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Sunday, May 23, 2010
Derivatives: Any positive market news may trigger sharp up move due to short covering
The market continues to remain in the sell mode, but global markets hold the key; any positive market indicator may propel up move due to significant short covering
The Foreign Institutional Investors (FII) continued to dump Indian stocks that caused a severe correction during the week ended 21st May 2010. FII's have sold shares worth a net Rs 9908.08 crore so far this month, till 21 May 2010, according to data from the stock exchanges while the domestic funds have bought stocks worth a net Rs 4103.47 crore. The ongoing Euro zone crises and the rollover activity during the next week in the future & options (F&O) segment ahead of the expiry will keep the market volatility high. The S&P CNX nifty corrected 162.35 points during the week under review to close at 4931.15 on Friday. In the F&O segment the average volumes during the week was significantly higher at Rs 113735.93 crore. Huge volume in both the cash and the F&O segment that was accompanied with the market fall is a major concern. The nifty future closed at marginal discount to the underlying at 4928.40. The Nifty May open interest (OI) increased 15.36 lakh shares in OI during the week under review and the total OI stood at 2.97 crore shares. The Nifty June OI increased by 13.05 lakh shares to 69.26 lakh shares on 21st May 2010. Over all the stock futures may series shed OI, however the June series stock futures witnessed significant addition of OI. Most of these OI additions were on the short side. On Friday the overall stock future May series shed 5.79 crore shares in OI while the June series added 8.45 crore shares in OI.
In the nifty option segment also the indicators were pretty negative as the 4700, 4800 and 4900 strike in the June series added OI signifying fresh put brought at these levels. The May series 4800 and 4900 strike calls witnessed aggressive call writing. The overall mood continues to be negative. However now since such huge short is being built in the June future series, any positive mood swing may trigger sharp up move that would be caused by the short covering.
Overall the market wide OI on Friday increased by 3.57 crore shares to 246.30 crore shares as compared to the previous day. The stock future segment witnessed aggressive OI addition during Friday.
The most active nifty calls on Friday in the May series were the 4800, 5000, 5100 and 5200 strikes while the corresponding puts were the 4900 and up puts. The 4800 may call added 10.50 lakh shares in OI due to aggressive call writing and the total OI increased to 14.34 lakh shares. The 4700 and 4800 strike put in the nifty June series added 7.79 lakh shares and 2.51 lakh shares in OI on Friday. This was fresh put buying of these strikes. The proceeding week will witness significant volatility, as it is the expiry week.
The market continues to remain in the sell mode and the F&O expiry in the next week will keep the market volatile. Improvement in the global market view will remain the key. Any positive market indicator may propel up move due to significant short covering. Now in the absence of any major positive trigger, the June series is only expected to build bearish positions.
Realty, metal stocks lead 3.2% Sensex slide
The market tumbled last week on persistent concerns about the euro zone sovereign debt situation and tougher financial regulations in some developed markets. Investors feared that the euro zone's efforts to tackle its sovereign debt crisis will fall short, jeopardizing the global economic recovery.
Disappointing global economic data also contributed to the downdraft. The number of US workers filing new applications for unemployment benefits unexpectedly rose last week for the first time since early April. The index of leading economic indicators slipped last month for the first time since March 2009, while factory activity in the US mid-Atlantic region accelerated less than expected in May.
Back home, sustained selling by foreign funds weighed on investor sentiment. Foreign institutional investors (FIIs) have sold shares worth a net Rs 8367.76 crore so far this month, till 20 May 2010, according to data from the stock exchanges. They had bought stocks worth a net Rs 2667.35 crore last month. Domestic funds have bought stocks worth a net Rs 3286.54 crore so far this month, till 20 May 2010.
The fourth quarter corporate results have been decent. The combined net profit of a total of 2,219 companies rose 23.9% to Rs 56,175 crore on 24.4% rise in sales to Rs 5,67,643 crore in the quarter ended March 2010 over the quarter ended March 2009.
Meanwhile, India's monsoon rains are on track to hit the country's southern coast on 30 May 2010, and the Laila cyclone in the Bay of Bengal would not derail the vital June-September rainfall, a weather office spokesman told a news agency on Thursday. The India Meteorological Department (IMD) in late April 2010 said rainfall is likely to be 98% of the long-term average. Good monsoon rains would help raise farm output, boost rural incomes and lower food inflation.
The south west monsoon is important for India as about 60% of the country's farmlands are rain-fed and more than half of the workforce is employed in the agriculture sector. The quantum of rainfall in the crucial sowing month of July and distribution of rainfall during the monsoon season also holds key.
The BSE Sensex fell 548.99 points or 3.23% to 16,445.61 in the week ended Friday, 21 May 2010. The S&P CNX Nifty fell 162.35 points or 3.2% to 4,931.15 in the week.
The BSE Mid-Cap index declined 3.65% and the BSE Small-Cap index declined 4.48% in the week. Both the indices underperformed the Sensex.
Trading for the week began on a weak note. The BSE 30-share Sensex fell 159.04 points or 0.94% to 16,835.56 on Monday, 17 May 2010, as concerns over the long-term health of the euro zone and weak US earnings dampened investor appetite for risk. The S&P CNX Nifty declined 33.60 points or 0.66% to 5059.90.
The key benchmark indices eked out small gains in choppy trading session on Tuesday, 18 May 2010, tracking higher European stocks and gains in US index futures. The BSE 30-share Sensex rose 40.20 points or 0.24% to 16,875.76. The S&P CNX Nifty rose 6.30 points or 0.12% to 5,066.20.
