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Friday, March 23, 2007
Edelweiss - Daily Market Outlook 23rd March, 07
Market Snapshot
Yesterday, the Sensex opened with a significant positive gap of 126 points at 13,072, and did not bother to look back. The markets got another booster dose as the US Federal Reserve kept the benchmark interest rates unchanged. Unabated buying saw the index rally to a high of 13,326. The index thus gained 1,010 points from the low of 12,316 hit last Friday. The Sensex finally closed today with a hefty gain of 362 points (2.8%) at 13,308. The index is now up 878 points (7%) in the last four trading days. Nifty Settled with a gain of 111 points to close at 3876.
The NSE and BSE cash volumes were higher compared to the previous day at INR 78 bn and INR 35 bn respectively. The F&O volumes were also higher at INR 402 bn.
Sentiment Indicators
The Implied Volatility (IV) across Nifty strikes has decreased to 26-30% levels. The WPCR of Nifty Options decreased to 0.98 compared to the previous day while the 5 day average is 1.07.
Outlook
The markets are expected to open flattish in line with global cues and no major news flow coming in today. The Nifty might consolidate after gains from previous trading sessions. However, we could see some profit booking to come in above Nifty levels of 3900. SEBI's announcement to allow short selling by institutions is seen as a positive as it will add liquidity to the capital markets.
Banking sector might continue to see strength as fresh buying will come in and shorts are covering their positions. Bajaj Auto is our top buy candidate in the Auto segment as we expect the Automobile stocks to gain further from current levels.
As expected, the roll levels have contracted to -7 and we advise the short rollers to be aggressive at Nifty levels of -5.
The Nifty staged a strong recovery and showing straight 7.5 % gains in the last 4 days the technical charts indicate that its time for Nifty to settle down. The next resistance for the Nifty index is at 3886 followed by 3900 which will be a strong resistance for the Nifty. On the lower side, the Nifty has a support at 3848 followed by 3818.
The Nifty staged a strong recovery and showing straight 7.5 % gains in the last 4 days the technical charts indicate that its time for Nifty to settle down. The next resistance for the Nifty index is at 3886 followed by 3900 which will be a strong resistance for the Nifty. On the lower side, the Nifty has a support at 3848 followed by 3818.
Intra-day Stock Ideas
NIFTY (3875.9) SUP 3823 RES 3934
BUY GAMMONIND (299.3)
Sl 294 T 309, 311
BUY ESCORTS (117.7)
Sl 114 T 125, 127
BUY IVRCLINFRA (301)
SL 296 T 311, 314
SELL HCLTECH (296.55)
@ 299 SL 304 T 288, 285
SELL RAJTV (199)
@ 202 SL 206 T 192, 190
STRATEGY INPUTS FOR THE DAY
STRATEGY INPUTS FOR THE DAY
Bulls say Bought'em out
Most people get interested in stocks when everyone else is. The time to get interested is when no one else is. You can't buy what is popular and do well.
We mentioned about sunshine after sun outage at the beginning of the week. You had plenty of time to pick up heavyweights which no one seemed interested to buy for the last couple of weeks . We've had a fairly successful week as far as the bulls are concerned. Yesterday, was particularly satisfying with the key indices shooting up with a sharp jump in volumes and a positive breadth. Along with a buoyant global mood, some amount of short covering also helped. FIIs too seem to have pumped up the volume yesterday. Provisional figures on the NSE show that the overseas investors poured in Rs7.13bn in the cash segment. In the F&O segment, they were net buyers of Rs21.76bn. All of a sudden, things are looking up once again, as if we never had a fall last month.
Has something drastically changed. Except the sentiment? It always pays to be a little bit cautious as some of the concerns that brought about last month's downfall are still there. Today, we expect a higher opening given the mixed set of cues from US and Asian markets. Also, some selling pressure could set in at higher levels ahead of the weekend. The market could remain choppy as we will have the F&O expiry next week.
