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Recommendations
Monday, October 01, 2007
Grey Market - Dhanus, Kouton, Saamya, Supreme
Power Grid Corporation 52 30 to 31
Dhanus Tech. 280 to 295 70 to 75
Koutons Retail 370 to 415 75 to 80
Consolidated Construction 510 170 to 175
Supreme Infra 95 to 108 58 to 60
Saamya Biotech 10 5 to 6
MAYTAS Infra 320 to 370 160 to 165
Circuit Systems (India) Ltd. 35 3 to 3.50
Kaveri Seeds 170 22 to 24
Stock Market Analysis
Stock markets have rebounded to make new highs and are likely to continue rising over the long-term. A report.
Arun Kumar, a regular stock market investor, is making substantial gains on his existing equity investments. With the Sensex crossing a record high of 17,000 points, he is both glad as well as worried.
He questions as to how high the markets can go from the current levels. He also wonders with caution whether the market can keep jumping from such higher levels. If the answer is 'yes', then what factors will help the bulls have their grip over the market.
India is now increasingly interlinked with the global economy, which has been grappling with challenges like credit or liquidity crunch following the subprime crisis, weakening dollar, galloping rise in crude oil prices and fears of global economic slowdown especially in the US.
Among the domestic factors, there are uncertainties over interest rates and elections likely next year. Thus, Kumar is perplexed as to whether this is the time to hold on to his portfolio and add more scrips (most of them have gained 30 per cent on an average) or sell off now only to enter at lower levels at every dip?
Like Kumar, many other investors are wondering what to do. Their questions are: Where are the markets headed? How much steam is left? Is a correction overdue? If yes, then how much will the markets slide? Will factors like rising money inflows, inflation, appreciating rupee and economic slowdown in the developed markets derail India's scorching growth?
The Smart Investor helps you answer these questions with the help of market experts and economists.
Rapid fire round
Investors, the world over, gave a euphoric welcome to the 50 basis point cut in interest rates by the US Federal Reserve in response to the credit crunch and interpreted it as a proactive step towards avoiding a recession.
However, the party was merrier for the emerging markets like Hong Kong, India and Brazil, as these markets gained more than the developed markets on account of strong comeback of foreign institutional investors' money.
India, one of the key emerging markets in Asia, has seen FIIs pumping in $2140.8 million in seven days ending September 26.
Starting the week at 16,845 (after crossing 16,000 and gaining 1,000 points only in the week before last), the Sensex zipped past another threshold of 17,000 and gained another 1,000 points within just six trading sessions.
Says Manish Sonthalia, vice president, equity strategy, Motilal Oswal, "The US Federal Reserve has ensured through the rate cut that enough liquidity is available. As liquidity chases growth, which is there in Asia, equity markets in India, one of the fastest growing economies in the world, have also rallied."
Adds Ketan Karani, vice president, research, Kotak Securities, "Asian markets especially China and India have been re-rated after the Fed rate cut, which has resulted in a shift in investments among various global asset classes."
Sandip Sabharwal, chief investment officer, JM Financial Mutual Fund, has yet another reason. Says he, "Indian economy and corporate profits have exhibited robust growth even during challenging times of rising interest rate cycle which started from 2003 onwards."
What's next?
The Sensex currently trades at a trailing twelve month price to earnings multiple of over 20 times. This is still cheaper than its closest comparable peer China, which is trading at double the valuations at 48 times.
The Sensex trades at about 19.5 times and 16.5 times for FY08 and FY09 estimated earnings. Though market experts are cautious over the medium term, they believe that the long-term trend of the Indian markets is that of a secular bull run.
Says Balakrishnan Kunnambath, managing director - Indian Subcontinent, SG Private Banking (Asia Pacific), "Strong liquidity will continue to chase risky assets and drive valuations beyond fundamental fair valuations. We are cautious on the overall market as valuations are in the expensive zone and growth is tapering off."
So is a correction underway? "We expect a correction in the short-term as sectors hit by rupee and interest rates have significant weightage in the index. However Sensex has support at 13500-14500 levels for the current year," says Harendra Kumar, head of research, ICICI Direct.
