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Monday, July 09, 2007
US Market posts strong weekly gains
Technology and oil stocks help indices combat the rising yield on10 year note fulled by Friday’s strong job report
Good economic reports, a number of deals and notable support from the Technology sector helped the US Market register good gains during the past week ending Friday, 6 July, 2007. Indices registered good gains despite the yield on 10 year note increasing to 5.2% on Friday, 6 July, and crude prices almost touching $73/barrel.
Barring Thursday, 5 July 2007, all the three indices gained on all the days during the holiday shortened week. Dow slipped on that day by mere 11 points. Market was closed on Wednesday, 4 July, 2007 in observance of Independence Day.
The Dow Jones Industrial Average gained 203 points for the week. Tech heavy Nasdaq gained 63 points while S&P 500 gained 27 points.
On Friday, 6 July, the Labor Dept. showed that nonfarm payrolls rose 132K last month. That was strong and above economists' forecasts (125K). Upward revisions in payroll figures for May and April amounting to an additional 75K jobs also eased worries about slowing growth.
The Labor Dept also showed that the unemployment held steady at a low 4.5% rate for a third straight month and the year/year hourly earnings rate slipped to 3.9%. Market took these figures also positively. Dow rallied by 46 points on that day.
Among tech stand-outs this week, Apple surged 8% to a new all-time high following the launch of the iPhone a week ago. Google also reached a new all-time high and gained 3.2% on the week.
Among the major deals announced during the week, the parent of Bell Canada agreed to be taken private for a total of $48.5 bln. It included nearly $16 bln in debt and marked the largest private equity buyout ever. Hilton Hotels agreed to be bought by the Blackstone Group at a $26 billion offer. Kraft announced that it is going to spend $7.2 billion for Group Danone's biscuit business.
Among other merger related news, The Carlyle Group announced that it plans to buy Manor Care for $6.3 billion while Apollo Management is going to take Huntsman private for $6.3 billion. AT&T is going to buy Dobson Communications for $2.8 billion.
Also, the Institute for Supply Management's manufacturing index for June showed increased activity and added to optimism about the economy.
Executive Summary
For the week, all the three indices registered good gains. DJIx is up by 1.5%, S&P 500 is up by 1.8% and Nasdaq is up by 2.4%. Crude prices soared above $72 but did not have much impact on the market, except that Energy stocks got a good boost. Yield on 10 year note increased from 5.1% during the beginning of the week to 5.2% at the week’s close.
Strong jobs report erased fears about slowing growth. Google and Apple stocks took Tech shares to new highs. Spate of merger news proved that private equity still has a long way to go. For the year, the Dow is up by 9.2%, Nasdaq is up by 10.4% while S&P 500 is up by 7.9%.
Trading volume was relatively light during the week with many traders enjoying vacation. The major U.S. stock exchanges closed early on Tuesday and remain closed on Wednesday in observance of Independence Day. Next week, earnings season will pick up after Alcoa kicks off the second quarter reporting season with its results after the close on Monday.
Wild Picks - Bajaj Electricals
One of the most popular capital market magazines, recommends Bajaj Electricals. They expect the company to register sales and net profit of Rs 1316.21 crore and Rs 48.44 crore in FY 2007. On a small equity of Rs 8.64 crore and face value of Rs 10 per share, EPS works out to Rs 56.1. At current price of Rs 609 (cum 1:1 bonus), the scrip is available at a P/E of just 10.9
Disclaimer: Don't blame us if Bajaj Electricals runs out of power
India Telecom sales exceed 100,000 crore
India’s telecom industry sales exceeded Rs1,00,000 crore for the first time in the last business year on the back of an increasing subscriber base, according to a survey released on 6 July.
Sales reached Rs1,07,000 crore ($26.42 billion) in the year ended March, a 22% increase from a year earlier, said the annual survey by Voice and Data, a telecom industry publication.
Mobile-phone company revenues grew 56% to Rs56,180 crore while fixed-line sales declined 11%, it said.