Germany's move to ban naked shorting of certain financial instruments, including shares of ten German financial companies rattled world stocks, with the domestic bourses following suit on Wednesday, 19 May 2010. The BSE 30-share Sensex fell 467.27 points or 2.77% to 16,408.49. The S&P CNX Nifty declined 146.55 points or 2.89% to 4,919.65.
The key benchmark indices rebounded on Thursday, 20 May 2010, after incurring heavy losses in the preceding trading sessions as oil major ONGC jumped. The BSE 30-share Sensex rose 111.19 points or 0.68% to 16,519.68. The S&P CNX Nifty rose 27.95 points or 0.57% to 4,947.60.
The key benchmark indices, on Friday, 21 May 2010, recovered after hitting their lowest level in nearly three months at the onset of the trading session as index heavyweight Reliance Industries (RIL) and banking rebounded. The BSE 30-share Sensex fell 74.07 points or 0.45% to 16,445.61. The S&P CNX Nifty fell 16.45 points or 0.33% to 4931.15.
Capital Goods index (up 1.20%), FMCG index (down 0.36%), PSU index (down 1.03%), Healthcare index (down 1.63%), Consumer Durables index (down 1.61%), Oil & Gas index (down 1.91%), outperformed the Sensex during the week.
Power index (down 3.41%), IT index (down 3.81%), Bankex index (down 4.17%), Auto index (down 5.05%), Metal index (down 6.49%), Realty index (down 8.82%), underperformed the Sensex.
In the Sensex pack, 24 shares declined last week, while the rest rose.
India's largest truck maker Tata Motors (down 12.93%), was the major Sensex loser last week, followed by realty major DLF (down 9.89%) and infrastructure developer Jaiprakash Associates (down 9.25%).
Copper maker Sterlite Industries fell 8.50%, tracking a steep decline in industrial metals on worries about the impact of Europe's debt crisis on global economy recovery. Copper price on the London Metal Exchange has almost lost 18% since hitting this year's high above $8,000 a tonne in early April 2010.
Meanwhile, investors also remain concerned that efforts by China to cool its economy including the central bank thrice raising banks' reserve requirement this year and clamping down on the property sector would choke demand for metals from Beijing.
India's largest private sector lender ICICI Bank fell 8.44% after the bank's board approved merging Bank of Rajasthan with itself. ICICI Bank has started a due diligence exercise on Bank of Rajasthan (BoR) from Tuesday, 18 May 2010. The swap ratio for the merger is set at 25 shares of ICICI Bank for every 118 shares held in BoR. The swap ratio is favourable to the shareholders of BoR. Bank of Rajasthan shares surged 80.84% to Rs 144.40 last week.
Diversified company Grasim Industries declined 7.49%. The Bombay Stock Exchange (BSE) has excluded Grasim Industries from the Sensex, BSE-100, BSE-200 and BSE-500 indices, effect from 26 May 2010 on account of demerger of the cement division.
Grasim's consolidated net profit rose 15.1% to Rs 654.48 crore on 10.4% increase in net sales to Rs 5385.62 crore in Q4 March 2010 over Q4 March 2009.
Index heavyweight Reliance Industries (RIL) fell 4.58%. The company said on Thursday, 20 May 2010, in view of the threat from cyclone Laila, the company has exercised caution and suspended all drilling operations in the East coast. All production operations on the FPSO (Floating Production Storage and Offloading) vessel operating in the KG D6 block were also suspended, RIL said.
The RIL stock had surged early this month, boosted by after a favourable ruling in the Supreme Court on gas dispute with Anil Ambani controlled Reliance Natural Resources (RNRL). The Supreme Court ordered the two firms to renegotiate a deal based on government policy on gas utilization.
Earlier, the Bombay High Court, in its order dated 15 June 2009 had directed that RNRL will get assured supply of 28 mmscmd of gas from RIL's Krishna-Godavari basin for 17 years at $2.34 per million British thermal units (mBtu). The gas price was 44.28% lower than the price fixed by the government for gas sale from the RIL block in the KG basin at $4.2 mBtu.
Telecom shares were in action last week as the auction of 3G spectrum ended on Wednesday, 19 May 2010.
Idea Cellular (down 8.60%), Reliance Communications (down 7.68%), Tata Teleservices (Maharashtra) (down 7.38%), declined. However, India's largest listed telecom operator Bharti Airtel rose 0.53%.
Bharti Airtel and Reliance Communications, each won 13 of the 22 telecom zones on offer while other major operators Vodafone Essar, Idea Cellular and Tata won a total of 9, 11 and 9 circles, respectively.
Idea paid Rs 5,765 crore for 11 circles, Bharti paid Rs 12,290 crore for 13 circles, RCom paid Rs 8,583 crore for 13 circles. Among the unlisted bidders, Vodafone paid Rs 11,617 crore for 9 circles, Aircel paid Rs 6,498 crore for 13 circles, Tata Teleservices paid Rs 5,864 crore for 8 circles and Sing Tel shelled out Rs 337 crore for 3 circles. Videocon and Etisalat did not get any 3G spectrum in any circle.
The successful bidders would be allocated the airwaves by the end of September 2010, after the spectrum is vacated by the Defense Department. The operators would have to pay the amount in the next 15 days.