Even Sonthalia feels that the markets should consolidate and be range bound in the short term.
Sandeep Sabharwal, while agreeing to it goes on to add that it could oscillate 3-4 per cent on the either side. However, long term investors should not pay much heed to the short term gyrations.
Speed-breakers ahead
Market experts believe that the party will last for a few more years. However, this doesn’t mean that the road will be smooth and free of difficult times having reached such high levels. India will have to battle some storms in the medium term.
The appreciating rupee, high oil prices, fears of US economic slowdown, and tapering growth in industrial production and corporate earnings still remain major risks.
However, market experts are unperturbed. Says a much enthused Karani, "Since India is a net importer, the appreciating rupee will be positive." Further, the risk of weakening dollar and US slowdown is limited to sectors like IT and textiles, adds Sabharwal.
High oil prices also pose a limited risk because even if crude oil price have risen more than 30 per cent since the beginning of the year, rupee (the best performing Asian currency in 2007) has also appreciated by 10-11 per cent.
Moreover, corporate earnings growth is also likely to be healthy at 15-20 per cent on a higher base except some sectors like IT, sugar and pharma.
However, some players feel that it is better to watch for August and September data for a better picture as the growth in index of industrial production has slowed down in the recent past.
Softer interest rates-a succour
Among all the factors, market players are watching interest rates keenly. Will Y V Reddy follow Bernanke's lead of reduction of interest rates?
Market participants feel that interest rates could soften going forward. However, economists differ. They don’t expect RBI to follow the footsteps of US Federal Reserve at least in the medium term.
Says D K Joshi, director and principal economist, Crisil, "I do not see RBI signalling interest rate reduction soon as high global crude prices remain a critical risk to domestic inflation. However if inflation remains at the current low levels and GDP growth slows down as expected by us, then we might see a reduction in rates later this year."
Rupa Rege, chief economist, Bank of Baroda, agrees that interest rates are likely to be stable for the time being; however with an upward bias in the second half on account of accelerated money inflows, rising inflation and good demand for loans from agriculture and infrastructure sector.
However, an analyst alleviates fears by saying that Indian corporates are insulated as they are relatively quite underleveraged with a comfortable debt-equity ratio. But continued money inflows remain a risk as it could stoke inflation again.
Strategies to adopt
Investors need to brace up for bouts of volatility due to factors like profit booking at higher levels, uncertainty over interest rates and elections next calendar year among others. Moreover, experts advise investors to whittle down returns expectations.
The trick could be to pick and choose stocks and still make decent gains as the rally hasn’t been broad-based. A better strategy would be to remain invested in sectors or stocks led by domestic growth and accumulate at every dip.
FIIs are attracted to India as the growth is largely driven by domestic consumption and thus are relatively immune to global shocks.
Thus, market experts as well fund managers are most positive on domestic growth stories like banks, infrastructure, power, capital goods, cement, metals and to some extent select media and telecom companies.
India provides huge business potential whether it is for building infrastructure like power, roads, ports and airports (which will require cement and metals) or changing demographics with substantial share of younger population boosting demand for autos, consumer durables, property and retail.
All this requires capital which is partly met by banks and financial services.
JM’s Sabharwal and Motilal Oswal’s Sonthalia are also positive on interest rate sensitive sectors like auto (except two-wheelers), real estate besides banks and financial services. This is because India has to maintain a benign interest rate scenario to keep the growth running.
But investors should be cautious on sectors like textiles, information technology, sugar, pharma and two-wheelers as they are going through a rough phase and various challenges and uncertainties.
But some analysts don’t mind taking a contrarian call on IT stocks as they are available at cheap valuations. Large-caps are going to be the market's favourite due to better liquidity.
Via BS
Maytas Infra IPO
Maytas Infra is moving up the value chain in the construction business and diversifying its service offerings.
While many companies have tapped the capital markets in the infrastructure space, not all of them have cheered investors.
The key ingredients to the success of the outperformers are appropriate size of balance sheet, diversification in terms of geography and services, a strong order book and adequate margins.
