Trading Calls

Nifty (5907) Supp 5843 Ress 5957

Buy BILT (163) SL 159 tgt 173, 175

Buy Gitanjali Gems (373) SL 369 tgt 383, 386

Buy ABB (1643) SL 1620 tgt 1685, 1695

Sell Aurobindo (523) SL 529 tgt 511, 509

Sell Bharat Forge (345) SL 349 tgt 335, 333

Uncertain gains

If America shows weakness and uncertainty, the world will drift toward tragedy. That will not happen on my watch. – George Bush.

With no major events to look forward to in the near term and due to the heightened uncertainty surrounding the US economy, the market here will remain sideways with no specific bias. We will continue to witness regular bouts of advances and declines till a fresh event - local or global - pushes the market players into action again either way. We keep hearing bad news from the global financial majors as well as regulators and experts on the US sub-prime crisis. This is unlikely to go away in a jiffy and will cap any sharp movement on the way up. At the same time, the downside too doesn't appear to be much. As a result, the key indices will remain stuck in a range for the short term.

FII inflows have also slowed considerably, though they continue to storm the primary market, as can be seen from the strong response to big-ticket IPOs like Mundra Port, Religare and now Edelweiss. This also confirms that interest from overseas investors remains unaffected by the recent regulatory curbs imposed on P-Notes and renewed volatility across global markets. In a nutshell, the medium to long-term outlook remains robust owing to the now well articulated 'India Shining' story.

In the near term, the action will be concentrated on the small-cap and mid-cap counters as can be seen from last week's spurt in some of these counters. Having said that one must be extra careful with these stocks as they tend to be pretty volatile and risky. Select large caps will also remain in the thick of things based on the news flow. Today, we expect a cautious to slightly higher opening and another choppy trading with lots of stock-based action.

Essar Oil will remain in the limelight. After market hours on Friday, the company announced that it no longer was planning to delist the shares from local bourses. Instead, it announced a US$6bn expansion plan for its Vadinar refinery. Essar Oil will raise part of the funds from a preferential allotment to promoters at Rs200 per share.

VBC Ferro Alloys could be another stock that might see some action amid market grapevine of a placement at Rs450 per share. The company is also holding substantial shares of Konaseema Gas Power and Orissa Power. Of this, Konaseema is slated to come out with an IPO. Karuturi Networks is likely to rise as billionaire investor George Soros has bought 1.4 million shares of the floriculture company.

Also watch out for stocks like Ashok Leyland, BILT, Yes Bank and Gujarat State Petronet Ltd.

Oswal Chemical might also perk up on news that it may sell its Chembur property to Reliance Capital. Plethico Pharma is likely to gain amid reports that it could announce an acquisition in the US. Gitanjali Gems may also advance as the company is expected to make 'an important' announcement today. Last week, an overseas brokerage firm also came out with a 'buy' report on the stock.

US stocks posted their first weekly gain this month after investors speculated that the worst of Wall Street's mortgage losses could be over and Wal-Mart boosted its earnings forecast.

Financial stocks rebounded from two weeks of declines after Goldman Sachs said it was not planning a significant write down. Wal-Mart surged the most since March 2003 after the world's largest retailer lured customers with discounts.

The Standard & Poor's 500 Index added 0.4% to 1,458.74. The Dow Jones Industrial Average rose 1% to 13,176.79, and the Nasdaq Composite Index gained 0.4% to 2,637.24. The Russell 2000 Index of small companies retreated for a third straight week, losing 0.4% to 769.50.

Crude oil lost 1.3% last week, only the second weekly decline since August. Gold lost 5.7%, the most since March, on speculation the dollar will rebound from record lows, reducing the appeal of the precious metal as an alternative investment.

European shares closed lower on Friday. The pan-European Dow Jones Stoxx 600 index lost 0.9% at 362.72. The UK's FTSE 100 declined 1.1% to 6,291.20, the German DAX 30 shed 0.7% to 7,612.26 and the French CAC-40 dropped 0.7% to 5,523.63.

In the emerging markets, the Bovespa in Brazil finished flat at 64,609 while the IPC index in Mexico jumped 1.6% to 29,631. The RTS index in Russia was down 1.3% at 2189 and the ISE National 30 index in Turkey rose by nearly 1% at 68,826.

Asian stocks were mostly up this morning but not all that much. The Morgan Stanley Capital International Asia Pacific Index advanced 0.3% to 158.90 as of 11:27 a.m. in Tokyo. Seven of 10 industry groups rose on the index, which slid 2.5% in the previous two days.

Japan's Nikkei 225 Stock Average added 0.3% to 15,197.82. Most stock benchmarks in the region gained, with Australia's S&P/ASX 200 Index climbing 1.3%. South Korea's Kospi lost 0.5%, while key indexes in Hong Kong, China, Taiwan and New Zealand were little changed.

Yet again bulls failed to make a come back on Friday as markets ended on the receiving end for third consecutive trading session. Although the India bourses ended lower but the drop was nowhere close when compared to the fall to the Asian markets as bulls were in the driving seat in the broader market. Mid-Cap and the Small-Cap stocks hogged the limelight. The BSE Mid-Cap and BSE Small-Cap indices added over 1.5% each continuing their streak of out-performance.