India's largest engineering and construction company Larsen & Toubro (L&T) (up 5.13%), was the top gainer from the Sensex pack last week. The company expects 20% growth in revenue and 25% growth in new orders in the current financial year. L&T's order inflow jumped 90% to Rs 23843 crore in Q4 March 2010 over Q4 March 2009. The company's order book as at 31 March 2010 stood at Rs 1,00,239 crore, which is 2.7 times its sales of Rs 36,996 crore for the year ended March 2010.
L&T's net profit surged 44% to Rs 1438 crore on 28% rise in sales to Rs 13490 crore in Q4 March 2010 over Q4 March 2009. Net profit rose 26% to Rs 4376 crore on 11% increase in sales to Rs 36,996 crore in the year ended March 2010 over the year ended March 2009.
State-run oil explorer, ONGC rose 4.58%. The Cabinet on Wednesday, 19 May 2010, more than doubled the price of administered price mechanism gas to $4.2 per mbtu. Administered price mechanism (APM) gas is a term used for gas blocks awarded to state-run energy firms on nomination basis. The base price of APM gas supplied by state firms will rise to $4.2 per million British Thermal Units (mBtu), the same as the rate approved for Reliance Industries, bringing about near-uniformity in the cost of the fuel in India.
According to reports, ONGC may be able to save a revenue loss of Rs 5,000 crore in this year that will boost its bottom line proportionately. The company is schedule to announce its annual result for the year ended March 2010 on Friday, 28 May 2010. ONGC had lost Rs 4745 crore in the year ended March 2009 (FY 2009) on selling APM gas. The APM gas price was last revised in 2005 to 1.79 per mBtu.
State Bank of India (up 2.20%), ITC (up 1.25%) and Cipla (up 1.05%), were the other Sensex gainers.
Numeric Power Systems
Those looking for an off-beat small-cap exposure can consider investing in the stock of Numeric Power Systems, a manufacturer of uninterruptible power systems (UPS).
After a year of poor performance in FY-09, the company has been steadily increasing its sales over the last three quarters; its entry into green energy businesses such as solar panel installations, light emitting diode (LED) and a planned micro wind turbines would, besides supplementing income, help the company augment its business in the power back-up/alternative power solutions space.
At the current market price of Rs 331, the stock trades at about eight times its expected per share earnings for FY-11. While the company may close FY-10 (results awaited) on a flat note, new initiatives, besides a pick-up in corporate spending, may boost earnings from 2011.
Investors may, therefore, require a two-three-year perspective to benefit in terms of improved earnings growth from the above businesses.
However, being a small-cap stock with a market capitalisation of Rs 342 crore, it would be subject to the vagaries of the market, especially in volatile phases. The stock, for instance, lost 15 per cent since the beginning of this month. Investors may, therefore, have to adopt a strategy of buying on declines linked to broad markets. Similarly, any sharp rallies of 15-20 per cent in the stock can be used as opportunity to book profits.
New initiatives
Numeric Power has traditionally been in the business of selling UPS, inverters and other power-conditioning solutions. This segment is reported to be witnessing a double-digit growth over the last few years, as a result of increasing data centre capacity (with IT and ITES driving the same) and worsening power situation. Numeric Power's sales have grown by 19 per cent annually in the last three years.
The company, claiming to have a market-share of about 20 per cent, has been combining its pure power back-up solutions with alternative energy solutions such as solar power.
For instance, the company's photovoltaic systems allows to bank solar power in a battery for future use. Its solar inverters and hybrid solar UPS systems all come with these options.
Solar panels that can be installed in the roof-top and can provide investment/tax incentives may well prove to be a high-volume business in India and abroad. Besides operating solar power projects for captive consumption in three of its units, the company has made over 200 installations to clients in India and abroad in sectors such as banks and telecom.
That the segment is quickly being ramped up is evident from the fact that it already contributes about 10 per cent to the top line.
UPS segment
Numeric Power has had a steady market in the UPS segment, thanks to the increasing power deficit in the country. Even as 2008-09 may have seen a cut in spending by corporates as a result of slowdown, Numeric Power's volume of UPS sold was 7 per cent higher than the previous year.
Aside of UPS traded, its own manufactured UPS volumes saw increased off-take of 14 per cent. Clearly, a peak power deficit (such as 12.7 per cent in March 2010) leaves very little choice for corporates but to spend on power back-ups and inverters.
However, the improved volumes came on the back of a marginal dip in realisations. That Numeric claims to have set up 80 per cent of the UPS in bank ATM networks in the country also indicates the demand for the product.
Numeric is also in talks for a tie-up with a US-based micro wind turbine company. Given the current incentives for alternative energy in the country, low-cost small-scale solutions may appeal to corporates. That banks such as SBI have resort to wind power indicates how corporates are looking at viable and efficient alternative power solutions.
While the green energy segment is unlikely to become a chunk of its overall business in the medium-term, it holds potential to drive profit margins.
Numeric Power's operating profit margins were 12 per cent for the December 2009 quarter as against 8.5 per cent a year ago. Revenue for the nine months ended December was Rs 322 crore while net profits stood at Rs 26 crore. The company has traditionally maintained low gearing and a return of net worth of about 20 per cent.
Business risk for Numeric Power arises from a large unorganised market for low-capacity UPS. The company along with players such as APC, Microtek, and Emerson reportedly account for a little over 50 per cent of the low-capacity UPS market.
It may, therefore, be inevitable for the company to upgrade itself to offering more high-end solutions catering to corporates.