The number of cellular and fixed-line users rose 46% to 206 million in a country that has become one of the world’s fastest growing telecom markets as economic growth accelerates, reaching 9.4% last year.
With increased connectivity, one in five Indians now has access to a phone, said the survey.
Cellular subscribers increased almost 73% to touch 157 million, making up for a 3.3% decline in the number of fixed-line users to less than 50 million.
A steep decline in the cost of owning a cellular handset and a connection has led to a surge in the use of mobile phones in the nation of 1.1 billion people.
In the last financial year, India added more mobile-phone users per month than China. An average 5.5 million cellular lines were sold every month.
State-owned Bharat Sanchar remained the top service provider, posting revenue of Rs40,135 crore in the year to March, followed by Bharti Airtel, Reliance Communications, Hutch and Videsh Sanchar
Bangalore's B-Trac Project
For Aamer Khan, 32, a media marketing professional in India’s tech hub, the journey to the city airport from his residence at RT Nagar, a northern suburb, can take almost as much time as it takes to reach on a flight to Mumbai, a trip he makes twice a month.
The 15km drive to the airport takes on an average 90 minutes, but with Bangalore’s already clogged roads adding almost 1,000 cars and two-wheelers a day, Khan says the road trip till he reaches the airport is always tense.
That’s because a majority of the roads that connect different points of the 800 sq. km city witnesses bumper-to-bumper traffic, with an average vehicle speed of 10km per hour. The city, which has a population of 6.5 million, has more than three million vehicles, almost one for every two citizens, compared, on average, with seven-eight vehicles per 1,000 Indians nationwide.
Early in June, an ambitious Bangalore traffic improvement project called B-Trac, a multi-pronged strategy by the police to improve the traffic situation in the city by 2010, got under way.
The Rs350 crore project includes a data centre that holds information on vehicles in the city and traffic offences, as well as cameras placed across the city to capture traffic movement. Around 280 traffic sub-inspectors have been given Blackberry mobile email devices with printers to issue fines and collect payments for traffic offences.
One of the more interesting features of the project also offers citizens real-time traffic updates that estimate the travel time between destinations.
Khan is already among its first users. He now plans his journey within the city by sending a text message to a number, giving the location he needs to reach, and gets an immediate response of the estimated time it would take based on cellphone usage patterns on roads.
“Whenever somebody sends an SMS to 54321 enquiring about travel time between, say, Brigade Road and Airport Road, our server does the calculation and messages back to the subscriber,” said Ashwin Mahesh, chief executive of Mapunity Information Services, a city-based start-up firm focused on developing geo-spatial applications.
Mapunity, incubated at the NS Raghavan Centre for Entrepreneurial Learning at the Indian Institute of Management here, built the traffic management system which is powered by around 200 micro towers of mobile operator Bharti Airtel Ltd. An additional 200 towers are set to be added in the next few months, Mahesh says.
The Bharti Airtel micro towers capture signals of active mobile phones at a particular junction (though only Airtel mobiles), and send back the information to a server hosted at Mapunity’s premises, which in turn analyses the cellular density as a proxy for traffic density.
A public display that estimates journey time from MG Road, the city’s main centre, to the airport, around 9km away, is already in place at the junction of Trinity Circle.
Citigroup - Weekly Technicals
Citigroup in their weekly technical report,
Nifty — The index traded flat on the opening session of the week; mid-week it consolidated around the “All-Time High at 4363.” On the last trading session it
closed on a strong note above 4363.The index ended the week with gains of 67 points.
Perfect Upwards Bar Reversal — The last trading session of the week saw the index posting a “Perfect Upwards Bar Reversal” on the daily bar chart (i.e., index traded below the previous day's low and closed above the previous day's high and close). This indicates it should move up from the current level.
