Market may edge lower

The market may edge lower tracking weak US markets. US stocks declined sharply on Friday, 11 January 2008 on a warning by American Express of mounting credit-card defaults and a slowdown in consumer spending. Dow Jones Industrial Average slumped 246.79 points, or 1.92%, at 12,606.30, Standard & Poor's 500 Index fell 19.31 points, or 1.36%, to 1,401.02 and Nasdaq Composite Index dropped 48.58 points, or 1.95%, at 2,439.94.

Asian markets were trading mixed today, 14 January 2008. Hong Kong's Hang Seng (down 0.12% at 26,836.09), South Korea's Seoul Composite (down 0.91% at 1,766.02) declined. However, Taiwan's Taiwan Weighted (up 1.65% at 8,162.12) and China’s Shanghai Composite (up 0.11% to 5,490.50), rose

Infrastructure Development Finance Company and CMC among others will declare their December 2007 quarterly results today.

Back home, the 30-share BSE Sensex rose 245.37 points or 1.19% to 20,827.45 on Friday 11 January 2008. The broader S&P CNX Nifty rose 43.15 points or 0.7% to 6,200.10 on that day

The two key indices, BSE Sensex and S&P CNX Nifty witnessed a divergent trend last week. While Sensex rose, Nifty declined. The 30-share BSE Sensex gained 140.56 points or 0.67% to 20,827.45 in the week ended Friday, 11 January 2008. The S&P CNX Nifty declined 74.20 points or 1.18% to 6,200.10 in the week.

As per provisional data, foreign institutional investors (FIIs) bought shares worth a net Rs 107.40 crore on Friday, 11 January 2008. Domestic institutional investors (DIIs) were net buyers of shares worth Rs 1.92 crore on that day.

FIIs were net sellers to the tune of Rs 463.45 crore in the futures & options segment on Friday, 11 January 2008. They were net sellers of index futures to the tune of Rs 776.64 crore and bought index options worth Rs 327.01 crore. They were net sellers of stock futures to the tune of Rs 13.26 crore and sold stock options worth Rs 0.56 crore.

Meanwhile, Industrial output rose 5.3% in November 2007 from a year earlier, well below market expectations and sharply lower than an upwardly revised annual growth of 12% in October 2007, data released on Friday, 11 January 2008, showed. Manufacturing production rose 5.4% in November 2007 from a year earlier, compared with a provisional annual growth of 13.3% in October 2007.

Annual inflation, based on the wholesale price index (WPI), remained unchanged at 3.5% in the week ended 29 December 2007 compared with the week ended 22 December 2007, as per data released on Friday, 11 January 2008. WPI was 5.89% in the corresponding week of the previous year.

Infosys Technologies - Jan 14 2008

Infosys Technologies - Jan 14 2008

Shortterm trading Calls - Jan 14 2008

Buy GT Offshore with a stop loss of Rs 950 for targets of Rs 1130 and Rs 1310

Buy Century Textiles with a stop loss of Rs 1100 for target of Rs 1350

Buy Ruchi Soya Industries only on declines with a stop loss of Rs 131 for a short-term target of Rs 164

Morning Call - Jan 14 2008

Market Grape Wine :

In House :

Nifty at a supp of 6110 and 6020 levels with resistance at 6247 and 6298 levels .

Sell : Intraday : ACC below 888 target 860 s/l of 896

Buy : in F&O Intraday : AxisBank : above 1175 target 1225 s/l of 1155

Buy : in F&O Intraday : RIL above 3140 target 3200 s/l of 3115

Out House :

Markets at a support of 20502 & 20341 levels with resistance at 20898 & 21020 levels .

Buy : RIL & REL at dips

Buy : RelCap

Buy : NTPC & JPHydro at dips

Buy : Geshipping & MundraPort

Buy : JyothyLab at dips

Buy : IBUllsreal & IBullsFin at dips

Buy : ITC at dips

Buy : SBIN & IciciBank

Buy : Religare at dips

Dark Horse : IciciBank , GEship , REL , JpAsso , IBullReal , RIL & SBIN

Grey Market - EMAAR MGF, Cords Cable, J Kumar Infraprojects

Future Capital Holdings 700 to 765 590 to 595


Reliance Power 405 to 450 360 to 370


SVPCL 42 DISCOUNT


Porwal Autocomponents 75 DISCOUNT ( Listing Today!)