Finally, benchmark Sensex lost 86 points to close at 19,698. NSE Nifty closed flat at 5,906.

Among the non index gainers, Essar Oil was yet again the star performer, the scrip gained over 22% to close at Rs192. The Fertilizer stocks were also in the limelight led by Nagarjuna Fertilizer and Chambal Fertilizer.

Sugar stocks gained slight momentum after UP government said that they would move SC against High Court order on cane prices. Renuka Sugar advanced 1% to Rs765, Balrampur Chini edged higher 0.2% to Rs85.

Fertilizer continued to be in the limelight as the government announced its plans to issue Rs75bn worth of bonds to pay for compensation to be awarded to fertilizer makers after officials agreed to sell farmers growing agents at below- market prices.

Chambal Fertilizer was the top gainer, the scrip gained over 28% to Rs72, Nagarjuna Fertilizer was up over 14% to Rs82, Deepak Fertilizer rose over 10% to Rs165 and GNFC added 8.5% to Rs190.

Orchid Chemical advanced by 4.7% to Rs238 after the company declared that it has secured US FDA approval for Cefpodoxime. The scrip touched an intra-day high of Rs240 and a low of Rs225 and recorded volumes of over 4,00,00 shares on NSE.

Satyam Computers edged higher 0.2% to Rs429. Reports stated that the company targets three $100mn deal globally. The scrip touched an intra-day high of Rs434 and a low of Rs415 and recorded volumes of over 20,00,000 shares on NSE.

Cambridge Solution surged 2.2% to Rs88 after the company announced that they would raise $40mn by selling securities. The scrip touched an intra-day high of Rs96 and a low of Rs85 and recorded volumes of over 78,000 shares on NSE.

Ranbaxy slipped 3% to Rs411 after the company declared that the company has recalled 75mn tablets of 600mg and 800mg dosages of Gabapentin from the US retail market after discovering impurities outside the approved specification limit. The scrip touched an intra-day high of Rs420 and a low of Rs408 and recorded volumes of over 10,00,000 shares on NSE.

Ashok Leyland was up 0.5% to Rs41 after the company announced that it forayed in the 49-ton category with the launch of its new 4910TT truck which is currently dominated by Volvo and AMW. The scrip touched an intra-day high of Rs42 and a low of Rs40 and recorded volumes of over 92,00,000 shares on NSE.

Pantaloon Retail was trading flat at Rs671. Reports stated that the company has planned to hive-off its sports business into a new entity, Planet Sports Retail. The scrip touched an intra-day high of Rs685 and a low of Rs655 and recorded volumes of over 1,00,000 shares on NSE.

Info Edge edged lower by 0.3% to Rs1360. Reports stated that the company has planned to expand in Middle East to hedge a likely slowdown in US clients IT spending. The scrip touched an intra-day high of Rs1389 and a low of Rs1345 and recorded volumes of over 10,000 shares on NSE.

Stocks in News:

BSNL to rollout WiMax services in rural areas by 2010; to invest Rs20bn from the USO fund.

Sovereign Government funds of Singapore, Dubai and Abu Dhabi in the race to buy 5% stake in Reliance Power in pre-IPO placement.

Reliance Industries' D6 block in KG basin to start gas production at 2.8bcf per day from Q3 2008 instead of H1 2008.

United Spirits to invest Rs1.4bn to increase wine production capacity and launch 100 brands in four years.

ADAG group is planning to invest Rs15bn in airports in MP and AP.

Essar Oil to triple its annual oil refining capacity to 34mn tons by 2010; to invest Rs240bn.

The private equity arm of ICICI Bank plans to invest US$800mn in Jaypee Infratech, part of the Jaypee Group.

Essar Steel to delist from exchanges; promoters to buy back shares at Rs48 each.

Educomp Solutions to invest Rs20bn to ‘enable’ setting up of 150 schools over next four years.

Oil blocks acquired by ONGC-LN Mittal group combine in Nigeria may face regulatory scrutiny.

Deccan Aviation may wipe out accumulated losses of Rs7.8bn by June 2008, according to its CEO.

National carrier Air India unlikely to launch IPO before 2009.

Bank of Baroda to form a life insurance JV with Andhra Bank and British insurer Legal & General.

13 cement companies show interest in forming a JV with SAIL for a slag cement plant at Rourkela.

RBI panel recommends introduction of trading in currency futures on dedicated exchanges, initially only for resident Indians.

Jawaharlal Nehru Port Trust to invest Rs70bn in various expansion projects over the next 4-5 years.

Government owned oil marketing companies asked to consider new discounts on ATF prices to domestic airlines.

SEBI would amend regulations to allow mutual funds to short-sell securities.

FDI limit in insurance to stay at 26% till political consensus evolves, according to Ministry of Finance.

India needs to sign a fresh agreement if it wants to go ahead with its plan to purchase 5mn tons of LNG, says Iran.

Companies planning to build city gas distribution networks would have to go through a competitive bidding process.

