Pre Session Commentary - July 7 2008

The Indian Market is expected to have a positive opening on the back of mixed global cues. On Friday, the Indian market closed in green with a smart recovery. Market neglected the weak European market and inflation rate, which touched a fresh high of 11.63% for the week ended 21st June 2008 as against 11.42% of the previous week. The domestic market tumbled at opening but soon started to recover on the back of buying interest from the hammered down sectors like realty, capital goods, power, banking and oil stocks. Further it extended its gains to close in positive zone. The BSE Sensex closed above 13,400 points today and NSE Nifty above 4,000. All indices except Metal closed in green and among those Capital Goods, Reality, Power Oil & Gas and Bank stocks were in limelight as witnessed most of the buying pressure. The Capital Goods and Reality indices closed with gain of more than 6%. The BSE Sensex closed higher by 359.89 points at 13,454.00 and NSE Nifty ended up by 90.25 points at 4,016.00. We expect that market may gain some ground during the trading session.

US markets were closed on Friday due to the Independence Day holiday.

Today the major stock markets in Asia are trading mixed. Asian markets declined in the initial trading, on the concern of falling global growth that is affecting the demand for goods and commodities. Further, the markets gained some strength.

Hang Seng index is trading higher by 99.69 points at 21,523.51 along with Taiwan Weighted trading up by 7.92 points at 7,233.33 while Japan’s Nikkei trading down by 8.43 points at 13,229.46.

The FIIs on Friday stood as net seller in equity and net buyer in debt. The gross equity purchased was Rs3,309.80 Crore and the gross debt purchased was Rs1,235.90 Crore while the gross equity sold stood at Rs4,012.20 Crore and gross debt sold stood at Rs76.70 Crore. Therefore, the net investment of equity reported was (Rs702.50) Crore and net debt was 1,159.20 Crore.

The rupee gained 14 paise to close at 43.15/16 against the US currency after a smart rally in local equity markets and on some dollar selling by foreign banks. In active trade at the Interbank Foreign Exchange (Forex) market, the local unit opened slightly better at 43.25/26 and improved further to settle the day at 43.15/16 against yesterday''s close of 43.29/31 a dollar.

Today, Nifty has support at 3,942 and resistance at 4,111 and BSE Sensex has support at 13,214 and resistance at 13,748.

Market may remain volatile

The market may witness cautious trend as US Market was closed on Friday and Asian indices are exhibiting mix trends in the morning trades. Investors should maintain caution as profit taking at higher levels may pull down the market. Among the local indices the Nifty could test 3975 and 3920 on the downside while on the upper side it may move up to 4050. The Sensex has a likely support at 13300 and may face resistance at 13600.

US Maket was closed on Friday on account in Independence Day of US.

Trading Calls - July 7 2008

Nifty (4016) Sup 3950 Res 4080

Buy BHEL (1500)
SL 1480 Target 1540, 1550

Buy PFC (106)
SL 101 Target 113, 115

Buy ONGC (876)
SL 868 Target 892, 898

Sell RPL (171)
SL 175 Target 166, 164

Sell Essar Oil (179)
SL 183 Target 170, 168

Battle shifts to politics!

A wise man thinks it more advantageous not to join the battle than to win.

Though the key indices registered yet another weekly loss, there is some hope for the bulls. For a change, the action would be more on the political front for the earlier part of this week. The battle-lines have been drawn and most key players have made their positions more or less clear. With the SP backing the N-deal, chances of early elections have reduced. Still, there may be some surprises - positive or negative. The deal itself may run out of time due to US elections. The problem with parties like the SP, the latest to offer support to a troubled government, is that they talk before the walk. The SP has reportedly started demanding that private oil companies like RIL, Essar and Cairn pay windfall profit tax. Most market participants may view this as a proxy war between the Ambani brothers as Anil Ambani is ‘close’ friends with the SP leadership.

Back to markets, we expect a cautious opening as Asian markets are mixed. The Hang Seng and Shanghai have posted strong gains. Other regional markets are either flat or marginally in the red. In the US on Thursday, the Dow Jones ended up while the Nasdaq and S&P 500 were almost unchanged. Wall Street was closed on Friday due to the Fourth of July holiday. European markets ended lower on Friday.

The gains in the Indian market on Wednesday and again on Friday suggest that the bulls still have some fight left in them. F&O data indicates that the market could rise slightly more before resuming the southward march. The Nifty July Futures shed some open interest on Friday while the discount on them fell by about 10 points. The open interest in stock futures too increased. At the same time, there was build-up in puts while calls saw some unwinding.