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Whirlpool of India
Investors with a medium-term horizon can consider buying the Whirlpool of India stock. Though the stock trades at 23 times its trailing earnings, which appears expensive, the potential for improvement in earnings is significant on account of the company's product launches, expanding dealer network and better pricing power.
The company's sales for FY-10, at Rs 2,137 crore, recorded a 30 per cent growth against 9 per cent in FY-09. Whirlpool's efforts to expand distribution reach through road shows and dealer-contact programmes in the Tier-II and Tier-III cities have evoked good response (added around 2,000 dealers in the network last year); in a year's time, this geographical expansion too may buoy-up sales.
With strong demand translating into good pricing power, the company has passed on part of the increase in raw material cost to buyers by way of price increases (of around 4 per cent in two rounds between December and now).
If commodity prices rise further, Whirlpool plans to pass it on to the consumers again, shielding its margins from erosion.
Whirlpool's net profit margins too are set to improve in FY-11, as it has repaid its entire debt recently.
The stock is up 115 per cent from our initial buy in November 2009. At the current market price of Rs 258, the stock still promises upside.
Sales strength
Whirlpool reports a five-year compounded growth of 19 per cent in sales.
This average is skewed by the muted 7 per cent growth in 2008-09 when Whirlpool saw a blip in demand following the sudden withdrawal of consumer credit for durable-goods purchases by finance institutions. With revival in the economy many NBFCs however kick started financing consumer goods purchases during diwali last year.
Whirlpool's already strong market position in refrigerators has been fortified through product innovations over the years.
In 2007 summer, the company launched Delight (frost-free) and Fusion (direct cool) range of refrigerators and in 2008 the ‘Mastermind' series (fully automated refrigerator).
In 2009, features such as e-light, stabiliser-free option, and l-shaped handles were added.
In 2010, the company unveiled the ‘Protton' model with freshness booster system .
For the current year, the company is working on the plan of launching UPS systems for home and office applications. The product has been tested in UP and Bihar and will be launched across markets soon.
The product upgrades clubbed with its marketing initiatives and a good after-sale service have helped Whirlpool grow sales.
Washing machines sales (in volume terms) have grown at a CAGR of 15 per cent in the years between 2005 and 2009; growth in FY10 picked up to 39 per cent. Refrigerator volumes have risen by close to 10 per cent annually between 2005 and 2009; in 2009-10, the volumes rose by 28 per cent.
The company is now set to venture into the non-metro cities and has conducted road shows in West Bengal (Asansol and Durgapur), Bihar, Uttar Pradesh, Maharashtra and all the four States in the South.
Over the long term, these new markets will help the company expand sales and gain a larger share of the market.
The company's marketing budget will be funded without much trouble as the company has cut down its debt burden, freeing up operating cash flows for promotional and distribution spends.
Healthy cash flows
At the end of FY10, after repaying almost Rs 110 crore of debt, the company had Rs 62 crore of cash balance (cash generated from operations was Rs 258 crore against Rs 184 crore in the previous year).
Cash generation was helped by a doubling of profits (to Rs 145 crore). Whirlpool turned profitable at the net level only in 2007-08. And in the last three years the company's earnings (net) have grown at over 100 per cent annually.
The company looks quite comfortable to handle future cash requirements internally. With all borrowed funds paid back now, net margins too will improve.
Margins expand
Conscious efforts to cut cost (raw material expense as a percentage of sales was down to 50 per cent in FY-10 from 52 per cent in the previous year), a profitable product mix and better realisations saw margins expand both at the operating and net levels in the March quarter and in full year FY-10.
For FY-10, the OPM was up three percentage points (to about 10 per cent) and net profit margin stood two percentage points higher at six per cent.
via BL
Standard Chartered Plc IDR
Conservative investors looking for defensive options can subscribe to the Indian Depository Receipt (IDR) offer of Standard Chartered (StanChart) PLC. The IDR is an opportunity for investors to invest in a globally diversified (both in terms of geography and segments) banking and financial services conglomerate at a reasonable price. Investors, however, need to bear in mind the higher capital gains and dividend tax incidence on returns from IDRs compared with domestic shares. Investors in the IDR would also lose out if the Rupee appreciates vis a vis the Pound.
StanChart's global access to low cost funds, the possibility of better growth driven by improving credit offtake as well as margins in the emerging markets and likely improvement in fee income as capital markets stabilise, argue for the investment.
Valuation
Each IDR represents one-tenth of Standard Chartered PLC's UK listed stock. The actual price at which the IDRs are offered for subscription by investors will be known only on Monday May 24th. The Friday closing price of Stanchart's shares at the London Stock Exchange offers a clue as to the likely level around which the eventual price would be determined. At Rs 103.6 (computed based on a 5 per cent discount on the current price of £16.1) ), the stock would discount the bank's calendar 2009 earnings by 13.4 times. The offer would be at a price-book value of 2.1 times, excluding goodwill. The pre-tax dividend yield would be 3.5 per cent.
This price would place the stock at a discount to most of the Indian private sector banks (1.8 to 4.4 times). While StanChart may not match the pace of Indian private sector banks on growth in its asset book, its large size, well-diversified presence across emerging markets, along with a clean balance sheet and strong risk management systems, make the stock a good investment.
The profit before tax (PBT) of StanChart for the year ended December 31, 2009 was Rs 24,044 crore .
Standard Chartered PLC intends to raise $500 million from this offer of IDRs. The primary objective appears to be an India listing as the offer will only add 1.18 per cent to the equity base and shore up the core capital ratio marginally from 8.92 per cent to 9.16 per cent. As of December 2009, the capital adequacy ratio of Standard Chartered PLC stood at a comfortable 16.5 per cent.