TRAI issues guidelines to telecom companies on employing recovery agents for the collection of dues from their customers.

FII Investment Trend:

FIIs were net sellers of Rs3.63bn (provisional) in the cash segment on Friday while the local institutions pumped in Rs2.4bn.

In the F&O segment, FIIs were net sellers of Rs8.69bn.

Foreign funds were net buyers of Rs7.88bn in the cash segment on Thursday.

Mutual Funds were net buyers of Rs4.83bn on the same day.

Weekly Stock Ideas

Moser Baer
Research: JP Morgan
Rating: Underweight
CMP: Rs 274.70

JP Morgan rates Moser Baer as ‘underweight’. Moser Baer reported muted Q2 FY08 results with 5% QoQ decline in revenue and 70 bps drop in EBITDA margins. This was despite the fact that Moser benefited from a refund of duties in Europe, excluding which, sales declined 8% QoQ and EBITDA margins fell 3% QoQ. Optical media volumes fell 8% QoQ with 8% QoQ decline in average selling price (ASP). Overall, net profit fell 66% QoQ to Rs 3.3 crore. The management expects a volume pick-up in H2 FY08, but expects subdued pricing especially in DVDR as Philips has cancelled licenses for major optical media manufacturers. JP Morgan expects margins to remain weak. During the quarter, the photovoltaic (PV) business generated revenues of $12 million with net level break-even. The management expects PV revenues of $80-100 million and margins may improve through the year, stabilising at ~20%. By adding the entertainment business to the estimates, JP Morgan expects decent 80+% volume CAGR over the next 2-3 years with sharp margin improvement. However, Moser will take at least three years to recover its initial investment of $100 million.

Ranbaxy Laboratories
Research: Merrill Lynch
Rating: Buy
CMP: Rs 411.70

Merrill Lynch maintains ‘buy’ rating on Ranbaxy Labs. Last week, the company announced it has settled the patent infringement suit with Astellas/Boehringer Ingelheim on generic Flomax, which allows launch of the generic in March ’10 with 180-day exclusivity. Merrill Lynch views this development as a significant positive and estimates over $200 million revenues and $120 million one-off profits during the six-month period. This implies Rs 20 NPV per share, assuming limited 40% discount, delayed authorised generic entry and 50% market share for Ranbaxy. The company expects to continue pursuing this strategy of monetising on its pipeline of first-to file (FTF) opportunities. Based on this, Merrill Lynch sees visibility on several FTF launches for the next three years. These include: (a) Possible Para IV launch/settlement in ’08 (not yet announced); (b) Generic Valtrex in ’09 (Rs 18-20 NPV); and (c) Generic Lipitor in the US in ’10 (Rs 30-35 NPV). Merrill Lynch estimates robust core earnings growth of 40.5% in CY07E and 20.5% in CY08E (Rs 22.7), driven by higher growth and EBITDA margins from the US and emerging markets. There is possibility of 30%+ EPS upside in CY08E from generic Lipitor launch in Canada and possible R&D milestones from GSK.

Gitanjali Gems
Research: Morgan Stanley
Rating: Overweight
CMP: Rs 375.30

Morgan Stanley initiates coverage on Gitanjali Gems with an ‘overweight’ rating. The company is a pioneer in branded jewellery and is leveraging its brand equity to drive growth in the retail market. On excluding the value of the company’s real estate business from its CMP, standalone jewellery valuation looks cheap at 9x FY09E earnings, given 80%+ growth (FY06-07) in branded jewellery. The company is set to benefit from a shift in consumer buying patterns towards branded and diamond jewellery. Morgan Stanley expects jewellery retail and exports to grow by 46% and 40%, respectively, at the top line and by 78% and 43%, respectively, at the operating profit level over FY07-FY10. The company is likely to deliver 51% growth in earnings during FY07-10. Morgan Stanley values the jewellery business at Rs 417/share and the real estate business at Rs 130/share.

Maruti Suzuki
Research: CLSA
Rating: Buy
CMP: Rs 1,049.45

CLSA assigns ‘buy’ rating on Maruti Suzuki. The company believes the domestic car market will continue to see strong secular growth in coming years at ~15% CAGR and will hit 2 million units by ’10. Maruti will launch two new compact segment cars in Q3 FY09. These will include the recently unveiled small car ‘Splash’ and a new small car called ‘A Star’. The ‘A Star’ has been designed for the export markets. 50,000 units of the ‘A Star’ will be contract manufactured for Nissan, while another 100,000 units will be exported to Europe under the Suzuki badge. ‘A Star’ will also be launched in India. These launches, together with the expected launch of the ‘Swift’ sedan, will drive volume growth for Maruti in FY09-10. With this, Maruti’s export volumes will hit 200,000 units in FY10 from 55,000 units in FY08. However, margins on these exports will be lower than existing export margins. Maruti aims to transform itself into a complete pan-segment car manufacturer in coming years and new launches in future will reflect this. Maruti and Suzuki plan to invest $2.2 billion to increase capacities over the next three years. Diesel engine capacity, as well as capacity at the second car plant, will increase to 300,000 units each by ’10. Maruti also plans to set up a new engine plant and upgrade its Gurgaon facilities.