One still can't say with absolute certainty that the ‘bearish’ phase is over. There are still considerable headwinds facing global and Indian markets. Further negative news is not ruled out. Crude oil remains the biggest joker in the pack. Technically, the key levels to watch out for are 3848 on the way down and 4325 on the higher side (Ah, when will it come!).

For India, the near-term trigger may come from the latest quarterly results. In a short time we would know how India Inc. is coping with multiple headwinds like rising inflation, higher borrowing costs and slowing demand. With overall expectations low, there could be some positive surprises.

The FIIs were net buyers of Rs3.72bn (provisional) in the cash segment on Friday while local institutions pulled out Rs970mn. In the F&O segment, they were net buyers of Rs1.2bn.

On Thursday, the FIIs were net sellers of Rs7.02bn in the cash segment, bringing their year-to-date outflows to $6.5bn. Mutual Funds pumped in Rs2.42bn on the same day.

The MSCI Asia-Pacific Index lost 0.4% to 132.24 at 10:17 a.m. Tokyo time, with about three stocks retreating for every two that rose. The regional benchmark has declined for the sixth day out of seven, and has dropped 16% this year.

Japan's Nikkei 225 Stock Average fell 8 points to 13,229, a 13th consecutive decline and extending its longest losing streak since 1954.

The Hang Seng in Hong Kong was up 254 points at 21,667 while the Shanghai Composite index in China surged 110 points or 4.1% to 2780. The Straits Times in Singapore rose 7 points to 2900 and South Korea's Kospi Index slid 12 points to 1566.

The Taiex in Taiwan added 13 points at 7241 while Australia's ASX/S&P 200 Index retreated 106 points or 2.1% at 4975.

European shares ended lower on Friday, marking a fifth weekly decline amid persistent worries about the health of the financial sector even as UBS said it could avoid losses in the second quarter and that it did not need to raise any fresh capital.

The pan-European Dow Jones Stoxx 600 index dipped 1.3% to 279.53, extending this week's retreat to 2.7%. It's fifth straight weekly drop is the longest losing streak since a seven-week fall ending January 25.

The Dow Jones Stoxx 600 index had posted strong gains on Thursday, after European Central Bank (ECB) President Jean-Claude Trichet took a neutral stance on interest rates after hiking a key interest rate by 25 basis points to 4.25%.

National benchmark indexes fell in 17 of the 18 western European markets. UK's FTSE 100 closed down 1.2% at 5,412.80, while Germany's DAX 30 fell 1.3% to 6,272.21 and the French CAC-40 dropped 1.8% to 4,266.00.

Shares of regional financial firms fell after Goldman Sachs said European banks may need to raise as much as US$141bn to shore up their capital. Bradford & Bingley tumbled to the lowest since 2000 after TPG dropped plans to buy a stake in the UK mortgage lender.

British Airways slumped as crude traded above US$144 per barrel.

Crude oil traded near $144 a barrel in New York as Iran signaled that it will maintain its nuclear program policy a day after responding to an incentives package by world powers to halt uranium enrichment.

Crude oil for August delivery traded at $143.75 a barrel on the New York Mercantile Exchange at 11:03 a.m. in Singapore. It fell as much as $1.66 to $143.63 a barrel earlier today.

In the emerging markets, the IPC index in Mexico was down 0.45% at 28,338 while the RTS index in Russia dropped 1.1% to 2187. The ISE National-30 index in Turkey was up 1.1% at 41,428.

Climate change will be among the top topics at this week's summit of the Group of Eight (G8) leading industrial nations, according to Japanese Prime Minister Yasuo Fukuda.

The summit, to be held in Japan, formally begins Monday among the heads of state of the eight industrialized countries in the group: The US, Japan, Germany, the U.K., France, Italy, Canada, and Russia

The G8 discussions could extend further on Wednesday when the group opens its doors to leaders of some of the major developing nations: China, India, Brazil, Indonesia, Mexico, South Korea and South Africa.

Last trading session of the week ended with smart gains. The see-saw trend continued over the Indian bourses as bulls again made a come back after getting hammered on Thursday.

After starting off the day on a flat note, key indices gained momentum led by gains in the index heavyweights like L&T, RCom, ICICI Bank and HDFC. Barring the Metal index, all the other BSE Sectoral indices ended with smart gains with BSE Realty index drooping over 7.5%. Even the Mid-Cap and the Small-Cap indices ended over 1.5% each.

Finally, the BSE benchmark Sensex gained 359 points to close at 13,454 and the Nifty index added 90 points to close at 4,016.