J. Kumar Infraprojects 110 to 120 25 to 30


Cords Cable Ind. 125 to 135 35 to 40


Emaar MGF 725 to 850 400 to 450

Pre Market Watch - Jan 14 2008

The Indian market is likely to have positive opening as the Asian Market are trading mixed. On Friday, the Indian market closed on an upbeat note on the back of selective buying across the counters towards the end of the trading session. The market had slipped into the red in afternoon trade from an initial surge on thee back of less than expected industrial production data for the month of November 2007 that rose by 5.3%. The annual inflation, based on the wholesale price index (WPI) remained unchanged at 3.5% in the week ended 29 December 2007. The BSE Sensex closed higher by 245.37 points at 20,827.45 and NSE Nifty grew by 43.15 points to close at 6,200.10. We expect that the market may remain volatile during the trading session.

On Friday, the US market closed in deep red. The Dow Jones Industrial Average (DJIA) closed lower by 246.79 points at 12,606.30. S&P 500 index fell by 19.31 points at 1,401.02 and NASDAQ dropped by 48.58 points to close at 2,439.94

Indian ADRS closed in negative. In technology sector, Infosys fell by (6.30%) along with Satyam by (5.62%) and Wipro by (5.33%). In banking sector, HDFC bank and ICICI bank dropped by (1.18%) and (1.02%) respectively. VSNL decreased by (5.16%).

The major stock markets in Asia are trading mixed. Hang Seng is trading lower by 30.92 points at 26,836.09 and South Korea''s Seoul Composite is trading at 1,766.02 down by 16.25 points while Taiwan Weighted is trading higher by 132.81 points at 8,162.12

On Friday, the FIIs stood as net seller both in equity while net buyer in debt. The gross equity purchased was Rs4,334.20 Crore and the gross debt purchased was Rs580.60 Crore while the gross equity sold stood at Rs4,965 Crore and gross debt sold stood at Rs295.20 Crore. Therefore, the net investment of equity reported was (Rs630.80 Crore) and net debt was Rs285.40 Crore.

Today, Nifty has support at 6,102 and resistance at 6,269 and BSE Sensex has support at 20,467 and resistance at 21,028.

News Snippets - Jan 14 2008

News Snippets:

ONGC close to finalizing a stake sale in two of its blocks to BG; also in talks with US based Nobel Energy to offer stakes in some of its blocks.(BL)
JSW Bengal Steel likely to double the first phase capacity of its project to 6mn tons.(BS)
Reliance ADAG to invest Rs1.5tn in power, roads, metro rail and coal sectors in the next five years.(FE)
BSNL to launch full-fledged CDMA-based mobile services with an investment of US$500mn.to divest 20% stake in next 12 months.(ET)
Government plans to divest 10-15% stake in Air India through a public issue in the second half of 2008.(ET)
UTV Software has sought FIPB approval for raising funds.(BL)
Reliance Industries says it is ready to invest US$8bn to set up a pit-head coal-to-liquid plant in the command area of the Mahanadi Coalfields.(FE)
M&M to seek government support for roll out of Scorpio hybrid.(BL)
Unitech may hive off its telecom business.(ET)
Delhi High Court refuses to stay spectrum allotment to RCOM under dual technology.(TOI)
Adani Group’s arm to soon start work on its 1,320MW thermal power plant in Maharashtra; company has lined up Rs53bn for the plant.(BS)
Nalco signs MoU with the Indonesian government for a 0.5mn ton smelter and a 1,250 MW captive power plant.(ET)
Reliance Industries to venture into synthetic fuels through a US$6-8bn project.(DNA)
Future Group to invest Rs 3bn in Future Ventures India this year to facilitate acquisitions by the group.(ET)
GAIL and ONGC to work out an arrangement to market gas from the latter’s marginal field in Mumbai offshore.(BL)
Wockhardt plans demerger of new chemical entities (NCE); R&D division may include its in-licensed drugs from other companies and biotech drugs.(BS)
Kingfisher Airlines to buy five more Airbus A380s, spending an additional US$1.6bn on the aircraft.(Mint)
Ispat Industries has tied-up with Shell LNG to hike its sponge iron production capacity.(ET)
US based Forest Laboratories sues three Indian pharma companies, Orchid Chemicals, Lupin and Wockhardt for manufacturing imitations of patented drugs.(BS)
TVS Motor to miss its sales target for current fiscal by 100,000 units.(DNA)
Fortis Healthworld, a health product provider, plans to set up 200 health stores in west and south India over the next one year.(BS)
Inox to invest Rs1bn in Indiareit’s domestic unit.(ET)
US-based Clear Investments and Power Finance Corp to jointly float a US$1bn PE fund for the Indian power sector.(ET)
Mudra Lifestyle to expand manufacturing facilities with an investment of Rs1.7bn.(TOI)
Hinduja Group in association with ONGC to invest US$20bn for oil exploration in two fields in Iran, to set up a 15mn ton refinery in Kakinada and a LNG terminal at Mangalore.(BS)
Megasoft, a product based technology company, plans to acquire an European or US based company for US$50mn.(BS)
ICICI Bank may cut home loan rates, according to its CEO.(FE)
Punjab government receives two proposals worth Rs 24bn to set up SEZs from Ansal Properties & Infrastructure and Ishan Developers & Infrastructure.(BS)
Dolphin Offshore Enterprises plans to get into providing coast-to-coast shipping, light rig operations and harbour management services.(BS)
Essar group’s mobile phone chain targets Rs50bn in annual revenues by 2010.(BS)