IFCI is likely to gain after the state-run term lender said it has appointed Ernst & Young, for advising the company on the induction of a strategic investor. Dabur India will be in focus amid reports that it is to acquire Singapore's Unza Holdings. TCS is also expected to attract attention amid reports of a big bang acquisition. HCL Tech and Cambridge Solutions are also going to be in the limelight as a deal could be brewing between the two companies. Torrent Pharma might also be in spotlight as reports suggest the Ahmedabad-based company along with Israel's Teva are the only ones left in the race for the generic business of Germany's Merck. Telecom stocks could be in the thick of things as well after the Cabinet formally approved 75% FDI yesterday.
ITC and other cigarette makers could be in for some more pressure as Maharashtra has also decided to impose a 12.5% VAT on all tobacco products except bidis. Indiabulls Real Estate Ltd., the real estate arm of stock broking firm Indiabulls Financial will make its debut today. F&O trading in Hinduja TMT will be suspended from March 30 due to the spin-off of its IT business into a separate company. The existing contracts for April and May will expire on March 29 and fresh month contracts will not be introduced.
US markets closed mixed. While the Dow managed slim gains the Nasdaq ended in the red and the S&P 500 finished flat. The S&P 500 ended flat at 1434.54. The Dow added 13.62, or 0.1%, to 12,461.14. The Nasdaq lost 4.18, or 0.2%, to 2451.74.
US light crude oil for May delivery jumped $2.08 to $61.69 a barrel, a gain of more than 3%, on the New York Mercantile Exchange. The front-month contract was 16 cents higher at $61.85 a barrel.
Treasury prices slumped, raising the yield on the 10-year note to about 4.58% from 4.54% late on Wednesday. In currency trading, the dollar fell versus the euro and rose modestly versus the yen. COMEX gold for April delivery added $4.20 to $664.20 an ounce.
Blackstone Group LP, the leveraged buyout firm that has spent $160bn taking companies private in the past two decades, plans to raise as much as $4bn by going public.
Motorola shares slid more than 6%. The mobile handset maker warned on Wednesday that it will post a first-quarter loss and that full-year sales will miss forecasts, owing to weak sales of mobile devices. The company also said its chief financial officer would retire effective April 1.
European indexes rose. The pan-European Dow Jones Stoxx 600 index added 1.5% to 374.36. The index is now up about 2% from its Dec. 29 close of 365.26, having recovered from last month's sell-off. The German DAX Xetra 30 closed up 2.2 % at 6,856.96, the French CAC-40 rose 1.8% to 5,598.37 and the UK's FTSE 100 added 1% to 6,318.00, with the latter's gains capped by some weakness in the pharmaceutical sector.
In Asia, stock benchmarks in Singapore, China and Korea are down. The Hang Seng is nearly flat while the Nikkei has gained marginally. The Morgan Stanley Capital International Asia-Pacific Index gained 0.1% to 145.72 at 11:02 a.m. in Tokyo, set to close at the highest since Feb. 27. For the week, the gauge is heading for a 3.1% rise, the most since the five days to Aug. 18. Markets open for trading elsewhere in the region fell, except in Australia, Taiwan and Malaysia.
HOW MARKET FARED
Fantastic Friday on cards
This week as of now is turning out to be an impressive for the bulls as the benchmark Sensex has recovered by nearly 1000 points from weeks low of 12427 on Monday to 13300 mark making a strong come back in last four trading sessions. Strong Global cues and the decision of the Federal Reserve to keep interest rates unchanged boosted the key indices at open. Today's rally yet again belonged to the large cap stocks again, however the Mid-Cap and the small cap stocks were unable to follow today yet both the indexes managed to close up nearly by 1%. Aggressive buying was again witnessed in the scrip's across the bourses lifting the benchmark Sensex over 350 points.
Finally, the 30-share benchmark Sensex surged 362 points to close at 12308. NSE Nifty jumped 111 points to close at 3875. VSNL, Tata Chemical and PNB were the major gainer, however Britannia, Zee Tele and Glaxo were the major losers among the 50-scrip's of NSE Nifty.
Suzlon Energy slipped sharply after reports stated that the company would increase its bid for Repower. The scrip fell from a high of Rs1025 to hit an intra-day low of Rs975 finally closing 1.3% up to Rs1008. The scrip touched an intra-day high of Rs1025 and a low of Rs975 and recorded volumes of over 5,00,000 shares on NSE.