ABG Shipyard
Research: Citigroup
Rating: Buy
CMP: Rs 807.65

Citigroup maintains ‘buy’ rating on ABG Shipyard, aided by an order book cover of 6.7x FY08E sales and 59% FY08-10E EPS CAGR. It has increased the company’s price target primarily on the back of changes to margin estimates after better-than-expected margin performance in the past two quarters. ABG reported strong EBITDA (ex-subsidy) margins of 23% each in Q1 and Q2. While margins may not be sustainable at such high levels, Citigroup believes that its earlier 17-18% margin assumptions over FY08-10E were conservative, given that a combination of new orders at higher prices and operational efficiencies may result in sustained margin improvement from historical levels (18% in FY07). This reflects Citigroup’s new operating margin (ex-subsidy) assumptions of 21-22%, which the company is expected to achieve over the forecast horizon, though unexpected raw material (primarily steel) price increases pose a risk to these estimates.

Indraprastha Gas
Research: ABN Amro
Rating: Buy
CMP: Rs 154.60

Indraprastha Gas (IGL) is a joint venture of Gail, BPCL and the government of the National Capital Territory (NCT) of Delhi. Over the years, IGL has set up 153 CNG stations, including 67 mother stations, 42 online stations, 38 daughter booster stations and six daughter stations. IGL supplies piped natural gas (PNG) to homes and commercial/industrial establishments such as hotels, hospitals, embassies, restaurants etc. As on March ’07, IGL had provided PNG connections to over 75,000 domestic and 300 commercial customers. The company also supplies regasified liquefied natural gas (R-LNG) to industrial consumers in NCT. During FY07, the company’s net sales grew by 17% YoY to Rs 614 crore and net profit increased by 30% YoY to Rs 138 crore. In H1 FY08, IGL’s net sales grew by 16% YoY to Rs 336 crore, while net profit grew 30% YoY to Rs 81.3 crore. Demand for CNG is expected to rise with introduction of CNG-based cars and LCVs, besides incremental demand generated from new users such as the Northern Railways and introduction of radio taxis & high capacity buses for the Commonwealth Games. Hike in fuel prices will lead to more consumers converting their vehicles to CNG. Innovations such as ‘Mobile CNG Dispensing Schemes’ along highways will also encourage CNG conversions.

India Islamic Mutual Fund

The country is likely to get its first Islamic mutual fund soon, as a Delhi-based asset management company Taurus has approached capital market regulator Sebi to launch such a product based on Shariat laws.

“Subject to Sebi approval, we expect to mop up Rs500 crore from Taurus Parasoli Ethical Fund,” Taurus Mutual Fund managing director, R K Gupta, told PTI here.
Detailing the features of the five-year closed-end fund, Gupta said it would invest in shariat-compliant stocks, whose underlying companies aren’t engaged in businesses that are banned by the Islamic laws.

He claimed 71 stock in BSE-100 and 366 stocks in BSE-500 are Shariat-compliant.
Gupta said the product was likely to attract more non-Muslims than Muslims, since the concept was quite business-like.

Since interest income is banned under Shariat laws, Taurus would furnish quarterly disclosure of income, breaking it up into interest income and capital appreciation.
Those who do not want the interest can donate it to Zakat, which is an obligation on Muslims to pay part of their income to specified charities to uplift poor, the destitute and so on.
This break-up would also enable subscribers to understand operating income of companies in the underlying stocks better, and they would be more comfortable making judgements about stocks, Gupta said.

Parsoli Corporation Ltd, a Mumbai-based firm, would advise Taurus AMC about the Shariat-compliant stocks and assist the fund house in marketing the product. But it would be entirely up to Taurus to decide on investment in these stocks.

Every three months, Taurus would send a report of investments in these stocks to a Shariat board, consisting of three eminent Islamic scholars, Gupta said. If any stock is found to be non-compliant with the Shariat, Taurus would have three months to withdraw those investments.
Gupta said the company also plans to introduce three more products, including one diversified equity scheme for NRIs. Taurus would come out with a new marketing strategy for these funds.
While Taurus expects to launch the Islamic Fund and one more fund this fiscal, two more funds may be introduced in the next fiscal, he said.

Launched in 1994, Taurus Asset Management Company was initially promoted by IFC Washington and Lazard India Ltd. In 1999, it was bought out by Delhi-based HB Group, which merged its HB Mutual Fund with Taurus later.

Trading Tutorials

For a day trader, each day is war. Just as a general with a detailed plan of action who eventually wins the war, the more the preparation that is put in prior to the commencement of the trading day, the greater the chance of a success.

Many a time, a trade is terminated prematurely, only to face the mortification of seeing the price zooming up. A well-drawn trading plan can help avoid such a situation. A trading plan should have: (a) entry level, (b) exit level and (c) stop loss.

Previously, we dwelt at length on the stock selection criteria. That would be the genesis of the trading plan. It would be a good idea to have a list of stocks for going long and another list for shorting. As the trading day unfolds, the stock that can be traded that day will become apparent.