Promoted by B Teja Raju (son of Satyam Computer Services chairman B Ramalinga Raju), Maytas Infra is one such company having these attributes. Focused on irrigation, roads and bridge, and building infrastructure business, Maytas is one of the fastest growing construction companies.
Maytas’ contract revenues on a standalone basis have grown at 57 per cent annually to Rs 787.7 crore in FY07 and net profit has increased at 107 per cent annually to Rs 55 crore. Also, the operating margins have improved from 5.1 per cent in FY03 to 16.1 per cent in FY07.
Maytas generates a majority of its income from the roads and irrigation accounting for 77 per cent of FY07 revenue. Road segment includes the construction of roads, highways and bridges, while irrigation includes development and construction of dams, canals and tunnels.
However, the company is now focusing on other segments as well. Its current order book accounts for only 68 per cent coming from the transportation and irrigation segments, while the share of other segments such as buildings, power, railways and oil & gas sectors account for the rest.
Bigger horizon
There are considerable opportunities within the road and irrigation segments driven by higher government spending on highways, rural roads, bridges, irrigation canals, dams and tunnels.
According to industry estimates, investment in the road segment is expected to grow at 15 per cent annually till 2011. The company has a sizeable order book of Rs 1,113 crore from the road segment.
As of June 2007, Maytas had 12 road and bridge contracts in different stages of construction in the states of Assam, Chhattisgarh, Karnataka, Uttar Pradesh, Maharashtra and Tamil Nadu. These projects are undertaken either independently, or as part of a joint venture.
For example, it has invested Rs 57 crore as its equity participation for 33 per cent participation interest in the Bangalore-elevated tollway project, a build-operate-transfer (BOT). This project is estimated to cost Rs 775.7 crore and to be completed by the 3Q FY08.
Also in irrigation, under the different central and state development schemes such as Accelerated Irrigation Benefit Programme (AIBP), there are huge investments lined up.
According to a CRIS-INFAC report, investments worth Rs 74,400 crore will be made over the next five years compared to Rs 51,400 crore over the last five years.
Though there are considerable opportunities in the transportation and irrigation segment, there is intense competition as well. However, the company also believes there is enough room for everybody to grow.
To further reduce its dependence on these sectors and tap the emerging opportunities in the other infrastructure segments, the company is making its presence in the other segments as well.
“We are identifying suitable partners and positioning ourselves for expected opportunities in the water and waste water management, special economic zones, urban infrastructure, ports and airport,” says B Teja Raju, vice-chairman, Maytas Infra.
Port and airports
Maytas plans to enter into development and operation of ports and airport through alliances with strategic partners.
The company has already been awarded a project for the development of a deep water port at Machilipatnam, Andhra Pradesh on a build-own-operate-and-transfer basis at an estimated cost of Rs 1,590 crore.
The company proposed an equity investment of 40 per cent in a consortium with Nagarjuna Construction and SREI Infrastructure Finance.
Along with opportunities in port infrastructure, the company is also eyeing to participate in airport projects.
According to the civil aviation ministry, India requires an investment of Rs 4.8 lakh crore to be invested in this sector by year 2020 towards development, building and modernisation of airports.
Power
Along with other partners, the company is also investing in the growing power sector. Out of the total issue proceeds of Rs 327 crore at the upper price band, Maytas will invest 162 crore as its equity share in power projects.
The company has formed two special purpose vehicles with 50 per cent interest in both companies -- KVK Nilachal Power and SV Power.
Both these companies will have a combined power generation capacity of about 400 MW of power in Orissa and Chhattisgarh. KVK Nilachal is on a BOT basis and will be completed in FY10. SV Power is on a build-operate-own basis to be completed by third quarter of FY09.
Outlook
Maytas is growing in terms of revenues and order book. The order book has gone up from Rs 800 crore in FY05 to Rs 3590 crore currently, which is almost 5.6 times of its FY07 revenues, executable over 18-30 months.
More importantly, the diversified portfolio of its current order book with increasing share of power and other growing segments indicate better volumes and higher margins.
Maytas is in the investment phase, where most of its projects are under implementation. It is infusing fresh capital in the long gestation BOT projects and SPVs through the IPO and internal accruals.
The company is expected to maintain strong revenue growth driven by current order book and its entry into other areas.
