1,980 MW plant in Punjab, at a total investment of about Rs150bn (about US$3.1bn).

Public sector hydel power generation company NHPC is likely to bring out its much-awaited IPO next month after twice postponing the same in the last two years. SBI Caps, Enam Financial and Kotak Mahindra are book runners and lead managers of the issue, for which Karvy will be the registrar. "If everything goes well, the IPO is likely to be in the first week of August, tentatively August 7," said NHPC CMD S.K. Garg. The proposed issue involves NHPC infusing 10% fresh equity through this public offer to raise Rs16.8bn while the Government will divest its 5% stake in the company.

The duration and pricing of the issue would be decided after July 27 when the company would file its Draft Red Herring Prospectus (DRHP) with the registrar of companies (RoC). NHPC had earlier filed the Draft Red Herring Prospectus (DRHP) in April 2007, but it was turned down by SEBI, as the company did not have the required strength of independent directors on its board then. Later, the company re-filed on August 6, 2008, but could not launch the IPO due to poor market conditions. IPOs are also due from JSW Steel and Jaiprakash Power Ventures.

Weekly Stock Picks - July 18 2009


Buy Cummins

Buy Patni

Buy IVRCL Infra

Buy Reliance Infra

Weekly Newsletter - July 18 2009

After a highly volatile first half, the market appears to be heading for a similarly swinging month at least, as bulls and bears slug it out among themselves. Its all down to quarterly results, which are going to accelerate from next week, and daily dose of news. The market will take directional cues depending on the tone of the corporate earnings and other news flow. Given the fact that the news will be mostly mixed, one should brace for a rollercoaster ride. There will be days when the stocks will fall sharply and there will be days when they will rally. The catalyst(s) could be local and global.

It will of course be tough to catch the swings on either side, especially the timing. So, the best approach is to take it day-by-day. We expect a broadly rangebound market with no specific bias at least in the near term. If one looks at a little further ahead - medium to long term - the outlook is positive. However, concerns still remain on monsoon's overall progress and its fallout on rural demand, which apparently is what the Government and the market too is betting big on. We also cannot ignore the global factors, though strong domestic consumption will ensure another year of decent growth for India.

Key results to be announced next week: Essar Oil, IDFC, JSW Steel, Mercator Lines, Mindtree, RCF, Triveni Engineering, Dr. Reddy's, Ultratech Cement, Thermax, Yes Bank, LIC Housing Finance, Renuka Sugars, OBC, HDFC, BHEL, Canara Bank, Wipro, India Cements, IFCI, Hindustan Zinc, Tech Mahindra, ONGC, ACC, Maruti, Ambuja Cements, Siemens, Biocon, ITC, Apollo Tyres, MRPL, Alstom Projects, Union Bank, United Phosphorus, GSPL, Idea, Bharti Airtel, Marico, Balrampur Chini, RIL, Ranbaxy, HCC, Shree Cement, GAIL, Bharat Electronics, Jet Airways, CESC, RPL, ICICI Bank, HUL, JP Associates and Godrej Consumer.

Fiscal stimulus bearing fruits: FM

Finance Minister Pranab Mukherjee said that some positive signs are emerging for the Indian economy. Production of major steel producers registered a growth of 13% in June 2009 (YoY). Cement production increased by 13.1% in June (YoY). Sales of automobile sector have registered a growth of 14.3% in June. This was driven by the demand in two wheelers at 17.4% in June.

"This reflects greater purchasing power with the middle income groups, easier availability of credit and affordability," the Finance Minister said. Consumer goods continued to record a double-digit growth at 12.4% in May over the corresponding period of the previous year, he said. Number of mobile phone connections in May increased by 49%. Approximately 12mn new mobile connections were added during the month.

Mukherjee said that the Government’s fiscal stimulus since December is showing positive results, though the economy is still not out of the woods. "These are small beginnings that show that our strategy to generate internal demand is responding," he said. "In the medium term, we should have clear objectives and come back to the path of fiscal discipline." In recent weeks, there have been some concerns on the progress of monsoon, Mukherjee said. The Government is monitoring the situation on a daily basis and is ready to implement its contingency plan, if required, he added.

"What is required right now is to achieve high growth in the shortest possible time," Mukherjee told the Rajya Sabha, urging them to support the finance bill. "This level of deficit is not sustainable and we shall correct it soon." The Lok Sabha passed the budget on Tuesday. The Finance Minister said that the widening of the deficit won’t crowd out borrowing needs of private companies, adding that the Centre was working in tandem with the RBI to ensure that enough money is available with the banks to lend to companies and households.

The Finance Minister also said "it is essential that we come back to the path of fiscal prudence without compromising our growth momentum as soon as the current economic circumstances permit us to do so". Fiscal prudence is critical for maintaining a stable balance of payments, moderate interest rates and steady flow of external capital for corporate investment, he said.

As indicated in the medium term fiscal policy statement, required under the FRBM Act and placed as a part of the budget documents, the fiscal deficit is expected to come down from 6.8% of GDP in FY10 to 5.5% in FY11 and further to 4% in FY12, Mukherjee said. Correspondingly, the revenue deficit is expected to decline from 4.8% of GDP in FY10 to 1.5% in FY12, he added.

Noting the serious concerns voiced on the implications of the Government’s borrowing programme, the Finance Minister said that the net market borrowing requirement for FY10 through GoI dated securities works out to Rs3.98trillion. The actual net borrowing through Government securities in FY09 was Rs2.21 trillion. Notwithstanding the increased borrowings in the current year, the cost of borrowing has been significantly lower so far, he said.

During the first half of FY10, the Government's market borrowing is being supported by RBI through its Open Market Operations (OMO), Mukherjee said. It has to be understood that the OMO should not be confused with monetisation of government borrowings and that the Centre has no intentions of monetising its debt, he emphasised.

On the disinvestment of Public Sector Units (PSU), he said that the President’s Address to the Joint Session of Parliament on 4th June had clearly spelt out the policy of the UPA on disinvestment. Which is that the Government would develop people-ownership of public undertakings while ensuring that its equity does not fall below 51% and the Centre retains the management control. The Finance Minister said he had reiterated the same in his budget speech.

"It is our intention to enable the PSUs to benefit from techno-managerial efficiencies and become more competitive in the market. My Ministry has initiated discussion with other Ministries and Departments for identifying the PSUs where a portion of Government shareholding can be sold and for issue of fresh equity to meet their fund requirements. The details are being worked out and would be announced in due course," Mukherjee said.

On infrastructure, he said it is a high priority area for the UPA. Investment in infrastructure will raise the capacity for rapid growth and employment generation, he said. Rural infrastructure is of special importance, as it will disperse incomes and bring prosperity in the rural areas. Through the four fiscal packages announced so far (including the budget), the Government has given an overall stimulus of nearly Rs2.18 trillion to the economy. Bulk of this is being directed towards investment in infrastructure, both urban and rural, as well as ‘Aam Admi’ centric programmes, like NREGA, Pradhan Mantri Adarsh Gram Yojana, Bharat Nirman, etc.