Moving Averages — The index is trading above the 10 dma = 4318 and 20 dma = 4253; the 10 & 20 dma crossover is positive .The 10 wma is at 4223. The index trading above the averages should be considered positive. [dma = daily simple moving average; wma = weekly simple moving average]
Channel — The index is moving in an upward sloping channel from the low of 4136 (low of 19 June 07). Support and resistance during the current week’s trading can be expected within the channel. Weekly projection on the upside of the channel is around the 4450 level.
Support — The index has multiple support around the 4300 levels. The lower end of the channel is at 4320; the low of Friday’s (6 July 07) Perfect Upwards Bar Reversal is at 4304; the 10 dma is at 4318. Intra-week dips should find support around the 4300 level.
Conclusion — Expect the index to move toward 4450 levels during the week’s trading; support can be expected around 4300 levels.
Stocks you can pick up this week
Welspun India
Research: Merrill Lynch
Rating: Buy
Current Market Price: Rs 64
Fundamentals of Welspun remain intact despite the rupee’s appreciation. The negative impact has already been factored in as the stock has corrected more than 20% over the past few months. Merrill Lynch has revised the earnings estimate on the back of growth in volumes, both for towels (27%) and bed linens (40%).
For India, home textile exports seem to be performing better than apparel exports. This is visible from the strong performance in home textile exports to the US, compared to apparel exports. Keeping in mind the strong underlying growth potential and relatively better pricing power to weather the rupee storm, Welspun is fairly priced at an estimated P/E of 11x FY08 and 0.8 P/B. The company will save power cost as it has shifted to gas-based power for its Vapi facility. The Christy manufacturing facility is being shifted to India, the benefits of which will be onstream from FY09.
Jet Airways
Research: HSBC
Rating: Underweight
Current Market Price: Rs 795
The March ’07 results were not as good as expected. Quarterly performance was inflated by including the whole year’s export credits received from the Indian government. Stripping this out, recurring earnings fell 30% to Rs 39.8 crore and were 40% below forecast.
Even after adjusting out export credits, EBIT and EBITDAR both fell YoY, gross domestic yields per available seats per kilometre (ASK) were flat and excluding surcharges, were down 14% YoY. International routes finally broke-even, almost two years after Jet’s expansion. However, HSBC doesn’t expect this to last. It has reduced FY08 forecast to reflect these risks. It estimates tangible book value per share will collapse to Rs 142 in FY08. It says that the current price levels imply that Jet can grow its EBIT at a 23% CAGR after its earnings recovery in ’10, which is unrealistic.
UTV Software
Research: Prabhudas Lilladhar
Rating: Buy
Current Market Price: Rs 509
UTV Software expects its movie business segment to report revenues in the range of $50-55 million for FY08, with EBITDA margins close to 30% for the segment. Based on the performance of recent movie releases and guidance provided by the company, Prabhudas Lilladhar has revised upwards its estimates for UTV. It expects UTV’s earnings to witness a CAGR of 98% over the next three years.
At the current market price of Rs 526, UTV Software is trading at a price-to-earnings multiple of 13.9x FY10 estimates. The company has raised $77.3 million on AIM for financing the cost of production and working capital requirements of 30 movies.
Reliance Industries
Research: ABN Amro
Rating: Sell
Current Market Price: Rs 1,711
ABN Amro has downgraded RIL to a sell on account of aggressive valuation of its E&P assets. RIL’s EEPS of Rs 100-113 over FY08-10 shows a growth of just 6% p.a. ABN Amro’s FY10 estimates are 26% below consensus on account of its cautious view on refining/petrochemicals margins and assumption of an appreciating rupee (Rs/$ will average 41 in FY08, 39.35 in FY09 and 38.40 thereafter).
The KG-D6 oil and gas production is expected to start from Q2 FY09, with oil production averaging 25,000 b/d in FY09 and 50,000 b/d in FY10. If the court order on KG-D6 gas is enforced, EPS in FY09 and FY10 may drop by 10% and 22%, respectively. The Reliance Petroleum (RPL) refinery could begin operations in H2 CY08, but commercial production will commence only from April ’09. The Singapore GRM is estimated to fall to $5/bbl in FY10, from $6.1/bbl in FY07. Petrochemical margins should remain healthy for the next 12 months, but a sharp downturn looks inevitable by ’09-10, as most new Middle East projects (ex-Iran) are on track.