Business
Standard Chartered PLC is a holding company that offers a host of financial services through its subsidiaries in almost 70 countries with predominant presence in the high growth markets of Hong Kong, Korea, India, China, Africa and other Asian countries.
The company segments its business into Wholesale segment and Consumer segment.
The Wholesale segment comprises transaction banking , capital market services, corporate finance and principal finance mainly targeted to corporates. The bank's consumer banking encompasses credit cards, personal loans, wealth management, mortgages and auto loans.
StanChart has an international credit rating of A, as against BBB- sovereign credit rating for India, an indicator of the edge it enjoys over Indian banks in accessing global funds for its operations at a low cost. The bank's high low-cost deposit proportion of 53 per cent as of December 2009, also helps reduce the overall cost of funds.
Financials
StanChart's net profit attributable to shareholders grew by 14 per cent annually during 2006-09. The PBT during the same period grew at an annualised 17.4 per cent. During the period 2006-09, the profit contribution from under-banked and high-margin geographies such as India, Asian economies such as China and Indonesia and Africa rose at a much faster pace than that from the developed regions, thereby increasing the overall profitability. StanChart also made acquisitions such as Union Bank of Pakistan (in 2006), American Express Bank (2008) and Korea First Bank Hsinchu International Bank which strengthened its presence in the emerging markets. StanChart adopts advanced Basel II norms on par with global banks with respect to its operational structure, which lends higher transparency and increases its readiness to tackle risks.
India, despite being a smaller business in terms of lending, has been a significant profit contributor to StanChart owing to higher fee based income from the growing wholesale banking business. India contributed 20 per cent to PBT, though it only made up 6.5 per cent of the asset book in 2009.
Despite it being a troubled year, StanChart weathered 2009 reasonably well. While its total income grew by 9 per cent, the costs only grew at 4 per cent thereby improving the group operating profits. This helped cost-income ratio fall from 56 per cent in 2008 to 51 per cent in 2009. A huge jump in the provisioning for bad-assets (51 per cent increase in 2009) partly limited profit growth but improved the overall provision coverage.
StanChart also has significant fee income (50 per cent of total income) coming in from services such as cash management, wealth management, principal investments and corporate finance. For 2009, the 22 per cent fall in operating profits for consumer banking was made up by the 36 per cent expansion in wholesale banking profits.
In the year ahead, the strong traction in consumer credit offtake in StanChart's key markets — India, Hong Kong, Korea and Singapore — may aid improvement in consumer banking offtake.
StanChart's Net Interest Margin, which was maintained at 2.5 per cent for 2006-08, fell to 2.3 per cent in 2009. While this was a function of the pressure on interest rates last year, margins may improve significantly from now on the back of the bank's low funding costs, rising rates and demand for credit.
Consumer banking which was a laggard in 2009 too may drive profit growth as the wealth management business revives as the global economy revives. StanChart indicated in its Interim Management Statement for the first quarter of 2010, that the group witnessed improvement in volumes, as the consumer segment increased its contribution to the overall income and profits. There was also increase in lending volumes. StanChart's overall asset quality is reasonable in the global context, especially given its emereging markets focus. The Gross NPA ratio stood at 2 per cent with an overall provision coverage of 70 per cent by end of 2009. The average loan to value is low in both mortgages (50 per cent) and wholesale banking , substantially limiting credit risk.
Credit growth is usually correlated to overall economic activity and on this score investors in StanChart may not have much to worry about. IMF forecasts regions such as Developing Asia, Africa and West Asia may have GDP growth rates of 8.4 per cent, 4.3 per cent, 4.5 per cent for 2010 and 8.4 per cent, 5.3 per cent and 4.8 per cent in 2011. This may have a two-fold impact on business as consumer demand revives and corporates revive borrowing plans. The prospect of a shift from a very easy monetary policy to a slightly tighter one does exist in India, China and Korea. However, StanChart's large low-cost deposit base and its access to low cost funds may help it weather such a phase better than peers.
Offer details: The issue opens on 25 May and closes on 28 May 2010. .
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MindTree
Investors with a two-year horizon can consider buying the shares of MindTree, a software and R&D services provider, given the overall improvement in IT spending from clients and a revival in the US.
The company has showed a robust improvement in key operating metrics, most importantly through the increase in per-hour realisations over the past two to three quarters.
A ramp-up in its top clients, revival in the number of large-deals and a heavy thrust on fixed-price contracts allow for revenue and margin visibility.
At Rs 539, the stock trades at a modest valuation of 10 times its likely FY11 earnings. This valuation is at a slight discount to comparable mid-tier IT companies. MindTree's share price was knocked down (15.6 per cent) over the last three weeks, largely due to the fact that the company would invest $10-11 million towards developing ready-to-brand 3G smartphones to be launched in the US and India.
Considering that any further investment by the company would only be made based on the performance of this product, the price correction may be unreasonable and present an attractive point for investors to enter.
In FY10, MindTree's revenue increased 4.7 per cent to Rs 1,296 crore, while the net profit trebled to Rs 214.8 crore. This is much better than several mid-tiers that had to contend with revenue declines last fiscal.
The company has seen an increase in realisations of close to 7.7 per cent onsite and 2.3 per cent offshore over the course of the last few quarters, thus aiding its margins. MindTree's top five clients have increased contribution to revenues, suggesting that ramp-up in volumes is well under way, a fact reinforced by a repeat business proportion of 99.1 per cent. The company has also seen an addition of large clients ($10 million) over the course of the last fiscal.