At the upper price band of Rs 370, the issue is priced at 39 times its FY07 fully diluted earnings. This seems expensive compared with peers such as IVRCL and Patel Engineering, which are trading at 34 and 23 times respective trailing earnings.
However, considering the future earnings growth, higher operating margins and its stakes in 11 SPVs make Maytas a promising investment.
Issue opens : September 27
Issue closes : October 4
Higher level may attract profit taking
Political concerns may trigger profit taking on the bourses after a solid surge witnessed over the past few days. Political concerns have resurfaced with CPI (M) veteran Jyoti Basu on Saturday, 29 September 2007, ruling out the possibility of any compromise on the issue of Left’s opposition to the Indo-US nuclear deal. While the operationalisation of the deal has been put on hold by the government pending the findings of a committee, it cannot be stalled forever.
The Communists want the government to defer the Indo-US nuclear accord by six months and have warned of a political crisis if it is implemented. The committee set up of the government to look into Left Front’s concerns over the deal is scheduled to hold its next meeting on 5 October 2007.
On the flip side, political turmoil arising from nuke deal will not impact India’s basic economic fundamentals though some infrastructure projects may get delayed. India’s economy is expected to post strong growth for a long period of time mainly due to favourable demographics.
Q2 September 2007 results is the next major trigger for the market. Figures of advance tax suggest that earnings will be decent to strong. Stock specific activity may take place in the near term on the bourses ahead of the earnings-reporting season, based on result expectations. IT bellwether Infosys Technologies kickstarts reporting season on 11 October 2007.
The market has been a roll with the Sensex hitting record high in each of the past eight trading sessions from 19 September 2007 to 28 September 2007. Heavy FII buying and hopes of a further cut interest rates by the US Federal Reserve at its next policy meeting on 30 October 2007-31 October 2007 has boosted bourses. Sensex rose 140.54 points 0.82% at record closing high of 17,291.10 on Friday, 28 September 2007.
From a low of 13,989.11 on 21 August 2007, Sensex galloped a whopping 3,301.99 points or 23.6% to 17,291.10 on Friday, 28 September 2007
As per provisional data, FIIs were net buyers of shares worth a net Rs 2275.71 crore on Friday, 28 September 2007. Domestic institutions were sold shares worth a net Rs 100 crore on that day. FIIs inflow in the month of September 2007 totaled Rs 16132.60 crore.
The stock market remains closed tomorrow, 2 October 2007, on account of Gandhi Jayanti.
Asian markets extended their recent rally on Monday, 1 October 2007. Key benchmark indices in Japan, South Korea, Singapore and Taiwan were up by between 0.39% to 1.6%.
US stocks and bonds slipped as the dollar fell to a record low on Friday, 28 September 2007, amid concerns that US economic growth would continue to slow. The Dow Jones industrial average lost 17.31 points, or 0.12%, at 13,895.63. The Standard & Poor's 500 Index fell 4.63 points, or 0.30%, at 1,526.75. The Nasdaq Composite Index fell 8.09 points, or 0.3%, to 2,701.50.
US crude for November 2007 delivery lost $1.23 to settled at $81.65 a barrel on Friday, 28 September 2007, below its all-time high of $83.90.
Morning Call
Market Grape Wine :
In House :
Nifty at a supp of 4950 and 4900 with resis at 5047 and 5081
Mkt to stay range bound with a positive bias
Intra day: Buy Bajajauto with a TGT of 2619 and a SL of 2550
Buy HDIL above 628 with a TGT of 647 and a SL of 622
Out House :
Markets at a support of 17017 & 17117 levels with resistance at 17371 & 17474 levels .
Buy : RIL
Buy : Relcap & REL
Buy : Sail and Tisco
Buy : SBIN & Kotak
Buy : MRPL ,RNRL , TTML , IFCI , Nagarfert & JpHydro
Buy : IBullReal s/l of 662 target 717 then 737
Buy : GMRInfra
Buy : JpAsso
Buy : Grasim and IndiaCem
Dark Horse : GMrInfra , IBullReal , REL , Aban , RelCap , SBIN & IOB
Bullet for the Day : IBullReal & GmrInfra with stop loss .