Saregama
Research: ICICI Direct
Rating: Outperformer
Current Market Price: Rs 326
Saregama is set to script a turnaround, piggybacking on the emergence of new entertainment media. It has diversified into digital music, internet radio and online music sales. With a new management and more focus on new income streams such as FM and mobile ring tones, Saregama’s film and home video division will contribute handsomely, following key tie-ups with big international studios. Re-entry into the film distribution and production space and 14 hours/week of TV content production will drive growth for the non-music segment.
Given the robust growth in the high-margin business like publishing and home video, coupled with effective utilisation of the music library, ICICI Direct expects Saregama to command improved valuations given its high earnings visibility. At the current price of Rs 302, the stock trades at a P/E of 21.15x FY08E EPS of Rs 14.28 and 16.77x FY09E EPS of Rs 18.01.
Wipro
Research: ICICI Direct
Rating: Hold
Current Market Price: Rs 519
AT the current market price, the stock trades at 23.2x FY09E EPS of Rs 23.2, which factors in the impact of a strong rupee. Wipro has acquired a number of firms in FY07 to add domain expertise across a number of verticals.
The benefits of these acquisitions will accrue going forward, aiding volume growth and pricing power. The company will be impacted by the current strength in the rupee, which is evident from ICICI Direct’s EPS estimates derived from a rupee-dollar rate of 40 in FY09E. Margins could fall by 445 bps in FY08E and by 155bps in FY09E, with the company’s current state of operations. However, it’s too early to ring the alarm bells.
The rupee impact will be offset by reduction in average employee costs by employing more freshers, increasing utilisation, a growing non-ADM (non-application development & maintenance) business portfolio with higher margins, and maturing BPO practice building strong domain-specific, platform-based solutions that will drive realisations.
Kamat Hotels
Research: Tower Capital & Securities
Rating: Buy
Current Market Price: Rs 180
Room demand is growing at a rapid pace of 13% YoY. Tower Capital expects the pick-up in average room rates (ARRs) and occupancy rates (ORS) to continue at least till FY09. Kamat Hotel’s blended ARR will rise at a CAGR of 21% from FY06-FY09E. This, coupled with the expansion in both properties, will add to the bottomline.
By ’10, the company plans to increase its room capacity by 223%. KHIL is envisaging management of eight properties that will provide better visibility in earnings from FY09. Revenues are expected to see a CAGR of 35% and PAT a CAGR of 41 % during FY06-FY09E. At 10x FY09 FDEPS, it is a good buy, which Tower Capital believes is conservative, taking in account the huge growth, healthy margins, peer comparison and cyclicality of the industry.
Trading Calls
Bharti Airtel, Support @ 840-814, Resistance @ 888-909
MRPL, Support @ 40-38, Resistance @ 43-44
Wipro, Support @ 508-497, Resistance @ 526-532
A midcap week in the offing
With the market at a historic high, investors are bracing for a volatile week ahead of them. On a trailing basis, the Sensex price to earnings multiples may be lower than what it was when the index was at 14000. Still, investors may not be holding a big shopping list as far as frontline shares are concerned, since key stocks have risen sharply over the past few months. Buyers may instead look for bargains and value among mid-cap and small-cap shares.
Should there be a correction, sellers are likely to target banking and capital goods shares as these have gained the most in the past couple of months.
Shares of software exporters will be in focus this week, with Infosys Technologies reporting its April-June (Q1) quarter earnings on Wednesday. While it is widely expected that Infosys’ Q1 results may just meet or even fall below their guidance and market consensus estimate, analysts would watch out for the company’s earnings expectations for the rest of 2007-08. Analysts are also keen to know about measures that Infosys has adopted to minimise the impact of the rising rupee against the dollar.