Economic News

Direct tax collections registered 42.8% increase in the first nine months of current fiscal.(BL)
Passenger fares unlikely to increase in the coming rail budget.(FE)
RBI of the view that Temasek and GIC cannot be considered as separate entities as they belong to the same government.(BS)
A hike in fuel prices looks imminent after left leaders agree to marginal increases along with duty cuts.(FE)
The government has finalized the draft policy on solar energy and would roll out a solar city by next week.(ET)
Government considering 8% levy on annual gross revenue on telecom service providers for up to 5MHz of spectrum.(Mint)
TRAI to phase out access deficit charges from this year.(BL)
Investment in the construction sector is expected to rise 19% per annum to touch Rs3,034bn in the next two years.(ET)
Union Ministry of Labour decides to include hotel industry under the Factories Act.(Mint)
Government accepts a new policy under which entrepreneurs could acquire 70% of land directly from the farmers with their consent.(FE)
MCX to launch coal and electricity futures contracts this year.(FE)
Ministry of Information and Broadcasting has postponed FM radio auction indefinitely.(BS)
The railway ministry plans to expand the scope of the Wagon Investment Scheme to allow private players to own and design specialized wagons.(FE)

Daily Trading Calls - Jan 14 2008

Nifty (6200) Sup 6137 Res 6252

Buy Sobha (952) SL 940
Target 977, 982

Buy Patel Eng (951) SL 940 Target 980, 985

Buy NTPC (272) SL 267
Target 280, 283

Sell Bharat Forge (361) SL 366 Target 350, 348

Sell Tata Motors (762) SL 769 Target 750, 745

Blame it on the world!

All blame is a waste of time. No matter how much fault you find with another, and regardless of how much you blame him, it will not change you.

Though the global markets continue to be in a shambles owing to the nagging worries over the state of the US economy, our market has managed to outperform. If your portfolio is in doldrums, you could blame the world but that does not solve your problem. Over the weekend, we've had more bad news from the US , which may continue to weigh on the sentiment.

Among other things that will have a bearing on the sentiment include: the quarterly results, the mega IPO of Reliance Power ( even dabbhawalas are set to market the issue) and a few others, and of course the month-end meetings of the Federal Reserve and the RBI. Today, we expect a slightly lower opening on the back of weak global cues. Things will remain highly volatile.

The Sensex and the Nifty touched new all-time highs last week on the back of strength in a few index stocks. But, last week was different as we saw the large caps regaining focus while the small-caps and mid-caps witnessed a steep sell off after their gravity-defying rise over the past couple of months. Whether this trend continues or will be some more pain in the non-index counters. The coming days will reveal.

With the global markets not showing any sign of recovery, the bias may turn negative in small-caps and mid-caps for a while. Those who had jumped on the small-cap-and-mid-cap bandwagon should try and get rid of all the junk stuff, even at a loss. Select large caps could continue to do well, based on the emerging news flow and other inexplicable reasons. But be careful as there could be a chance of a small reversal in the near term. Though the Sensex and the Nifty managed to gain last week, the rally was on the back of lower traded volumes and worsening market breadth.

Shares of Porwal Auto Components will get listed on the bourses today.

Results Today: CMC, Dhanlakshmi Bank, Exide, IDFC, KLG Systel, Lok Housing, Monnet Ispat, Omnitech, Repro India, RDB Industries, Texmaco, Vikas WSP and Zen Technologies.

RCOM, Idea Cellular and Bharti Airtel could gain on getting spectrum from the Government. The Centre has made allotment of start up spectrum to RCOM for providing GSM services under the Unified Access Services Licenses (UASL). The company will, in due course, offer nationwide GSM services.

Ranbaxy's Board will meet on January 17, to consider demerger of New Drug Discovery Research Unit of the company into a separate entity.

Motilal Oswal Financial Services' Board has approved an investment of Rs100mn in the share capital of an Asset Management Company and investment of Rs10mn in the share capital of a Trustee Company.