There has also been a steep increase in fixed-price contracts — that ensure better realisations, to 31.2 per cent of MindTree's revenues.
The company also has an enviable revenue-mix with 71.9 per cent revenues from services delivered from offshore locations (largely India) and ensures cost-optimisation. This proportion is among the best in the industry. MindTree hopes to better the Nasscom projected growth rate of 13-15 per cent in IT exports for 2010-11.
With its key segments of operation such as the US geography and verticals such as BFSI (Banking, Financial Services and Insurance) and travel and transportation stabilising, the company appears well-paced to achieve this growth on the revenue front.
A wage hike of 13-15 per cent may affect margins in the near-term, while a spurt in attrition (14 per cent) is a key execution risk.
Muted debut for SJVNL; Jaypee Infra falls below issue price
State-run hydro power generation company SJVNL lost about 4% on its debut and closed at Rs25 on the BSE after kicking off its maiden trading journey at Rs28. The stock hit a high of Rs28 on May 20 and a low of Rs24.10 on May 21. The company had priced its IPO at the top end of the Rs23-26 price band following strong response to the issue. A discount of Rs1.30 per share was given to retail investors and employees. The SJVNL IPO was subscribed 6.64 times, kick starting the government's divestment programme for FY11 on a positive note. The QIB portion was bid 9.02 times, while the HNI segment was bid 3.38 times and retail investors segment was subscribed 3.11 times. The central government offered 41.50 crore of SJVNL, formerly Satluj Jal Vidyut Nigam Ltd., for sale through the IPO. With the successful completion of the IPO, the Centre's stake has declined to 64.47% from 74.5%. The Himachal Pradesh (HP) state government holds 25.5% stake in SJVN. the company reported a net profit of Rs7.75bn on net sales of Rs14.23bn for nine months ended December 2009.
Shares of Jaypee Infratech Ltd. fell on listing amid a weak market and closed well below the issue price of Rs102 per share on the BSE. The stock opened at Rs93, touched a high of Rs98.50 and a low of Rs90 before shutting shop at Rs91. Set up as a special purpose vehicle for the Yamuna Expressway, Jaypee Infratech had raised Rs22.5bn from the initial public offering (IPO) between April 29 and May 4. The 165 km, six-lane Yamuna Expressway will connect Noida and Agra, in Uttar Pradesh. The company currently has debt of Rs40.44bn. Jaypee Infra had priced its IPO in the band of Rs102-117 per share following lukewarm response, with retail investors getting a discount 5% on allotment. The issue was subscribed 1.24 times, with 27.39 crore shares bid against 22.17 crore shares on offer. The IPO comprised fresh issue of equity shares and an offer for sale of 6 crore shares by parent Jaiprakash Associates.
Abbott to acquire Piramal's healthcare solutions business
Abbott announced a definitive agreement with Piramal Healthcare Ltd. to acquire full ownership of Piramal's Healthcare Solutions business (Domestic Formulations), for an up-front payment of US$2.12bn, plus US$400mn annually for the next four years, giving Abbott the No. 1 position in the Indian pharmaceutical market. The total consideration works out to US$3.7bn. This further accelerates Abbott's emerging markets growth following the recent acquisition of Solvay Pharmaceuticals and announcements last week of Abbott's collaboration with Zydus Cadila as well as the creation of a new stand-alone Established Products Division to focus on expanding the global markets for its leading branded generics portfolio.
Abbott plans to fund the deal with internal accruals and said that the transaction would not change its earnings outlook for 2010. Piramal's pharma solutions business makes and sells cheaper versions of patented drugs and the unit accounts for more than half of its revenue. Piramal's other interests include contract manufacturing (CRAMS) and pathology laboratories. Abbott said that the combined sales force would be the largest in the industry in India, and forecast that sales in India of more than US$2.5bn by 2020. In September 2009, Abbott bought the drugs unit of Belgium's Solvay for €4.5bn. This month, Abbott entered into a licensing agreement to commercialize products of India's Zydus Cadila in 15 emerging markets, in a bid to accelerate Abbott's growth in emerging markets.
Piramal Healthcare will remain in the industry and invest in remaining businesses, Chairman Ajay Piramal said. The stock was highly volatile this week, rising sharply on speculation of a possible stake sale by the promoters, but the rumours were later denied by the Piramal family. Reports had suggested that Sanofi-Aventis, Pfizer and GlaxoSmithKline could be possible buyers of the founders' stake in Piramal Healthcare. Shares of Piramal Healthcare ended at Rs502 on the BSE on Friday after touching a day's high of Rs599.90 and a day's low of Rs488. On the other hand, Abbott India shares closed at Rs1,096, up 3.7% over the previous day's close. It also cooled down from the day's peak of Rs1,210.
ICICI Bank-BoR merger swap ratio fixed at 25:118
ICICI Bank entered into an agreement with the Tayal family to merge Bank of Rajasthan (BoR) with it. A decision to this effect was taken on May 18 by both the banks. According to ICICI Bank, the share swap ratio has been fixed at 25 shares for 118 shares of BoR. This is based on an internal analysis of the strategic value of the proposed amalgamation, average market capitalization per branch of old private sector banks and relevant precedent transactions, ICICI Bank said in a statement. "The proposed amalgamation would substantially enhance branch network and presence in northern and western India," ICICI Bank said. At the proposed share swap ratio, the indicative price for BoR works out to about Rs188.42 per share, which reflects a premium of 89% to the latter's closing stock price on May 18. The deal values BoR at about 2.9 times its book value, compared with the industry average of 1.84. BoR's board has approved the deal, which will be subject to regulatory clearances. It's board will meet again on May 23 to discuss the ICICI Bank offer. ICICI Bank has started a due diligence exercise on BoR.