Archidply Industries Ltd. started trading at Rs74.55 on BSE against its issue price of Rs74. The scrip ended at Rs50.45 translating into a discount of 47% hitting an intra-day high of Rs74.55 and a low of Rs48.80 recording volumes of over 1,00,00,000 shares.

India Cement surged by over 4.5% to Rs130 after HSBC raised its stake in the company to 8.43%. The scrip touched an intra-day high of Rs131 and a low of Rs122 and recorded volumes of over 1,00,000 shares on BSE.

Panacea Biotec rallied by over 9% to Rs303 after the company announced that it has forayed into healthcare delivery by way of entering into collaboration to set-up 220 bed multi specialty hospital in national capital region of Delhi at Gurgaon, India. The scrip touched an intra-day high of Rs307 and a low of Rs281 and recorded volumes of over 20,000 shares on BSE.

Steel Strips ended at Rs115 down 3.3%. The company announced that the board of directors would meet on July 04, 2008 to consider and allot optionally convertible bonds to Tata Capital Ltd up to an amount of Rs200mn on preferential basis. The scrip touched an intra-day high of Rs119.95 and a low of Rs111.

L&T advanced by 6.5% to Rs2379 after reports stated that the company is in talks with a consortium of banks to raise ~Rs170bn as debt to fund its plans of entering the power generation segment. The company is in discussion with a consortium of international banks, including ICICI Bank and SBI to fund four power projects, each with a capacity of over 1000 mega watt, reports stated.

Reliance Power advanced by over 4% to Rs136 following reports that the company is planning to buy a stake in an Australian firm that owns coal mines and has an enterprise value of US$3bn. The scrip touched an intra-day high of Rs142 and a low of Rs127 and recorded volumes of over 82,00,000 shares on BSE.

Flawless Diamond advanced by 2% to Rs48 after the company announced that it is opening up its 21st retail outlet at in Andheri. The scrip touched an intra-day high of Rs52.8 and a low of Rs44 and recorded volumes of over 20,000 shares on BSE.

Educomp Solutions edged higher by half a percent to Rs2784 after the company announced that it has entered into a strategic alliance with Designmate to market its product, Eureka.in. Educomp has bought 5,000 liceBSEs of Eureka. in an exclusive rights for all private schools in India.

Educomp has bought 5,000 license of the international award-winning 3D animated product used for learning science and mathematics and available in more than 1,400 schools. The scrip touched an intra-day high of Rs2869 and a low of Rs2685 and recorded volumes of over 79,000 shares on BSE.

Reliance Industries in talks to acquire downstream assets of Chevron. (ET)

Central Electricity Authority has submitted an alternative gas distribution plan to the Government for 18mmscmd of Reliance Industries’ D-6 gas.(FE)

BPCL has entered into an equal JV with the Kenya Pipeline Co for setting up LPG bottling plant in Kenya.(BL)

Tata Motors has increased its stake in Automobile Corporation of Goa by 3% to 40.6%. (ET)

L&T plans to acquire a research company to expand its technological skills in deep sea drilling.(BS)

Tata group firm Trent plans to invest Rs20bn in setting up 50 ‘Star Bazzar’ hypermarkets in India.(FE)

MTN Group may issue 20% fresh equity to RCOM as part of multi-stage merger deal.(BS)

ONGC Videsh has been short-listed to bid as operator for deepwater blocks in Angola.(BL)

Cadila Healthcare to restructure its consumer business and create a single listed entity by early 2009.(BL)

Coal India plans to invest ~15bn for setting up 28 washeries with total capacity of 98mn tons. (ET)

Ranbaxy has successfully completed the phase II clinical trials for the first malaria drugs.(BL)

Idea Cellular plans to invest Rs6.47bn for the rollout of operations in Mumbai circle.(BS)

BSNL has asked for allocation of 10 MHz broadband wireless spectrum on an urgent basis.(BL)

M&M plans to start selling a diesel pick-up truck in the US.(BS)

GM to invest Rs12bn at its Talegaon unit near Pune.(BS)

ChrysCapital has acquired 7-8% stake in Amtek Group for Rs3.5bn.(BL)

GMR is planning a scheduled commercial airline by the end of 2010.(BS)

Areva T&D successfully type-tested its first 1,200 KV capacitor voltage transformer.(BL)

GoAir has reduced the number flights to 800 from 1,000 earlier.(BL)

Binani Cements to invest US$100mn on expansion for its plant in China and US$125mn to buy plants in Mauritius and West Asia.(BL)