Sun TV Network, through its subsidiary South Asia FM Ltd., had entered into a strategic alliance with Red FM to further its radio broadcasting business in North, West and East India. SAFL has now entered into an agreement with South Asia Multimedia Technologies Ltd. for a 6.98% stake in SAFL. Sun TV will continue to hold its stake of 64.12%.

Euro Ceramics has dropped plans for a preferential placement. Kirloskar Pneumatic's Board will meet on January 19, to consider a new project of RoadRailer Manufacturing and Services from it's Nasik property

Indian Bank and Jaiprakash Associates have declared strong results for the third quarter.

US stocks ended sharply lower on Friday amid renewed concerns about the economy and the impact of the credit crisis. Stocks fell for a third straight week, the longest losing streak since August, after forecasts from AT&T, American Express and Tiffany stoked speculation that the six-year economic expansion is ending.

AT&T dropped the most since 2003 after saying customer demand weakened. American Express had the steepest loss since September 2001 after adopting a cautious view for the year. Tiffany tumbled the most in five and a half years on slower holiday sales. Goldman Sachs said the US may already be in a recession.

The S&P 500 Index fell 0.8% last week to end at 1,401.02, bringing its year-to-date loss to 4.6% for the worst start since 1982. The index fell to an almost 10-month low on January 8. The Dow Jones Industrial Average sank 1.5% to 12,606.30. The Nasdaq declined 2.6% to 2,439.94.

Market breadth was negative.

In the wake of more bad news on the housing sector meltdown and the credit crunch, Wall Street expects the Federal Reserve to cut benchmark interest rates by at least half a percentage point at the end of its two-day meeting scheduled for January 30.

There is also speculation that the Fed will jump in and cut rates ahead of the scheduled meeting.

American Express said it expects lower profit through 2008 because of slower spending and missed credit card payments. Its shares slumped 10% on Friday. Capital One Financial warned that 2007 profit will miss previous estimates because of more loan delinquencies and addition to Q4 cash reserve.

Merrill Lynch may have to writedown $15bn in bad mortgage bets when it posts results next week, according to the New York Times. Analysts currently expect the financial major to take a $12bn writedown. The company is also apparently seeking to raise $4bn in capital. Merrill Lynch shares rose 5%.

Next week brings earnings from Merrill Lynch and four other big banks, including Citigroup, and results are expected to be pretty dismal amid the continued fallout from the credit and mortgage market crises.

Bank of America said it was buying Countrywide Financial for $4bn in stock, rescuing the biggest US mortgage lender. Countrywide shares slumped 15% after rising more than 50% on January 10 on rumors about the deal.

The US Government said the November trade gap swelled to its highest level in 14 months, due to record oil imports.

Treasury prices rallied, lowering the yield on the 10-year note to 3.78% from 3.88% late on Thursday as investors sought safety in government debt. In currency trading, the dollar fell versus the yen and inched higher versus the euro.

US light crude oil for February delivery fell $1.02 to settle at $93.71 a barrel on the New York Mercantile Exchange. COMEX gold for February delivery jumped $4.10 to settle at $897.70 an ounce after briefly topping an all-time high above $900 an ounce in the morning.

Across the Atlantic, European stocks too declined, but the sell-off was less severe. the pan-European Dow Jones Stoxx 600 index slipped 0.5% to 343.69. The UK's FTSE 100 fell 0.3% to 6,202 while the French CAC-40 shed 0.5% to 5,371.41, while the German DAX 30 rose 0.1% to 7,717.95.

In the emerging markets, the Bovespa in Brazil slumped 2.5% to 61,942 while the IPC index in Mexico slid 1.2% to 28,723. The RTS index in Russia was up 0.3% at 2313 while the ISE National-30 index in Turkey was down 0.8% at 65,130.

Asian markets were down marginally this week. The Hang Seng in Hong Kong slipped into the red after a higher opening while the Nikkei in Tokyo was shut for a public holiday. The Hang Seng was down 216 points at 26,650 while the Kospi in Seoul fell 18 points to 1764.

The Straits Times in Singapore was down 40 points at 3246 while the Shanghai Composite in China dropped 12 points to 5472. But, the Taiex in Taiwan advanced 117 points to 8146 following opposition party Kuomintang's decisive electoral win at the weekend.

Earnings, global cues to drive sentiment

It was a brave fight back by the bulls towards the end of the sessions. Amid wild gyrations unabated buying in the banking, Realty and select Mid-Cap stocks lifted the markets from their days low. However, the small-cap stocks in BSE, continued to be under pressure and lost further ground. Finally, 30-share Sensex closed at 20,827 adding 245 points and Nifty ended at 6,200 up 43 points.