"An in-principle approval has been taken to amalgamate the bank with ICICI Bank. The majority shareholder is looking at swapping his official shareholding of 28.60% with ICICI Bank shares. Other details on valuation and share swap will be decided on May 24," said BoR MD & CEO G. Padmanabhan. He was appointed by RBI, after the central bank slapped Rs2.5mn fine on BoR for alleged violation of various norms. These included irregularities in transactions and misrepresentation of documents, norms pertaining to anti-money laundering, Know Your Customer and irregularities in the conduct of accounts of a corporate group. The RBI also appointed Deloitte Haskins & Sells to conduct a special audit of the bank, which recently submitted its interim report to the central bank. In March, SEBI banned 100 entities, including Tayal Group firms from all stock market-related activities for fraudulently hiking the promoter holding in Bank of Rajasthan, while conveying the impression they were reducing their shareholding. Though BoR promoters say they hold a 28.60% stake in the bank, SEBI has put the promoter shareholding at 55.01%.
India's food inflation edges higher, fuel prices steady
Food prices in the country inched up in the week ended May 8 while prices of non-food articles declined and that of fuel items remained steady, data released by the Government showed. Inflation in the Food Articles group rose to 16.49% at the end of the first week in May as against 16.44% in the week ended May 1, the Commerce & Industry Ministry said. It stood at 8.28% in the corresponding period last year. The WPI for the Food group declined to 293.9 from 294.0. Inflation in the Primary Articles group softened to 16.19% in early May compared with the previous week's annual reading of 16.76%. Inflation in the group stood at 6.67% during the week ended May 9, 2009. The WPI for this group declined by 0.1% to 299.2. Non-food Articles' inflation fell sharply to 18.68% in the week ended May 8 from 21.24% in the preceding week. Inflation in this group stood at 3.3% in the year-ago period. The WPI for this group declined by 0.4% to 282.1. India's Fuel price inflation remained steady at 12.33% in the week under review while the same was at -6.17% during the corresponding week of the previous year. The WPI for this group remained unchanged at its previous week’s level of 365.3.
Rupee falls to 6 1/2 month low...recovers as exporters sell dollars
The Indian rupee weakened to its lowest in six-and-a-half months against the US dollar on May 21, slipping below the 47 mark for the first time this year, as stocks extended recent losses tied to the euro-zone debt crisis. The partially-convertible Indian currency fell as low as 47.3350, its weakest since Nov. 3, 2009. That tool this week’s losses for the rupee to more than 4%. It was last trading at 46.85 in late Friday trading as against the previous week's close of 45.20.
The rupee recovered on Friday helped by dollar selling by exporters. Indian shares pared their losses on Friday after having dropped over 2% as foreign funds continued to dump risky assets like emerging market securities amid growing concerns that lack of cohesion among euro-zone leaders will aggravate the debt crisis in the region. Data from the capital market regulator SEBI has shows that foreign institutional investors (FIIs) have pulled out US$1.3bn from the Indian stocks so far in May, reducing net inflows for the year to US$5.3bn.
Funds tracker EPFR Global said investor flows in the third week of May reflected the uncertainty and heightened risk aversion with equity funds posting net outflows of over US$12bn and bond funds enjoying inflows of US$212mn. European equity funds had their worst week since late April 2008, with investors pulling a net US$4.8bn, whilst US bond funds benefited from the flight to safety, the data provider said.
Germany spooks markets with ban on naked short selling
World markets went through another tumultuous week, with risk aversion still pretty elevated amid lingering concerns that the euro-zone debt crisis will dent a global economic recovery. So, stocks were pummeled and commodities were pounded while the dollar and bonds were snapped up as investors continued to prefer safety and quality. But, the euro rebounded from a fresh four-month low against the US dollar by Friday amid talk of some intervention by the European Central Bank (ECB). A couple of weak economic reports on the US economy also led to the improvement in the euro-zone shared currency at the expense of the greenback. The euro also benefited from a flurry of short covering. At the same time, fear psychosis climbed with the CBOE volatility index or VIX spiking to a 14-month high of 46.37. The Wall Street's key fear gauge has soared from a three-year low hit four weeks ago as investors are increasingly turning skeptical about the efforts to rein in the sovereign-debt troubles in the 16-member bloc. Even at Thursday's highs, the VIX is still way below the peak level of almost 90 hit in October 2008 - after Lehman Brothers collapsed.
The European Union (EU) and the International Monetary Fund (IMF) have hammered out a nearly US$1 trillion bailout package for the debt-plagued euro-zone nations, but that has failed to assuage investor concerns so far. The ECB's announcement that it had made an initial purchase of €16.5bn (US$20.4bn) in government bonds as part of a programme to soothe markets had limited impact on markets. Sentiment across the globe took another big hit this week after Germany’s market regulator BaFin banned investors from naked short selling in 10 banks and insurers, as well as naked credit-default swaps (CDS) on euro-area government bonds. The regulator didn’t provide details on how it will enforce the ban or whether it would extend to trades outside Germany. Most CDS trading takes place in New York and London.