IDFC surged by over 2% to Rs87 after the company bought a stake in the toll-road unit of Abhijeet Group for Rs656mn. The scrip touched an intra-day high of Rs89 and a low of Rs85 and recorded volumes of over 37,00,000 shares on NSE.
VSNL rallied by over 10% to Rs423 following reports that the company may be asked by the government to sell land to raise as much as Rs100bn. The scrip touched an intra-day high of Rs426 and a low of Rs389 and recorded volumes of over 21,00,000 shares on NSE.
BHEL surged nearly by 6% to Rs2230 after reports stated that the company may win an order from ONGC to supply equipment for oil rigs. The scrip touched an intra-day high of Rs2256 and a low of Rs2103 and recorded volumes of over 9,00,000 shares on NSE.
The index heavy weight Reliance Industries rose 2.6% to Rs1375 after the company entered into a Memorandum of Understanding with Rohm and Haas Company to explore the joint construction of a world-scale acrylic-monomer complex in Jamnagar, India. The scrip touched an intra-day high of Rs1379 and a low of Rs1347 and recorded volumes of over 24,00,000 shares on NSE.
Banking sector once again out performed the benchmark indexes as the Bank index rose over 4% for second consecutive trading session after Finance Minister said money supply with Banks will ease in coming days as Government will start spending funds from the budget marked for the fiscal year. The Mid-Cap stocks yet again led from front, Bank of India surged by over 12% to Rs176, Canara Bank rose 7.8% to Rs208 and PNB advanced 7% to Rs482. HDFC Bank, SBI and ICICI Bank were the major gainers among the heavy weights with each gaining over 3.5%.
Oil & Gas exploration stocks also were in the limelight today. ONGC was up by a whopping 5% to Rs852 and Reliance Industries surged by over 2.5% to Rs1375. Oil & Gas stocks refinery stocks also extend their gains marginally. BPCL gained 0.7% to Rs313, HPCL marginally gained by 0.9% to Rs267 and IOC edged higher 0.6% to Rs420.
Auto stocks slowly shifted to top gear today. Hero Honda led the race the scrip rose 5.2% to Rs685, Maruti paced ahead by 5% to Rs831, Tata Motors surged by over 3.5% to Rs805 and M&M advanced 3.7% to Rs781.
ICICIDirect: Gokaldas Exports - Initiating covering (Buy: Rs 236, Target: Rs 315)
Gokaldas Exports (GOKEXP)
Price: Rs 236 Target Price: Rs 315
OUTPERFORMER
Gokaldas Exports Ltd (GEL), India's largest garment exporter, has drawn up
an extensive roadmap for growth. It is expanding capacity by setting up
three new factories and diversifying its client and product mix. Big global
retailers are consolidating their vendor base and the company will be
optimally positioned to capitalize on the opportunity with its expanded
capacities. We initiate coverage on the stock with an OUTPERFORMER rating.
Capacity boost to aid volume growth: GEL is expanding garmenting capacity
from 24 million pieces per annum to 36 million pieces by FY09E. This will
aid volume growth and translate into revenue growth. We expect revenues to
grow at a CAGR of 15% over FY06-09E.
Diversifying into niche categories: The company is diversifying its product
mix by entering into new categories like structured suits, industrial and
work wear, innerwear and sleepwear. This foray would enable the company
improve realizations.
Strong relationship with global retailers: Renowned brands like GAP, Nike,
Sears, Marks and Spencer, and Tommy Hilfiger among others, are consolidating
their vendor base and increasing purchases from suppliers with large
integrated capacities like GEL.
Favourable policy initiatives: The company is likely to be a key beneficiary
of policy initiatives for the textiles sector like extension of Technology
Upgradation Fund Scheme (TUFS), labour law changes and setting up of
integrated textile parks.