Among the 30-scrips of Sensex ICICI Bank (up 6.13%), DLF (4.71%), Reliance (3.34%), HDFC Bank (2.47%), NTPC (2.33%) were top five gainers. However, ACC (down 4.32%), M&M (3.54%), Satyam Computer Services (2.24%), HDFC (2.18%) and Ambuja Cement (2.01%) were the top losers.

Orchid Chemicals edged higher 0.4% to Rs291 after the company announced that its formulation facilities, comprising the Cephalosporin plant and Penicillin plant have been approved by the Medicines Control Council (MCC), South Africa. These facilities manufacture a range of Cephalosporin and Penicillin injections. The scrip touched an intra-day high of Rs294 and a low of Rs281 and recorded volumes of over 4,00,000 shares on NSE.

Pantaloon Retail rose over 3% to Rs822 after the company announced its plans to invest Rs3bn in a joint venture with National Textile Corp. to develop and modernize textile mills. The board of Directors of the company approved the joint- venture plan to develop two mills owned by state-run National Textiles in the city. The scrip touched an intra-day high of Rs826 and a low of Rs780 and recorded volumes of over 1,00,000 shares on NSE.

Mukta Arts down 0.3% to Rs190. The company announced that it would consider selling securities to large investors on Jan. 18. The scrip touched an intra-day high of Rs203 and a low of Rs185 and recorded volumes of 42,000 over shares on NSE.

Educomp surged by over 3.5% to Rs4532 after its subsidiary signed MoU with IIT Chennai to develop Science enrichment programme. The scrip touched an intra-day high of Rs4575 and a low of Rs4375 and recorded volumes of over 1,00,000 shares on NSE.

Aries Agro a micronutrient and other nutritional products manufacturing company for plants and animals, today listed on the BSE and NSE at Rs150 and Rs160 respectively, as against its offer price of Rs130 per share. The scrip closed at Rs251.60 on the BSE and at Rs249.80 on the NSE. The company entered capital market with an IPO of 45,00,000 equity shares of Rs10 each for cash at a premium to be decided through the 100% book building process. The scrip touched an intra-day high of Rs261 and a low of Rs150 and recorded volumes of over 2,00,00,000 shares on BSE.

Precision Pipes an Indian maker of automotive and appliance components, rose as much as 17% on its trading debut on BSE toughing a high of Rs175. The shares were sold at an issue price of Rs150. The scrip finally ended at Rs138 at a discount of 7.5%. The company raised Rs750mn selling 5mn shares last month. The funds raised are being used to expand two of the company's five plants and to set up two plants to start exports. The scrip touched an intra-day high of Rs175 and a low of Rs132 and recorded volumes of over 62,00,000 shares on NSE.

TTML advanced 3% to Rs57 after the company announced that the Department of Telecommunications (DoT) has given its "in-principal" approval to the company for starting GSM mobile services under the dual technology norms. The DoT has also cleared the plan of the unlisted Tata Teleservices to kick off GSM services across the country. The scrip touched an intra-day high of Rs58 and a low of Rs55 and recorded volumes of over 2,00,00,000 shares on NSE.

Idea Cellular gained 1.5% to Rs139 after the company said that the Department of Telecommunications (DoT) issued Letters of Intent to the Company for providing Unified Access Services (UAS) in nine Service Areas viz. Kolkatta, West Bengal, Assam, Karnataka, Orissa, North East, Jammu & Kashmir, Punjab, Tamil Nadu (including Chennai). The scrip touched an intra-day high of Rs141 and a low of Rs137 and recorded volumes of over 84,00,000 shares on NSE.

What the FIIs are doing

FIIs were net buyers of Rs1.7bn (provisional) in the cash segment on Friday while the local institutions were net buyers of just Rs19.2mn. In the F&O segment, foreign funds were net sellers of Rs4.63bn.

On Thursday, FIIs were net sellers of Rs6.31bn in the cash segment. Mutual Funds were net buyers of Rs464mn on the same day.

Axis Bank, Reliance capital, Moser Baer, Shree Cement

Reliance Capital
Research: Macquarie
Rating: Outperform
CMP: Rs 2,768

Macquarie has initiated coverage on Reliance Capital with an ‘outperform’ rating and a target price of Rs 3,392, with a 23% potential upside. The company looks set to make a serious breakthrough into multiple segments of retail financial services. Macquarie believes the domestic financial services sector is in a period of high structural growth. The retail side of this is being driven by chronic under-penetration, which is being unlocked by changing demographics and greater availability and reach of products. The wholesale segment is being driven by significant acceleration in investment activity in the economy. Reliance Capital is entering a critical phase in most of its businesses, where it will start to grow aggressively and give a massive push to break into the top three.