Determining the entry levels in the stock should be done with the help of intra-day charts. Technical tools that are used during day trading should not be too many, either. Each day-trader should make a trading system comprising one or two oscillators to generate a buy signal. Oscillators can be combined with trend lines and patterns on the bar chart or candlestick charts. The price reversing from supports would also be a good place to initiate a buy. It would be best to stick to one or two oscillators alone, as greater the familiarity, the greater the degree of comfort.

Exit levels in day trading can also be determined with the help of technical tools. Some examples are sell signal in the oscillator, trend line and reversal from previous peaks, to name three. Apart from these technical levels, the trader can also determine exit levels with the help of a certain minimum expectation per trade. For example, the minimum expected return per trade could be 1 per cent.

Stop loss levels are the most important part of a trading strategy. The minute the entry point is decided, the stop should be placed a few points below. As soon as the trade moves in to profit, the stop should be moved up to protect profits. Day traders who excel in taking losses dispassionately definitely win big in the end

Tata Power

Tata Power shareholders can consider booking profits on their holdings. The stock has run up rather sharply in the last two months, gaining by 67 per cent to Rs 1,252 on Friday. At this price, the stock discounts the annualised sustainable 2007-08 EPS (on fully diluted equity) by a whopping 35 times. The valuation — at 29 times — is not cheap either, if you take the unadjusted earnings of the first half ended September 30.

Fundamentally, there has been no material change in the company’s prospects between September and now that would justify this surge in valuation of the stock. The market’s sudden recognition of the good long-term prospects for the power sector has buoyed up most power/equipment stocks and Tata Power is one of these.

The company’s performance in the second quarter certainly does not provide any justification for the spike, either. Though revenues increased 12.5 per cent to Rs 1,350 crore, sustainable earnings (net profit excluding extraordinary items) actually fell 10 per cent to Rs 182 crore.

That said, the long-term prospects for the company appear bright indeed. Tata Power is on an ambitious capacity expansion programme that will see it adding about 10,000 MW of capacity in the next five years. This includes the 4,000-MW ultra mega power project (UMPP) at Mundra, where the company is making good progress. Orders for key machinery and equipment have already been placed and the company has also tied up for a part of its fuel requirements through the equity acquisition in Indonesia’s PT Kaltim Prima Coal and PT Arutmin.

The company did not bid for Krishnapatnam UMPP but is in the race for the next one at Tilaiya, in Jharkhand, another 4,000-MW project. Besides this, it is implementing a 1,000-MW project at Maithon in partnership with Damodar Valley Corporation. Tata Power is also examining the feasibility of setting up a 3,000-MW plant in coastal Maharashtra based on imported coal.

While all these projects will catapult the company into the big league, taking its capacity close to 15,000 MW by 2012 from 2,300 MWnow, investors should note that revenues and earnings from these expansion projects are at least five years away. Growth in earnings in the interim may not be high enough to justify the current valuation for the stock. Shareholders can book profits at the current price, which does appear expensive.

Sugar Sector

Sugar Sector

India Equity Strategy

India Equity Strategy

Sagar Cements, Hanung Toys

Sagar Cements, Hanung Toys

Index Outlook

Sensex (19698.3)

The bulls, rejuvenated by the Diwali break, came thundering back last week to yank the Sensex back from a deeper correction. The Indian markets displayed remarkable resilience last week. Weak industrial production numbers for September and quaking global markets did little to dampen the upbeat mood on our bourses.

The frenzy has now percolated down to the mid- and small-cap stocks. Both the BSE mid-cap as well as the BSE small-cap indices recorded successive life highs in the last three sessions of the week. Open interest in the derivatives segment has crossed Rs 1,00,000 crore again. Stock futures comprise more than half of this build-up; denoting that the outstanding contracts could be predominantly speculative in nature.

But the up trend in the Indian markets is not showing any signs of flagging yet. Though Sensex dipped below 18800 support on Monday, it recovered from the next support at 18340, thus retaining the positive outlook for the short-term.

The move that began from 17171 trough on October 22 can now extend further, giving the medium term target of 21400 to the Sensex. The positive medium term view will be negated only on a fall below 18300.

The labelling of the waves has become easier after the assertion of the short-term up trend last week. The most obvious count is that the Sensex is charting the fifth part of the wave that commenced from the March trough at 12316. The outermost target for this wave is 20942. But a fifth wave extension can take the wave beyond the target mentioned above.

The near term outlook for the Sensex is positive and the index can move higher to 20228 and then 20495 next week.

Some nervousness can be expected in the region around 20000. But the outlook for the week will turn negative only if the index falls below 18900.

Though the technical charts continue to be gung-ho, investors need to keep a balanced head on their shoulders in this market. The situation is getting close to the one seen in April 2006 with retail investors getting hyper-active in futures segment, muted FII inflows and runaway rallies in mid and small cap stocks. Leveraged positions are a definite no-no. Stocks witnessing steep run-ups are best left alone.

Nifty (5906.2)

Though Nifty dipped below 5600 briefly on Monday, the recovery on the same day has helped to avert a medium term down trend in the index.