Merrill Lynch, in its pre-earnings note, said, “While the demand environment remains strong, we expect the US dollar revenue growth guidance to be raised only marginally as companies would be cautious in giving revenue guidance early in the year. The EPS (earnings per share) guidance in both dollar and rupee terms is likely to be impacted at least 3 to 5% due to the steep rupee/dollar appreciation of over 5% since Infosys gave the guidance.”
Market participants believe that the recent weakness in Infosys shares has factored the expectations of a likely downgrade in its earnings guidance (in rupee terms) for 2007-08. Infosys shares have fallen 6% in the past three months against the Sensex’s rise of 20%. They advise investors to buy Infosys shares on further weakness as its operating environment is expected to remain robust.
Positive surprise from Infosys on its outlook will give a boost to all top software companies and in turn the Sensex (top 4 software companies comprise 17% of the index).
On technical charts, analysts see the Sensex facing strong resistance around the 15000-level. Networth Stockbroking’s head of technical and derivatives research Viral Doshi said, “Upside resistance exists around15100 and 15200-mark, whereas (a) breach of 14800 would trigger a downside correction.”
Many in the market advice against major fresh buying in index shares as they are likely to post limited gains in the coming months and that this phase of the bull run belongs to mid-caps.
Analysts expect a 40-60% rise in mid-caps over the next 4-5 months after their underperformance vis-a-vis their frontline counterparts in the past 12-15 months.
Shares of oil marketing companies would remain under pressure on news the government is unlikely to hike prices of petroleum products in the near future despite global oil prices hitting a near 10-month high.
On Friday, crude oil futures gained $1, or 1.4%, to close at $72.81 a barrel on the New York Mercantile Exchange after touching a high of $72.92 in the session, its strongest intra-day level since September 7, 2006.
Bulls have tough times ahead
The bull market does not end till the last bear has given up hope of a reversal in trend—that’s an old saying among market players. Going purely by this contrarian indicator, bulls can sit pretty for the time being.
Though bruised from repeated defeats over the past many months, bears have not given up hope yet and are looking for a suitable opportunity to strike back.
But if one were to look at some key indicators at hand, bulls are not going to find it easy defending Point 15K, which they had captured on Friday.
Firstly, valuations. At a one-year forward price to earning ratio of roughly 20, Indian equities do not rank among the cheapest in the emerging markets universe.
The high P/E can be justified to the extent that India offers a wide array of sectors to choose from, a liquid market, an effective regulatory framework and good corporate governance. But the tribe of analysts voicing concern about the Indian market beginning to look overvalued is growing.
The high base effect appears to be catching up with India Inc. Brokerages expect the cumulative earnings of Sensex companies for the April-June quarter to grow around 19%, compared with the same period last year. This is well below the growth estimates being flashed a year or two ago. For next year, analysts have toned down growth projections further.
Look carefully through the pile of research reports churned out by broking firms daily. The number of earnings and rating downgrades—something very rare till a year ago—is on the rise.
Already, players are eyeing the Infosys Technologies guidance on Wednesday uneasily. Tech stocks have been going through a rough phase because of the rising rupee, and Infy’s guidance may hold the key to the short-term trend in the sector.
Loan growth—a key indicator of demand in the economy—is also showing signs of cooling off, thanks to RBI’s efforts to rein in inflation by hiking interest rates. Loans to corporates and individuals dipped by Rs 30,532 crore between April and June 22. Even discounting the fact that corporates may be borrowing from sources other than banks, there is no denying that the average consumer is feeling the heat of rising rates.
So what is the saving grace for the market? Inflation is under control and this has raised hopes that banks may not hike interest rates anytime soon. Most players feel that a correction, if at all it comes, will be sparked by global factors rather than domestic ones. So what is the best strategy under these conditions? Majority of brokerages are advising their clients to follow a stock-specific approach.
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