It has already established its credentials by surging to the top spot in the mutual fund league tables, and is now starting to make an impact in insurance and broking/wealth management as well. Its core strengths remain its strong brand name, aggression in the market, deep pockets and execution capabilities. The stock looks expensive at >11x P/BV, even on a consolidated basis, but its holding-company-like structure makes it difficult to view it on traditional valuation parameters. Also, the market is factoring in its large unrealised gains on the equity portfolio, some of which include strategic holdings in other group companies.

Moser Baer
Research: JP Morgan
Rating: Underweight
CMP: Rs 289

JP Morgan retains its negative view on Moser Baer with a sum-of-the-parts based June ’08 price target of Rs 250. Risks to the target price include a sharp price increase in optical media. Monthly sales of Taiwanese optical media manufactures fell 15% month-on-month. December monthly sales also fell 36% year-on-year (YoY), indicating continued original equipment manufacturer (OEM) pricing pressure. Optical media sales fell 14% quarter-on-quarter (QoQ) and 30% YoY during the second quarter. JP Morgan expects subdued pricing to continue, especially in DVD-R, leading to weak margins. On January 4, ’08, Warner Brothers (WB) announced that it will exclusively support the Blu-ray format. This is a major positive for the Blu-ray format as WB has the largest market share (18-20%) in the US and earlier supported both formats. As greater clarity emerges on the next-generation DVD format, JP Morgan believes that adoption will accelerate, but expects significant volumes only in late ’09. The photo voltaic business may face significant margin pressure going forward, led by higher poly-silicon prices in the near term and rising competition in the long term once the supply tightness eases.

Axis Bank
Research: CLSA
Rating: Buy
CMP: Rs 1,167

Axis Bank can trade up to 25x 12-month forward P/E based on its strong growth trajectory, and reiterates ‘buy’ rating on the stock with a price target of Rs 1,300. Axis Bank’s Q3 FY08 profit grew 66% YoY to Rs 310 crore, ahead of estimates, led by strong growth in core operations and higher treasury gains. Despite moderation in sector loan growth, Axis Bank’s loan book grew 50% YoY led by corporate and agricultural credit. Retail loans as a percentage of total loans fell to 25% (29% in December ’06). Despite strong loan growth, asset quality improved, gross non-performing loans (NPLs) fell 5% YoY, while net NPLs declined 12% YoY. Gross NPLs are now at 0.8% of advances and coverage has improved to 50%. Net interest margins (NIMs) expanded 90 bps to 3.9%, of which, 30 bps was due to the bank’s recent capital-raising.

Cost of funds declined by 45 bps QoQ due to capital-raising and aggressive growth in low-cost demand deposits. Cost pressures for Axis Bank continue; while employee costs have increased 51% YoY, other operating costs have risen 75% YoY (partly due to rising rentals for new branches). Treasury gains also increased sharply due to a buoyant equity market and some reversal of mark-to-market hit on the bank’s bond portfolio. Axis Bank, with Tier-1 capital of 12.6%, is well-capitalised to leverage on rising credit demand.

Shree Cement
Research: Merrill Lynch
Rating: Neutral
CMP: Rs 1,325

Shree Cement’s operating performance in Q3 FY08 was a tad better than expectations due to lower-than-expected rise in costs. Q3 EBITDA/tonne was up 2% QoQ versus flattish forecast. Contrary to expectations, Shree’s power and fuel costs fell 8% QoQ in Q3 FY08. Shree stated that higher blending had offset the impact of rising pet-coke prices. Overall, operating cost per tonne was up 3% QoQ, in line with the improvement in cement prices. Reported net profit fell 66-67% YoY to Rs 35 crore, due to accelerated depreciation. For the industry, the window of opportunity to increase cement prices is short (1-2 quarters), as nearly 49 million tpa (mtpa) of new capacity is expected to be commissioned by March ’09. Merrill Lynch is also uncomfortable about the recent uptick in clinker inventory across the industry, including North India.

The upside to cement prices in the North may be capped in the near term due to recent large capacity expansions by both Binani and Shree Cement. Merrill Lynch expects Shree to post flattish earnings in FY09E. Despite likely strong volume growth of ~30% YoY, FY09-EBITDA growth may be modest at ~8% YoY due to forecast of a downturn in cement prices by end-CY08. Shree is evaluating greenfield capacity expansion in Madhya Pradesh as part of its long-term plans. This is unlikely to impact cash flows over the next year or so. In the next six months (by Q1 FY09E), Shree will commission further 1.5 mtpa expansion at Ras, thereby taking its composite capacity to 9 mtpa versus 7.5 mtpa currently.