Valuations: At the current price of Rs 236, the stock discounts its FY08E
EPS of Rs 24.99 by 9.4x and FY09E EPS of Rs 31.46 by 7.5x. On an EV/EBITDA
basis, it trades at 8.0x for FY08E and 6.7x for FY09E. Peers like Bombay
Rayon Fashions and Kewal Kiran Clothing trade at a P/E multiples of 9.6x and
9.7x their FY08E earnings. We believe the current valuations do not capture
the premium discounting that the stock deserves owing to its leadership
position and significantly higher realizations. Liquidity in the scrip has
improved after a stock split from a face value of Rs 10 to Rs 5. We value
the stock at 10x its FY09E EPS of Rs 31.46, giving us a 12-15 month price
target of Rs 315, an upside of 33% from current levels.
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ICICIDirect: Initiating coverage - Bharat Gears (Buy: Rs 62, Target: Rs 82)
Bharat Gears (BHAGEA)
Price: Rs 62 Target Price: Rs 82
OUTPERFORMER
Bharat Gears Ltd (BGL), one of India’s largest gear manufacturers, is well
positioned to cash in on the strong volume growth in the tractor and
commercial vehicle (CV) segment. The company completely wiped out its
accumulated losses in FY06 and is firmly on the road to profitability. We
expect net profit to grow at a CAGR of 38.1% over FY06-08E, translating into
an EPS of Rs 9.1 for FY08E on the post-rights issue equity. We rate the
stock an OUTPERFORMER.
Buoyancy in demand to continue: BGL's main customers are original equipment
manufacturers (OEMs) in the tractor and CV segment. Tractors contribute
around 60% to its revenue, while over 35% comes from CVs. The volume growth
from these OEMs due to strong demand and capacity expansion would drive
demand growth for BGL. We expect production to rise at a CAGR of 22.5% over
FY06-08E, while net sales are expected to grow at a CAGR of 15.4% to Rs223.3
crore.
Debt restructuring to improve bottom line: The company repaid high-cost debt
amounting to Rs 3 crore in FY06. In July 2006, the company came out with an
Rs 7.2 crore rights issue. The proceeds will be used to redeem preference
shares and repay high cost debts. With the projected cash generation from
operations, the company should reduce high-cost debt further. We expect
debt-equity ratio to improve from 9.8 in FY05 to 1.6 in FY08E, easing
pressure on bottom line. We expect net profit to grow at a CAGR of 38.1%
over FY06-08E.
Technology support from foreign partner: BGL has a financial and technical
collaboration with ZF Friedrichshafen of Germany, the world’s largest maker
of drivelines and chassis for automobiles. Product innovation and design
capabilities are becoming increasingly important for auto ancillary
manufacturers and the association will help the company design new products
for its customers for their new vehicle launches.
Valuations: We believe there is limited downside for revenue growth as the
company’s fortunes are directly linked to the continuously improving
performance of its clients. Debt restructuring would help ease the pressure
on bottom line. We estimate EPS to grow at a CAGR of 19.4% over FY06-08E. At
the current price of Rs 62, the stock discounts its FY07E EPS of Rs 6 by
10.3x and FY08E EPS of Rs 9.1 by 6.8x. We value the stock at 9x its FY08E
EPS to arrive at a target price of Rs 82.
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ICICIDirect: YES Bank - Initiating coverage (Buy: Rs 124, Target: Rs 170)
Price: Rs 124 Target Price: Rs 170 OUTPERFORMER
YES Bank, a new-age private sector bank with a high quality management, has
positioned itself as a knowledge player with a technology-driven superior
business model. We expect earnings, both interest and fee-based, to grow at
a CAGR of 64% over FY07E-09E to Rs 241.4 crore, providing strong visibility
to its robust financial performance. Net interest margins should stabilize
at 2.8-3% over the next two years. We initiate coverage on the bank with an
OUTPERFORMER rating.
Strong growth in advances, superior asset quality: The bank’s credit growth
has been much higher than the average industry growth of 30% mainly due to
low-base effect. We expect it to maintain the momentum with credit growing
at a CAGR of 88% over FY07E-09E to Rs 20,552 crore. Asset quality is
expected to remain impeccable with zero net NPAs.
Impressive earnings growth: Buoyed by the remarkable growth in advances and
rising yield on advances, we expect net interest income to grow at a CAGR of
93% over FY07E-09E to Rs 659.4 crore and fee-based income at a CAGR of 74%
to Rs 254.9 crore over FY07-09E.
