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Tuesday, November 06, 2007
Monday, November 05, 2007
Capital goods boom continues
Sagely wisdom has it that excessive optimism about anything is unhealthy, but this view does not seem to be applicable for stocks in the domestic capital goods sector.
These stocks have dominated the bull market in the past year and may continue to do so, given the immodest expectations from investors about the sector’s ability to deliver steady earnings growth over the next 3-4 years.
Going by the huge amount of investments lined up for India’s infrastructure and order books of these companies, such expectations may be justified. But the question remains “do the existing premium valuations in these shares vis-a-vis the market and the regional peers leave any room for error”?
The answer is probably a “no”. ING Asset Management’s CIO (equities) Paras Adenwala says, “There is too much optimism to the extent that even a small setback could have exaggerated consequences on stocks, given that the sector is over-owned.”
According to analysts, L&T is trading at over 45 times 2008-09 estimated earnings, BHEL at over 30 times 2008-09 estimated earnings and ABB at roughly 34 times 2008-09 estimated earnings. The 30-share Sensex trades at 20-21 times 2008-09 estimated earnings.
Though not strictly comparable, the mania in capital goods stocks is eerily reminiscent of the dotcom era at the start of this century when investors were willing to pay unreasonable valuations for IT companies. Analysts cite there could be possible delays in expansion plans and order execution as most of these companies are functioning at full capacity.
Also, a higher-than-expected decline in margins, arising out of foreign competition, may be a dampener. It is known that the government is trying to rope in Chinese and Korean companies to accelerate India’s infrastructure growth.
Their entry may not be positive for domestic players such as BHEL, L&T and ABB, given their better operational efficiencies. A few months ago, power minister Sushilkumar Shinde said Bhel’s current capacity was not enough to meet the country’s power needs even if it doubles its capacity. Bhel is raising its capacity 2.5 times in the next three years.
Fund managers feel that there will be a gestation period of at least 2-3 years before foreign competitors start catering to the domestic infrastructure story. Despite concerns, Mr Adenwala remains bullish on the sector. “This is probably the only sector with visibility in earnings for at least 3-4 years.”
This is one of the reasons why most fund managers feel premium valuations in these shares are sustainable. Also, no fund manager can afford not to have these stocks in their portfolio, which have risen 125-250% in the past year.
While sceptics may argue that the stocks have become overvalued, cheerleaders point out that earnings of these companies for the latest quarter have matched high expectations that the market had from them.
Analysts estimate that total investments needed over the next 5 years to build India’s creaky infrastructure would be roughly Rs 15,000 crore. Optimists argue that there is no need to be apprehensive about the prospects of these companies, given their plans to expand to other areas of infrastructure development beyond their core strengths.
Market Close: global pressures not ignored this time !
The markets ended in red on account of selling pressure in large caps after it had a weak start following the Global cues in red. Asian indices were in deep trouble after Hang Seng closed down by over 5% (-1526 points) and Shanghai down by 2.5%,Hangseng was down on worries that rules allowing Chinese Investment into Hangseng were delayed. Subprime issues played over the minds of investors which saw selling. Amid the cautious atmosphere value buying was seen in midcaps and small caps indices. Small cap index was up by 1.07% and mid cap index was up by 0.367%. Auto, bank, oil & gas, IT stocks were down .European markets are trading in red too led by worries about the state of the US economy.
Sensex closed lower by 385 points at 19,590 levels. Supporting the indices were gains in Bharti Airtel (+5.60%), Cipla (+1.70%), NTPC (+0.85%), Ambuja Cement (+0.21%) and Ranbaxy (+0.10%). Restricting the gains were the losses in ICICI (-4.74%), ONGC (-3.72%), L&T (-5.27%) ,Maruti Suzuki (-2.58%), and Infosys (-2.53%).
The Capital Goods sector saw major weakness and also the Auto sector . Banks were strong in morning trades but they gave back most gains. However it was a day for the mid caps. The large caps saw contraction in valuations and the mid caps were getting rerated.
Solar Explosives exploded today and was up by (11.1%) at Rs 301. Solar Explosives Ltd has acquired a majority stake in an unlisted Company to further business interest. This acquisition is subject to all regulatory approvals and compliance. Solar explosive provides explosive solutions for mining activities including slurry Explosives. The company undertakes manufacturing of Detonators and Detonator components through its subsidiary. The company is the one of the largest manufacturer of Packaged Explosives in India with a Licensed Capacity of 2 lac tonne Explosives (Bulk and Packaged), 140 Million numbers of Detonators and 20 Million Meters of Detonating Cord. Solar explosive is the market leader with a market share of 25% compared to 15% of Indian Explosive Ltd and 9% of Gulf Oil Corp. Solar has been looking grow inorganically and is in discussion with a couple of companies.We had Wow call on the company and that delivered fantastic gains in just a month.
GEI Industrial System was up by 10% at Rs 138. Net profit of GEI Industrial Systems rose 30.18% to Rs 2.20 Cr against Rs 1.69 Cr for 2nd Qtr 2007 on yoy basis. Sales rose 55.17% to Rs 34.82 Cr against Rs 22.44 Cr for 2nd Qtr 2007 on yoy basis. GEI Industrial Systems (GEI) formerly known as GEI Hamon Industries, is a specialist in heat transfer technology. It designs, engineers and lays condensers and other auxiliary engineering services for power (combined cycle steam- and gas-turbine-based, nuclear, hydroelectric, and gas- and diesel-engine based) plants, petroleum refineries, LNG terminals, petrochemical and chemical plants, oil and gas fields, offshore gas processing platforms, CNG filling station, electrical locomotives, fertiliser plants, metallurgical industry, cement plants and power utilizing equipment.Wow call on GEI was booked partially after it delivered 15% gains in just 2 trading sessions
Technically Speaking: Sensex is now in pullback mode. 19430 is a support of sorts however the big support is at 19200. Advance Decline maintained a balance of 1:1 almost with advances marginally higher than number of decilines The Volumes were good at Rs 9000+ crore for the BSE. Sensex resistance is at 19900 and that would need to be crossed. This week is Diwali and investors are waiting for a big Diwali Gift. The talk ofthe town is that Sensex will do 21000 this week. We have seen such kind of action earlier and such action will not suprise us.
FIIs selling to a tune of Rs 1093 cr
Foreign institutional investors (FIIs) were net sellers of Rs 1,093.16 crore (provisional) today, according to data released by BSE.
While FIIs made gross purchases of Rs 3,851.03 crore, gross sales totalled Rs 4,944.19 crore.
Domestic institutional investors (DIIs) were net buyers of Rs 648.69 crore today. While DIIs made gross purchases of Rs 1,679.43 crore, gross sales totalled Rs 1,030.74 crore.
FIIs were net sellers of Rs 761.40 crore on Friday, November 2, according to data released by Sebi today. While FIIs made gross purchases of Rs 3,322.70 crore, gross sales totalled Rs 4,084.10 crore.
Mutual funds (MFs) were net buyers of Rs 218 crore on Friday. MFs made purchases of Rs 832 crore and sales of Rs 614 crore.
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