Gold .. the bullish trend continues

Gold prices strike record high for fourth consecutive day

Gold struck record new high for fourth consecutive day on Friday, 11 January, 2008. Prices struck $900/ounce mark earlier in the day but ended the day around $4 higher against previous close. Rally in gold continued to be spurred by comments from Federal Reserve Chairman, Ben Bernanke, who hinted at another interest rate cut and this sent the dollar tumbling down against the rival currencies. Silver prices too gained on Friday.

Gold generally moves in the opposite direction of the U.S. currency. Gold, as a dollar-denominated commodity, suffers from dollar strength.

Comex Gold for February delivery today rose $4.1 (0.5%) to close at $897.7 an ounce on the New York Mercantile Exchange. During intraday trading prices rose as high as $900.1/ounce. This year, prices have gained 7% till date.

Friday’s closing price was the highest price after a record $873 that gold hit on 21 January, 1980.

Comex Silver futures for March delivery rose 9.5cents (0.6%) to $16.37 an ounce. Friday’s closing price is an all time high price equaling the one reached on 7 November, 2007 (a twenty six year high price at $16.275). Silver has gained 9.4% in 2008. The metal had climbed 15.5% in FY 2007. The metal also has gained for seven straight years.

Gold witnessed the greatest annual gain in twenty eight years by gaining $200/ounce (31%) in FY 2007. In 2006, silver had jumped 46% while gold gained 23%.

It's all about Power!

Power utility stocks have seen good gains in recent months, further upside depends on their ability to deliver on promises.

Power utility stocks have been a hit with investors since the last few months with stocks of nearly all major companies beating the BSE Sensex by a good margin.

The outperformance comes as a surprise, considering that stocks of power utilities are typically valued on a price-to-book value basis, since they earn fixed returns and a steady or a predictable cash flow and, there has been no unusual jump in their earnings recently.

Traditionally, stocks of power utilities have been valued between 1-2 times their respective book values. In terms of costs, including fuel expenses, interest and depreciation, all of it is pass-through and are passed on to the consumers so as to ensure that power utilities earn the fixed rate of return of 14 per cent on the shareholders funds (return on equity or RoE).

The conventional method of valuations though now seem to have gone for a toss as most of these companies are trading at about 4-5 times their respective book value and, their PE multiples are now at over 30 times FY07 earnings.

What's changed? To know the factors responsible for this up move and to know if there is still power left in these stocks, read on. Much of the action was started with the announcement of ultra mega power projects (UMPP), followed by the controversy over nuclear power in the country.

By that time, the market was convinced that the government is not only aiming for the ambitious capacity additions of 78,577 megawatt (MW) during the Five Year Plan ending 2011, but also, a large part of it is very likely to be achieved.

Their belief was further fuelled by the government's initiatives such as allocation of coal mines and allowing merchant power. The listing of Power Grid at premium valuations instilled more confidence among investors.

However, the most recent trigger in the sector, says Deepak Jasani, head of retail research, HDFC Securities, “For the last few months, there has not been any fresh trigger for the re-rating of the power utility sector apart from the hype built over the Reliance Power IPO. Re-rating of stocks in this space is happening based on relative valuations with respect to various parameters like capacity (existing and planned), book value, etc, when compared with the Reliance Power valuations.”

Relative parity The forthcoming IPO of Reliance Power (RPL) has had a big rub-off on valuations. To give some numbers, based on Reliance Power's IPO price, at lower-band, of Rs 405 per share, the market is valuing the company at Rs 91,530 crore, in terms of market capitalisation. At the IPO price, its price to book-value per share works out to over 7 times.

There is nothing exceptional in the case of RPL, which justifies a premium valuation over others. Analysts say, for the six projects totaling 7,060 MW and estimated to cost Rs 31,789 crore, for which the funds are being raised in the IPO, the RoE for RPL is unlikely to be significantly higher than the usual 14 per cent. That's even after considering some upside potential in the case of the 3,960 MW Sasan-based ultra-mega power project and merchant power capacity.

Now compare this with NTPC, India's largest power producer and the sixth largest coal-based producer in the world, which currently has an installed capacity of about 28,000 MW (including about 1,000 MW through joint ventures) and a RoE of 14.9 per cent (for FY07). For NTPC, the price to book-value works out to 4.6 times.

Notably, NTPC has already undertaken various projects, which will see its capacity increase to over 50,000 MW by 2012. And by 2016, its capacity should stand increased to over 75,000 MW. Notably, NTPC's cash generation too, estimated at over Rs 10,000 crore in FY08 (and likely to grow at over 10 per cent annually), is sufficient to fund its growth plans, with little contribution from loans.