Weekly Technicals - Overbought!
Nifty — The index closed on a strong note on the opening session of the week, after which the rally continued throughout the week’s trading. It ended the week with gains of 183 points.
Momentum Oscillators — On the daily chart, MACD is in buy mode. RSI (14) – Relative Strength Index is exhibiting a reading of 82.55 (reading above 70 signifies overbought). Stochastic (5,3) is in overbought zone and in sell mode; it is showing signs of negative divergence. Momentum oscillators are showing overbought reading on daily charts; the index could decline from current levels during the week's trading.
Moving Averages — The 50 dma = 4485, 20 dma = 4660, 10 dma = 4819. The index is trading above the averages. Rising moving averages act as support during declines; support can be expected around the 10 dma at 4819 during the week’s trading.
Support — The index has support around 4930 (low of 26 September 2007), break of support around 4930 could see index decline toward 4800 levels during the current week’s trading.
Higher Levels — The index can test higher levels around 5076.
Conclusion — Index can test higher levels around 5076; support is around 4930, break of which could see index decline during the current week’s trading.
Northbound journey to continue
After witnessing the surge on Friday the market is expected to make further headways on firm Asian markets. The market may see some short-term profit bookings in frontline stocks creating a volatility in the afternoon trades.
Major US indices slipped on Friday, clueless investors questioning themselves whether another rate cut is likely from Federal Reserve after a handful of economic readings. The Dow Jones industrial average fell by 17 points, or about 0.12% lower, the Nasdaq moved down by eight points to close at 2702.
The Indian ADRs also witnessed a fall on the US bourses. MTNL tumbled 6.18% followed by VSNL shedding 3.44%, while Infosys, Satyam, Wipro, Dr Reddy's Lab and Patni Computer were down around 0.5 -2% each. However, Tata Motors, ICICI Bank, HDFC Bank and Rediff gained over 1-2%.
Crude oil prices slipped on Friday, with the Nymex light crude oil for November delivery was down by $1.22 to close at $81.66 a barrel. In the commodity space, the Comex gold for December delivery gained $10.10 to settle at $735.50 an ounce.
Crude stays above $81
Prices increase by more than 15% in the third quarter
Crude-oil future prices for sweet light crude for November delivery which had ended at $81.62/bbl last week (21 Sept) finished 4 cents (0.04%) higher this week (28 Sept) at $81.66/bbl. Prices continued to stay above the $80/bbl mark throughout the whole week. It touched a high of $83/barel on Thursday, 27 September.
During the week, prices started on a weaker note around $80/barrel after the storm at Gulf of Mexico weakened and the place resumed back production. But then during the middle of the week, crude oil prices soared and were back at touching almost $83/bbl. Weak dollar, supply conditions and once again concerns regarding Iran’s nuclear policy took crude prices high.
But ultimately prices eased on Friday, 28 September, after refining margins shrank to their smallest in almost 11 months and heating oil and gasoline also tumbled.
As per this week’s inventory report by the Energy Dept, crude supplies rose 1.8 million barrels to 320.6 million for the week ended 21September (against an expected decline of 2.15 million barrels). Crude inventories are 3.5% lower than year-ago levels. U.S. stockpiles had fallen by a total of 18.3 million barrels in the previous four weeks. This was first gain in last five weeks.
Motor gasoline supplies climbed 600,000 barrels to stand at 191.4 million barrels. Distillate stocks were up 1.6 million barrels at 137.1 million barrels. Refinery utilization fell to 86.9% of capacity from 89.6% a week earlier.
The dollar has touched a record low against the euro for seven straight trading days. A lower dollar makes oil cheaper in the countries using other currencies.
Oil prices have risen 15% this quarter, the biggest quarterly percentage gain since the first quarter of 2005.
OPEC has planned to boost daily oil production by 500,000 barrels. OPEC's production target is 27.2 million barrels a day, beginning 1 Nov. OPEC, has decided to raise their daily output by 500,000 barrels per day, starting 1 November.