Increasing focus on CASA to stabilize NIMs: We expect the rapid ramp-up in
branch network, and subsequent increase in CASA deposits, to lower the
bank’s overall cost of funds. We expect net interest margins to stabilise at
2.8-3% levels over the next couple of years.
Valuation: At the current price of Rs 124, the stock is trading at 3.3x its
FY08E and 2.4x its FY09E adjusted book value (ABV). On a P/E multiple, it is
trading at 15.4x its FY09E EPS of Rs 8.05. Over the next two years, we
expect net income to grow at a CAGR of 77% to Rs 1,102 crore and ABV per
share to rise at a CAGR of 35% to Rs 50.6. Its balance sheet is set to grow
at a CAGR of 80-90% over FY07E-09E, with RoE at 18.4% in FY09E factoring in
a possible equity dilution. Compared to peers in the private sector banking
space, YES Bank is cheaper on a price to book value parameter. It also
scores better on asset quality. With a highly regarded management team, we
believe the bank will be richly valued in sync with HDFC Bank going forward.
With RoE improving, the bank is expected to maintain current valuations and
3.4x its FY09E ABV, gives us a target price of Rs 170, an upside of 37% overa 9-12 month time frame.
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Market may extend gains; volatility to remain
The market may open on a firm note with provisional data showing robust FII inflow on Thursday’s trading. However, volatility may remain ahead of next week’s expiry of March 2007 derivatives contracts. Rollover has already started to April 2007 contracts from March 2007 contracts. With the market scheduled to remain closed next Tuesday (27 March) for a public holiday, only four trading sessions are left before the expiry of the March 2007 contracts.
The key data today is the weekly inflation figure. There is lack of direction today from Asian markets which are mixed.
As per provisional data, FIIs were net buyers to the tune of a massive Rs 712.70 crore on Thursday 22 March 2007, the day when Sensex had surged 362 points in a global rally that was triggered by expectations of a cut in interest rates by the US Federal Reserve. FIIs were net buyers to the tune of Rs 1848 crore in index based futures on Thursday. They were net buyers to the tune of Rs 134 crore of individual stock futures on that day.
The US Federal Reserve policy-setting meeting on Wednesday dropped an explicit reference to the possibility of taking rates higher in its statement, sparking talk abut the next move of a cut. But a day later i.e. on Thursday investors soon started to consider that the US central may not be in a hurry to cut rates and that the dollar might be oversold, as the Fed also reiterated that inflation was still its main concern.
The Fed left interest rates unchanged at 5.25% on Wednesday. Rate hikes in the United States tend to drain cash from emerging markets, but rate cuts tend to swell flows of dollars to developing economies such as India.
Market expectations peg India’s wholesale price inflation rate at 6.51% for the 12 months to 10 March 2007, up from an annual rise of 6.46% a week earlier. The data will be released around noon today. The annual rate hit 6.73% on 3 February 2007, its highest in more than two years, but has moderated after the central bank tightened policy and the government cut duties on a range of items to rein in prices.
Indian bourses are set to record its first weekly gain after five consecutive weekly losses till the week ended 16 March 2007. The next major trigger for the domestic bourses is Q4 March 2007 earnings, reports of which by corporates will start next month. Analysts expect Q4 results to be strong. Market men will closely watch what company managements have to say about the outlook for FY 2008.
Asian markets were mixed on Friday. Key benchmark indices in Hong Kong, Japan, and Taiwan were up by between 0.1% to 0.5%. Key benchmark indices in China, South Korea and Singapore were down by between 0.1% to 0.8%.
US stock indexes ended Thursday's session little changed after a profit warning from Motorola Inc. knocked tech shares lower, stalling a global equities rally sparked by the Federal Reserve's signal that it was less inclined to raise interest rates. The Dow Jones industrial average gained 13.62 points, or 0.11 percent, to end at 12,461.14. But the Standard & Poor's 500 index dipped 0.50 of a point, or 0.03 percent, to finish at 1,434.54. The Nasdaq composite index slipped 4.18 points, or 0.17 percent, to 2,451.74.
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