The Nifty has now moved close to the 6000 mark once more. The third wave of the move from 5070 gives the medium term targets of 6059 and then 6419. Once the index moves past its previous high, another sharp surge is possible.

The short-term outlook for the index would stay positive as long as Nifty remains above 5664. If 5800 holds in the early part of next week, Nifty can move up to 6119 and then 6307 in the near-term.

However, watch out for bouts of profit booking in the band between 6000 and 6050.

Global Cues

The US markets attempted a recovery on Tuesday, but lack of follow-up buying made the indices slide down again towards the weekend. The Dow Jones Industrial Average has closed below the long-term 200 day moving average for yet another week.

Though further slide is anticipated in the short-term, the medium term range for DJIA is between 12500 and 14000. The Nasdaq Composite Index is also weak from a near term perspective.

Interestingly, the Hang Seng Index and Shanghai Composite Index that have been accompanying the Sensex in the mad hurtle upward have corrected more than 15 per cent over the last three weeks.

Some of the other Asian indices in Thailand, Taiwan, Singapore and Pakistan are also correcting in earnest. The Nikkei is the fore-runner in giving early indications that the four-year bull run from the 2003 could be nearing completion.

Via Business line

Kaushalya Infrastructure: Avoid

Investors can avoid the initial public offer of Kaushalya Infrastructure Development Corporation (Kaushalya) for now. Given the small size of business and the absence of any unique positioning, the valuation at the current offer price does not appear attractive.

In the offer band of Rs 50-60, the IPO is priced at 14.5-17 times its FY-07 earnings on the pre-offer equity base.

The IPO would expand the equity base by 76 per cent and holds the risk of earnings dilution in the medium term.

Further, Kaushalya’s plans to foray into real-estate and build-operate-transfer (BOT projects) may prove to be risky, given the small base and tremendous competition in these segments.

Attractive pricing may be crucial for small players that enter the market now, unless they have a niche in any promising segment in the industry.

This is especially because there are other opportunities in the listed space at present, with superior track record and better visibility for earnings growth.
Background and offer

Kaushalya is an infrastructure company, primarily into the construction of roads and bridges and a focus in Eastern India.

It plans to foray into building commercial and residential complexes through a tie-up with the West Bengal Government.

The company will raise Rs 42-51 crore through this offer, the proceeds of which would be utilised for purchase of construction equipment, investment in BOT projects and for acquisition of land/development rights for real-estate projects.
Pricing

Kaushalya’s sales grew at a compounded annual rate of 45 per cent over the last three years. However, its FY-07 sales of Rs 55 crore is smaller than peers such as PBA Infrastructure or Tantia Constructions, which are traded at discounted/similar valuations.

Though the order-book, as of July 2007 at Rs 76 crore, provides revenue visibility, it is only about 1.38 times the FY-07 revenue as against a industry average of three-five times last year’s revenues.
New forays

The company’s agreement with the West Bengal Housing Board to execute housing projects and allied infrastructure works can be expected to provide some upside to the company’s earnings over the long term.

The company is also likely to get a reasonable stream of business as it appears to enjoy a good reputation with the public works department and similar local authorities.

Further, the infrastructure development in East India lags behind the rest of the country providing much scope for players in that region.

We are however cautious about the company’s other tie-ups for foraying into real estate.

A good number of these tie-ups are with its own group companies that have been recently incorporated and with, perhaps, limited experience in the realty space.

Further, close to 70 per cent of the existing land reserves/rights are in Zaheerabad in Andhra Pradesh, a region that is completely out of the company’s existing domain and plans. Sale of the same could, however, bring in one-time income.

Entry into the BOT segment may also not be too easy, given that it requires financial and technical qualification or securing tie-ups with bigger players.

The IPO is open from November 20-23. SREI Capital Markets is the book running lead manager.

Kolte-Patil Developers: Invest

Investors with a high-risk appetite can subscribe to the initial public offering of real-estate company Kolte-Patil Developers. Attractive pricing, reasonable track record of execution and tie-ups with prominent real-estate funds are postives for this company.

However, as the industry matures, mid-sized players such as Kolte-Patil, with a decent execution record may be attractive candidates for takeover by bigger players. Finding sustained financing options may also pose a challenge to small companies. Investors can, therefore, consider exposure with a one-two/year investment horizon.

At the offer price of Rs 125-145, the company’s share is valued at 8-9.7 times its per share earnings for FY-07 on the existing equity base. The present issue will expand the equity base by 34 per cent. Post-issue, the company’s market capitalisation (based on the offer price) would be about Rs 1,000 crore.
Business and objectives

Kolte-Patil is a real-estate developer with predominant presence in Pune. The company has so far developed 25 projects covering residential and commercial buildings and IT parks in Pune and Bangalore. It now plans to raise Rs 237-275 crore for acquisition of land development rights for new projects and to meet the construction costs of existing projects.
Positives

Kolte-Patil’s execution capabilities have been well-tested, given that the company has managed to develop about four million square feet of projects so far. This is much larger than the executed area of some of the mid-sized realty companies that have tapped the capital market over the past one year.