Greenply Industries to set up laminate plant in Himachal Pradesh with an investment of Rs1.2bn.(BS)

Havells India plans a capex of Rs2bn on Greenfield and brownfield projects in the current fiscal.(BL)

Marks & Spencer proposal for 51% FDI in single brand retail business has been cleared by the Government.(BL)

FMCG companies may hike prices in their respective brands this month.(FE)

GNFC shut several manufacturing units due to technical problems. (DNA)

US-based Regal Entertainment and other PE Funds in talks with promoters of Pyramid Saimira Theater for ~14% stake. (ET)

Dabur India plans to focus on over-the counter products for lifestyle problems. (ET)

Biocon plans to hive off its research & development activity to a separate entity. (ET)

Reliance Power may be allowed to use excess coal from captive coal blocks of Sasan Ultra Mega Power Project. (ET)

IDFC set to build a pan-India logistics chain for creating industry specific and tailor-made facilities. (ET)

Binani Cement to consider long term bulk cement supply contract with real estate developers. (ET)

Essar Oil in race to acquire 50% stake in Kenya Petroleum Refineries. (ET)

Daimler-Hero JV to start in 2010, to make 70,000 trucks. (ET)

DoT to float draft cabinet note for auctioning 773 acres of land owned by VSNL. (ET)

UB Group to invest Rs10bn in three years to hike its brewing capacity.(BS)

Gammon Infrastructure plans to foray into waste water management.(BS)

US based distress fund Wilbur Ross may invest in SpiceJet.(BS)

Ranbaxy, Cipla, Wockhardt, Nicholas Piramal and Cadila, to soon withdraw 60 drugs combinations from the market.(BS)

L&T to restructure the engineering construction and contract divisions into four entities in 2-3 years.(BS)

Hindustan Unilever has implemented ploughshare mixing technology in its soap manufacturing plants to cut costs by 30%.(BS)

Whyte & Mackay may takeover Glen Moray, the Elgin-based distillery.(TOI)

Economic Front Page

Private Oil companies may have to pay windfall profit tax. (ET)
Direct tax collections grew 38.6% in the first quarter to Rs573.7bn.(BL)
Kenya government has invited Indian companies for participation in exploring activities.(BS)
The Government plans to allow proposal of existing GSM operators keep extra spectrum with them. (FE)
Andhra Pradesh to account for 40% of cement production in three years. (BS)
The Central Electricity Authority to look into quality issue of plant supplied by Chinese companies. (BS)

IT Earnings Preview - Q1FY09

IT Earnings Preview - Q1FY09

Weekly Review - July 7 2008

Weekly Review - July 7 2008

BL Kashyap & Sons Conference Call

BL Kashyap & Sons Conference Call

ING Vysya Bank

ING Vysya Bank

Deccan Chronicle

Deccan Chronicle

BHEL

BHEL

Weekly Technicals - July 6 2008

The markets ended with losses for the seventh week in a row as they continued to be haunted by global market cues, record crude oil prices, rising inflation and political worries.

The Sensex crashed to a low of 12,822 during the week - down almost 1,000 points from its previous close. However, some bargain hunting in beaten-down financial and realty stocks helped the index cut losses towards the end of the week. The index finally ended with a loss of 348 points at 13,454. It has shed a whopping 22.8 per cent (3,981 points) in the last seven weeks.

Among the index stocks, ACC, Maruti, Grasim and Reliance Infrastructure dropped 13-17 per cent last week. Tata Steel, Tata Motors, Ambuja Cements, ICICI Bank, Reliance Communications, ITC and Mahindra & Mahindra shed 7-12 per cent each.

On the other hand, BHEL surged nearly 9 per cent. Jaiprakash Associates, ONGC, Satyam and L&T gained 5-7 per cent each.

Political concerns, inflation worries and possible action by the RBI would continue to affect the markets in the short term. The market sentiment will also be driven by the earnings season.

Technically, the Sensex may drift towards its yearly support of 12,100. However, if the index manages to sustain above the 12,750-12,800 range in the short-term, there may be a pull-back rally upto 13,900 and 15,200. The index is likely to find support around 13,050-12,930-12,800 and resistance at 13,855-13,980-14,100.

The Nifty moved in a range of 315 points during the week. From a high of 4,163, the index dropped to a low of 3,848 and finally settled with a loss of 121 points at 4,016. The index tumbled over 22 per cent (1,142 points) in the last seven weeks. The Nifty shall seek support in the broad range of 3,750-3,850, below which it is likely to fall to 3,500.

via Business Standard

Dishman Pharma

Contract Research and Manufacturing Services (CRAMS) is expected to grow faster than other sub-sectors in the pharmaceutical industry. This is due to the expected ramp up in revenues as global pharma majors look to cut costs through outsourcing and strong operating margins for players which usually work on a ‘cost-plus’ base.