This gap in the valuations not only exists vis-à-vis NTPC, but to a large extent with other players as well. So, either RPL is over valued or the other power utility stocks are under-valued. Notably, as other stocks are catching up, at this point in time, based on historical valuation methods (price to book-value), all of them appear to be over-valued.

Says Srinivas Macha, vice president, Aranca, a global investment and research service provider, “In India, there seems little justification for such rich valuations as there is very little to show by way of performance. All the issues that dog the power sector in India such as high technical and commercial losses at 50-60% -- among the highest anywhere in the world, less than 50% of realisation of all power that is generated, inept state-run utilities with poor record of recovery, populist measures such as subsidies and so on, persist.” While things are improving, it's still a long way to go.

Growth story There are other things that seem to partly support the rising valuations. For one, the power sector is now being perceived as a growth sector, especially after many power projects have started to roll. In each of the last three five-year plans viz. 1992-97, 1997-2002 and 2002-07, the average total capacity addition has been 51.33 per cent of targeted capacity.

But, in the current plan (2007-12), key plant equipment (boiler, turbines and generators) for over 60% of the planned addition of 78,577 MW has already been ordered. So, there is greater visibility in terms of what is aimed and what is likely to be achieved. These developments too are playing positively on stock valuations, as it should result in higher earnings growth for companies.

Among other key fundamental changes that are responsible for the rally in the stocks of power utilities, says Amitabh Chakraborty, president, equity, Religare Securities, “The power utility stocks have been re-rated because of huge demand-supply mismatch and increased attention from the government. Utility returns were earlier capped and linked to the bank rate. So, there were no incentives to perform. Now, there is potential to earn higher returns by setting up merchant plants. Secondly, the ultra-mega power plants provide scale of economies for new power generation companies, and gas availability has also improved. Overall, all this is good news.”

Adds Krishna Kumar, fund manager and head of research, Sundaram BNP Paribas Mutual Fund, says “developments such as better fuel linkages, de-blocking of the coal mines for the private and public sector power generation companies and allowing merchant power generation, have improved the outlook of these companies.”

Not to forget, India is a power deficit country, especially when it comes to the energy requirement of the country. In the light of rising GDP thus, there is a long way for power generation companies to scale up their businesses. This has also led the private players to share the growth, and their participation is seen rising.

Merchant power The focus on merchant power, where power producers can earn higher returns compared to the traditional 14 per cent RoE, is also viewed as a key development, as it provides greater incentives to set up capacities.

With respect to merchant power, power producers can sell power at market determined prices, which in current scenario, may go up to as much as Rs 7 per unit on spot-basis, as compared with Rs 1.50-2.50 per unit, thanks to the huge demand-supply gap.

On the flip side, while the equation looks favourable now, it could change in a situation where supply exceeds demand and, buyers refuse to pay a high premium. Secondly, since the profitability will depend on market dynamics, besides, offtake commitment and timely payment by the buyer (of power), the lending community (banks, institutions, etc) too needs to be comfortable with lending to such projects.

Simply because, in case of merchant power plants, the risk will tend to be relatively higher. And due to such reasons, analysts believe that it will be difficult for any company to have an exposure of more than 15-20 per cent of their power generation portfolio, in merchant power plants.

Says an analyst, “For a company like NTPC, dedicating a 2,000 MW plant on merchant basis seems possible, as it has a strong balance sheet and equally robust profits, which can be used to service the debt, should anything go wrong. But, for a smaller company, debt servicing could become an issue in such an event.”

In the best case scenario (and considering a RoE of 25 per cent for merchant power plants), the blended RoE is unlikely to go beyond 17 per cent. In short, profits are unlikely to rise significantly, purely based on this factor alone and, will hinge largely on the fresh addition to existing capacity.

Is the power run over? While there's no doubt that these various developments are positive for the sector, the run up in share prices also suggests that the market seems to have already factored in the growth that is expected to accrue over three to five years from now.

But, there are many who continue to be bullish on the sector, Says Amitabh Chakraborty, “We are positive on the sector.” While some others believe that current valuations are either fair or on the higher side, they also suggest that further moves will depend on the listing of RPL and subsequent moves.

As per analysts estimates, factoring in the future growth plans of the bigger companies, the price to book-value for NTPC works out to around 2 times, while for Tata Power its about 1.8 times and for Reliance Energy (only power business) its about 1.6. These are close to fair values as per traditional valuation methods.

To sum up, in the short-to-medium term, there is little upside, if any, left from here on. But, going forward (long run), further upsides should come based on events including companies securing new projects, companies reporting satisfactory progress with regards existing projects and the government continuing to give attention to the sector.

Daily Technical Futures - Jan 14 2008

Daily Technical Futures - Jan 14 2008

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Market Outlook - Jan 14 2008

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