The company’s present projects are expected to generate 17.8 million square feet of saleable area — about four times its executed projects till date. On a comparison with peers, this target does not appear too ambitious, given the company’s track record and experience. Additionally, 19 of the 28 projects are in the construction stage providing visibility to revenues over the next couple of years.

Kolte-Patil’s revenue for 2007 and the current projects are tilted in favour of commercial buildings and IT parks. A majority of these are located in Pune, a fast-growing hub for the software industry. Further, with the Government of Maharashtra’s plans to develop the Mumbai-Pune connection as an IT corridor, Kolte-Patil’s current focus on IT parks and commercial space appears to be well-timed.

However, given the company’s established presence in Pune in the residential segment, this line of business may be a better bet for the company. The company’s proposed land/development acquisitions also reflect that its plans over the long term are tilted toward the residential segment.

Another positive for this company is its ability to attract real-estate funds such as ICICI Venture and K2 Property (a subsidiary of Yatra Capital) for specific projects. Such ventures will not only enable the company to ensure smooth finance for its projects but also enable it to foray into new and larger projects. For instance, the company is foraying into townships through a joint venture with ICICI Venture. These tie-ups provide better earnings visibility to the projects as smooth flow of funds and the rich experience of the private equity players could reduce project delays/disruptions.
share of owned land

Of the 40 million square feet of saleable area of land reserve, only 3 per cent is directly owned by Kolte-Patil. A high proportion (55 per cent) is land for which the company and its other entities hold development rights. We view this as a risk, as the possibility of legal complications (such as revocation of rights or change in agreement clauses) that lead to execution delays are high in case of such models.

However, it appears that the company has so far managed well, given its established presence in Pune. That most of the land owned through this model is also fully paid for, provides some comfort, although this does not completely eliminate the risks mentioned above.

For a mid-sized player such as Kolte-Patil, the lack of geographical diversification need not necessarily be viewed as a risk. The dynamics and regulatory aspects of real-estate markets vary across states in the country allowing only big players to understand and enter new markets, sometimes through local tie-ups.

Given the company’s well-entrenched position in the Pune market which has significant potential, Kolte-Patil’s focus on this region may in fact be a strategy that contains risk.
Financials

Kolte-Patil’s sales grew at a CAGR of 119 per cent over the last three years to Rs 229 crore in FY-07. Similar growth in net profits grew at 154 per cent. A chunk of this growth can be attributed to surge in volumes in 2007 as a result of completion of some IT parks. As revenues tend to be lumpy after lean periods, one cannot expect this growth to be repeated.

DSP Merrill Lynch and Edelweiss Capital are the book-running lead managers to this offer, which is open from November 19-22.

Renaissance Jewellery: Avoid

Investors can stay away from the initial public offer from Renaissance Jewellery. Though the offer is modestly priced and the company has a good financial record, the business carries a relatively high-risk profile at this juncture due to client concentration and US-centric operations.

The vulnerability of earnings to a US slowdown, dollar depreciation and the possibility of increase in gold or diamond prices peg up the uncertainties surrounding the earnings prospects.
Business

Renaissance Jewellery makes and sells studded precious jewellery to international retailers; it also has a small domestic presence through a retailing venture. Over 95 per cent of its revenues originate from the US.

The company operates three jewellery manufacturing units located in SEEPZ and Bhavnagar. Studded jewellery exports offer higher scope for value-addition and margins compared to the export of cut and polished diamonds, which is the predominant business for many of the Indian gem/jewellery exporters. A decade-long presence in this business and a good design pipeline have helped Renaissance establish strong relationship with key clients and steadily scale up its revenues and profits over the past few years.

While net sales (consolidated) have grown over two-fold to Rs 440 crore in the three years to FY-07, net profits have grown over three-fold from Rs 6 crore to Rs 25.4 crore over the same period. The planned expansion of capacities by 50 per cent, funded by this IPO, could aid the company in further scaling up revenues and profits should strong demand trends be sustained.
Uncertainties and risks

However, there appear to be a few uncertainties attached to the business prospects at this juncture. One, the company’s current sales are highly reliant on its top clients, with the biggest accounting for 42.3 per cent of revenues in FY-07 and the top five for nearly 95 per cent.

The company caters to large retail chains and wholesalers without any specific long-term sourcing contracts with the latter. This makes the business quite vulnerable to any churn in the client base.

Second, with over 95 per cent of the company’s revenues derived from the US, any slump in US retail sales could impact the company’s sales growth. Jewellery sales in the US markets are priced on a piece basis rather than on a cost-plus basis as is the practice in the Indian market. Therefore, the company’s ability to pass on any spike in raw material costs (on the prices of gold or diamonds) to customers may be limited, especially while competing with other suppliers.

Operating profit margins in this business are already thin, with the company managing a 6-7.5 per cent margin in recent years. With jewellery exports from India into the US ceasing to enjoy duty waivers under the generalised system of preferences with effect from July 2007, Indian exports have been exposed to higher competition than before.