Rally keeps on going in US Market
Despite lingering concerns about the economic outlook, market ends the week higher
US Market made a weak end for a strong quarter with indices slipping on the last day of the week ending on Friday, 28 September, 2007. Strong economic reports on Friday failed to take indices higher on that day. But the Dow Jones Industrial Average and Nasdaq managed to register modest gains for the week. S&P 500 was almost unchanged.
The Dow Jones Industrial Average gained 75 points for the week. Tech - heavy Nasdaq gained 30 points and S&P 500 gained just 1 point.
For the quarter the Dow, Nasdaq, and S&P 500 gained 3.6%, 3.8%, 1.6% respectively. The dollar index dropped more than 5%. Gold prices reached a 27 year high. Crude prices once again touched $83/barel mark but fell back to $81/barrel at the month’s end.
Market started off on a weak note on Monday, 24 September, 2007 after 73,000 workers in the United Auto Workers union went on strike against General Motors, as the two sides failed to reach an agreement over cuts in health care costs and union demanded to keep U.S. production jobs.
The financial stocks were also hard hit following reports that Deutsche Bank might have to take a big write-down of its leveraged loan commitments. There was also news that Barclays might be selling its subprime unit at a loss. Dow closed lower by 61 points on that day.
Reduced sales forecast from top two retailers put market in a tug-of war situation for most part of the day on Tuesday, 25 September, 2007. Retailer, Lowe's said that it expects FY07 earnings to be at the low end of prior guidance, or slightly below. Another retailer, Target, citing weak guest traffic, lowered its September same-store sales growth forecast to a range of 1.5% to 2.5% from 4.0% to 6.0%. Nevertheless, Dow closed higher by 19 points.
Indices rallied in the final hours of trading on Wednesday, 26 September, 2007 after GM and Bear Sterns gave market some good pieces of news. General Motors and the United Auto Workers union reached a tentative labor agreement. On the Bear Sterns front, The New York Times reported that the company is interested in selling its minority stake and there were rumors flying that Warren Buffet, Bank of America and Wachovia are potentially interested candidates.
On Thursday, 27 September, 2007, investors were rattled by a bleak new home sales report. Sale of new homes fell 8.3% in August and 21% from a year ago to a seasonally adjusted annual rate of 795,000, which was the worst level since June 2000. Stll Dow closed higher by 35 points due to good support from Energy sector.
But on Friday, 28 September, 2007, investors digested a large batch of economic news and lingering concerns about the outlook for corporate earnings and the economy.
August personal consumption expenditures, which make up over 70% of GDP, rose a stronger than expected 0.6%. The core PCE deflator – a closely watched gauge of inflation – was up just 0.1% for the month. The y-o-y increase in the core PCE deflator was a low 1.8%.
Comments from St. Louis Fed President William Poole caused a bit of a stir near the end of Friday’s trading after he reportedly said it would be a mistake for markets to bet on more rate cuts. That comment erased earlier gains in the Treasury market and sent the major indices to their lows for the session. Dow slipped 17 points on that day.
Among other economic data that were released during the week, the Commerce Department reported that orders for durable goods fell 4.9% in August, indicating growing concerns that business spending might not be strong enough. Orders fell in August after a 6.1% gain in July; the drop was the biggest monthly decline since January.
Executive Summary
For the week, the indices closed modestly up. DJIx was up by 0.54% and S&P 500 was up by 0.07%. Nasdaq was up by 1.13%. Despite lingering concerns about the economic outlook, the three major averages ended the week higher.
The dollar index dropped more than 5% in the past three months. Gold prices reached a 27 year high. Crude prices once again touched $83/barel mark but fell back to $81/barrel at the month’s end.
History says that September is generally the worst month of the year. But in nine years, this was the best September for market. For the year, Dow is up by 11.5%, Nasdaq is up by 11.8% and S&P 500 is up by 7.6%.
Trading Calls
Nifty (5021) Sup 4979 Res 5047
Buy GNFC (158) SL 154
Target 164, 166
Buy Praj Inds (237) SL 233 Target 245, 247
Buy M&M (752) SL 746
Target 763, 766
Sell Balrampur Chini (76) SL 79 Target 69, 66
Sell Hexaware (125) SL 129 Target 117, 115
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