Germany will act alone where necessary, German Chancellor Angela Merkel said, referring to the short-selling ban by BaFin. "All of this will stay in effect until another solution has been found at the European level," she told the German parliament. The Netherlands and Finland said they have no plans to implement similar measures. France too doesn’t plan to follow Germany in banning the use of contracts to speculate on European sovereign debt, Finance Minister Christine Lagarde said. France has banned "naked short sales" on equity markets since September 2008.
Germany will lobby governments to introduce a tax on financial markets, and for ratings companies to come under European supervision so governments regain primacy over markets, Merkel said. The euro is at risk and Europe may be facing its greatest challenge since the founding of the EU, she said. The consequences are incalculable if leaders fail to act, Merkel said. Faster budget cuts, tougher penalties for euro-zone members that flout the rules and the orderly insolvency of euro-region states are among the measures Germany will put to EU partners on May 21, she said. "The lack of rules and limits can make behavior in financial markets driven purely by the profit motive destructive and lead to an existential threat to financial stability in Europe and even the world," Merkel told lawmakers in Berlin. "The market alone won’t correct these mistakes."
Separately, EU finance ministers gave their blessing to proposed regulations that would curtail the activities of hedge funds and private-equity firms. US Treasury Secretary Timothy F. Geithner will visit Germany and the UK next week to discuss the debt crisis in that region. EU President Herman Van Rompuy will host a meeting of finance ministers in Brussels on Friday to discuss reforms to economic governance. German Finance Minister Wolfgang Schaeuble will present a nine-point plan aimed at avoiding a repeat of the crisis touched off by Greece’s budget deficit. Germany is likely to approve its share of a US$1 trillion safety net for troubled euro-zone states and European finance ministers are meeting to discuss changes to budget rules to prevent another Greek-style debt crisis.
3G auction ends...Govt set to pocket a cool Rs677.19bn
India's auction of third-generation (3G) mobile airwaves finally ended on May 19, and the Government's bounty from the same swelled to a whopping Rs677.19bn as against projection of Rs350bn from the combined 3G-BWA auction. This includes the amount payable by MTNL and BSNL. Meanwhile, bids for one set of pan-India 3G mobile licences reached Rs168.28bn on the 34th day of the auction compared to the base price of Rs35bn. Price per block of 2x5 MHz Pan India spectrum is Rs167.51bn. The 3G auction started on April 9. BWA bidding is to start two days after the close of the 3G auction. The BWA auction is also expected to be equally competitive, as 11 players are in the fray for just two slots for each circle, while the reserve price for pan-India licence is Rs17.5bn.
Out of a total of 22 circles for the 3G spectrum, 17 have three slots, while in rest of the five circles, four blocks of spectrum are available. The successful bidders would be allotted air waves in September after the spectrum is vacated by the defence forces. Proceeds from the two auctions would help the Government bridge the fiscal deficit. India's fiscal deficit may come down to 5.2% of GDP from the estimated 5.5% of GDP. The Government has pegged the fiscal deficit at Rs3.81 lakh crores for FY11.
Nine companies - Bharti Airtel, Reliance Communications, Vodafone Essar, Idea Cellular, Tata Teleservices, Aircel, Etisalat, STel and Videocon Telecommunications - took part in the online auction. Bharat Sanchar Nigam Ltd. (BSNL) and Mahanagar Telephone Nigam Ltd. (MTNL), who have already been issued 3G airwaves, will also have to pay the winner’s price. The winning firms will have to deposit the money within 10 days from now. As per the details given by the Department of Telecommunications (DoT), three more Clock Rounds were completed on May 19. With this, the total number of Clock Rounds completed to date has come to 183. The auction results are provisional and subject to approval by the Government, the DoT said.
Weekly Newslette - May 23 2010
After yet another rough and tough week, investors would be hoping to see some semblance of stability but things may remain quite volatile and gloomy amid continued worries over eurozone debt crisis. Macro-economic situation across the world remains murky and uncertain. So, you have anemic growth in the US fueled largely by an unprecedented fiscal-cum-monetary stimulus. On the other hand, China's economy appears to be overheated and the policymakers there are trying hard to avoid a hard landing. Japan remains in the grip of deflation and stagnant growth. The UK is witnessing low growth, with high inflation and rising budget deficit.
Back home the overall economic scenario is pretty good. Inflation seems to have cooled off a little though it remains considerably high. It will cool off if monsoon turns out to be according to initial prediction. India will also benefit if global commodities, especially oil remain under pressure. A high base effect will also play a role in containing inflation. The RBI has done a commendable role in navigating the economy through turbulent times. Interest rates are still quite low and may not rise as fast as had been feared earlier, especially if the external environment is fragile.
Earnings have been fairly good if not spectacular and the fiscal deficit is also likely to be kept under control with the 3G auction bringing a windfall for the Government. However, the disinvestment programme may suffer if the market sentiment is weak and FIIs continue to be cautious. What's more, India is also among the least affected by the European debt crisis though it will not be entirely immune to the problem.
Coming to next week's prospects, the euro-zone debt issue will continue to cast a shadow on the local bourses. The F&O expiry will only make things more volatile. No major local economic data is due next week before the GDP report is out on May 31. Notwithstanding the benign Indian outlook, one should stay away from the market to avoid the current volatility and weakness. Let the global situation calm down and stabilise a bit before taking a fresh plunge. If you can't resist the temptation buy only sound quality stuff.
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