Third, a higher tax incidence on account of the applicability of MAT to two of the company’s units from the coming fiscal may also potentially impact earnings.
New initiatives

The company however, has a few initiatives in place to address client and geographic concentration. For one, it plans to use the offer proceeds to fund a venture in the US which will target smaller and mid-rung retailers in addition to the large ones that are already being catered to. If successful, these efforts could help the company reduce its client concentration and gain better bargaining power as a supplier. Second, the company has forayed into markets such as West Asia to reduce its US dependence.

However, these initiatives are in a relatively nascent stage. Investors can closely watch progress on these fronts, post listing and consider exposures to the stock, at a later date.

Seen purely in terms of valuation, however, this offer is modestly priced in relation to listed players in the jewellery space.

The company’s net profits of Rs 25.4 crore for FY-07 translate into a per share earnings of about Rs 19.5 on the pre-offer equity base and to Rs 12 on the fully diluted equity base (factoring in warrant conversion). Based on the fully diluted equity for the sake of conservatism, this translates into the PE multiple of 10.5-12.5 times at the two ends of the price band.

Offer details: The company is offering equity shares in the price band of Rs 125-150, along with one detachable warrant, for every two shares. Each warrant is convertible into one equity share during the period from April 1 2009 and May 31 2009. The conversion will take place at a 25 per cent premium to the issue price for this IPO. IPO proceeds will be deployed towards investment in a foreign marketing subsidiary and substantial expansion of manufacturing capacities at Mumbai and Bhavnagar

Gold ETFs a good option

Gold ETFs are an interesting option for the investor. Tips on when you should jump onto the bangwagon.

Gold exchange traded funds (ETF) have recently started making their mark in the Indian mutual fund space. With their rising popularity, a lot of fund houses are introducing schemes in the market to cater to the needs of the customer.

In all this excitement there is one factor that is often forgotten: when should you look to invest in such schemes? We provide you with some help on how to go about taking this crucial decision.

Expecting appreciation
The basic tenet of investing is that one does expect appreciation in the short-term or the long-term. Also, it is completely dependent on the perspective or investment horizon of the individual per se. The same principle should be working for gold ETFs as well because any investor would like to invest only when he expects an appreciation in the value of the fund.

The gold ETF works on the principle that the value of the fund is linked to the gold prices. This implies that the investor will gain only when the prices of gold rise from the level at which they have bought the units. This is inherently built into the investor's expectations while investing, and the investment will be made only when he thinks gold prices are low or there is scope of appreciation.

Convenient amount
The second reason why an investor would want to use a gold ETF is because the investment can be made in a convenient amount. For instance, Rs 10,569 per 10 grams does sound like an inconvenient number to buy. On the other hand, Rs 2,000 for 10 units does sound quite comfortable.

There are some basic weights in which normal gold purchases are possible and for this very reason, the investor might have to shell out a particular amount depending upon the price of gold. This does not happen when the investor uses the gold ETF route for the purpose of investing such amounts because smaller amounts can still be invested whenever required through the purchase.

Specific condition benefit
Of course, there can be situations where one bets that international gold prices would rise. An investor who is able to spot this opportunity can take the decision to invest. In the past four years, we have seen many situations of global economic and political turmoil, when investors have shunned stocks and moved towards gold as an investment as it provides stability.

Sharp movement
Then there are opportunities when one can expect a sharp upward movement in the price of gold and this can become an opportunity for the investor. This window of opportunity often does not remain for a long time period. So, only those who move quickly will be able to gain from the situation. It is under such conditions that the investor will be able to use the gold ETF in an effective manner. Unlike other mutual funds, there is also a chance of using the intra-day volatility in prices because the investor can buy or sell the units at any time during the day. Due to this reason the investor will be able to ensure that they are able to get the best benefit of volatility.

Via Business Standard

Market Signals confusing

The markets continue to surprise every now and then, as they did last week by posting a record single-day (up 894 points) gain. After starting the week on a negative note, the Sensex rebounded sharply from the week’s low of 18,333, and rallied to a high of 19,988 - a whopping 1,655-point gain. The index eventually ended the week with a gain of 791 points at 19,698.

There are mixed signals as far as the market direction is concerned, with the negatives outnumbering positives. On the positive front, the index low of 18,333 is close to the monthly support level (S2 = 18,290). If the index is able to hold this support and trade consistently above the 19,840 level, it may rally to new highs.

On the negative front, the index has been making lower tops and lower bottoms in the last three weeks. For the week ended November 2, the high on the Sensex was 20,238 and low was 19,256. In the following week, the index touched a high of 20,009 and a low of 18,737. Last week, the index touched a high of 19,988 and a low of 18,333.

If the index consistently trades below the 19,500 mark, 18,660 would be a crucial level to watch out for, below which the index is likely to dip to 17,000/17,300 levels. The bulls would continue to hold the upper hand as long as the index stays above the 17,000 mark.

The 14-day RSI (relative strength index) is close to 30 levels. A RSI of 30 or less 30 indicates an oversold situation.

The Sensex is likely to face resistance around 20,330-20,525-20,725 this week, while it will find support around 19,065-18,870-18,670.