Early players, which are at the last leg of their capex cycle and have put together acquisitions that stretch from early stage to late-stage commercialisation of medicines, may stand to reap greater benefits from this trend. Dishman Pharmaceuticals and Chemical, a leading CRAMS player catering exclusively to innovator companies, appears a good bet, in this context.

Initially constrained by small size, low capacities and a business skewed towards fine chemicals, the company today has manufacturing capabilities focussed on patented molecules, key medicine intermediates and special chemicals.

CRAMS accounted for 75 per cent of net sales in 2007-08. Acquisition of Carbogen Amcis has given it the much-needed strength to carry out full-fledged CRAMS, with the subsidiary now contributing more than half of CRAMS’ revenues.
Taking stock

Our earlier recommendation on Dishman was a ‘buy’ at Rs 275 in February. The stock has held its ground even as the broader markets have fallen by 33 per cent in the period that followed. The company’s annual results strengthen conviction in the company’s growth prospects. Dishman managed to register strong growth on both sales (39 per cent) and profit terms (32.5 per cent) against an appreciating rupee (around 8 per cent).

Quite a few new contracts are lined up for execution in the next 12-18 months even as Dishman is engaged in advanced talks with major MNC clients for new orders.

Post-commissioning, its new units are expected to generate over Rs 500 crore each year at optimum utilisation (expected in two-three years). On a consolidated basis, taking into account losses in some subsidiaries and a poor performance from the marketable molecules segment (19 per cent of sales), Dishman’s net profit margins came down to 15 per cent from 16 per cent last year.
Investment rationale

Higher realisations from CRAMS business (with new contracts), good client management history and rupee depreciation are set to play out well for Dishman, which draws 90 per cent of its sales from exports. At the current market price of Rs 286, the stock trades at around 14 times its estimated per share earnings for 2008-09. This is at a fair discount to sector leader Divi’s Labs. The valuation is comparable to Piramal Healthcare (formerly Nicholas Piramal), which is a much larger player (but less exposed to CRAMS).
Changing dynamics

Dishman’s client dependence has been de-risked further with Solvay accounting for less than 14 per cent, against 20 per cent in the December quarter. Cumulatively, top five clients now account for around 35 per cent of the business compared to more than 45 per cent even a year ago.

Dishman’s FY-08 EBITDA margin was muted at 19 per cent. Several extraordinary and one-off costs took their toll. Plus, the marketable molecules business was hampered with unexpected price hike in raw materials. Going forward, coupled with 5-10 per cent price increases (management expectations) for that business and absence of the non-recurring expenditure, Dishman’s core margins are expected to be back to 22 per cent levels.

CRAMS is also expected to profit from higher capacity utilisation. Profit margins will also be aided by the fact that most of Dishman’s subsidiaries are expected to break-even this year.
Way ahead

There are several opportunities and challenges for Dishman over the next two years. The company is looking at new areas such as manufacturing high potency (hipo) products. Unit 9, which is expected to be operational from March 2009, would cater to these typically high-cost and low-volume products such as anti-cancer drugs, steroids, hormonal drugs etc.

Indian CRAMS players are involved in initial stages of these ‘hipo’ products whereas Dishman (benefiting from Carbogen’s specialisation) will target class 3 and 4 substances.

Margins of Dishman’s Vitamin D business (4 per cent of turnover) are expected to normalise at 18 per cent over the next two years.

Business from marketable molecules segment is expected to remain under pressure for the next two quarters (the China unit starting soon may provide some relief). Dishman’s bulk drugs JV in Saudi Arabia is unlikely to pay off before 2010 and much will depend on the speed of execution.

Lastly, the company could book forex losses (as against forex gains in last one year) on its $100-million forex loans as the rupee begins to depreciate, affecting near-term earnings.

Marico Industries

Inflation, rising interest rates and a slowing economy — if any set of companies is well-placed to weather this turbulent environment — it is a select set of FMCG makers. The FMCG business is not capital-intensive and generates high levels of cash; FMCG spends also make up a small, “core” portion of the consumer’s portfolio that is not immediately vulnerable to a cyclical economic slowdown.

Marico Industries, with a strong clutch of brands in personal products, hair care and edible oils, appears a good investment in this backdrop. Amidst spiralling input prices, strong brand equity in its traditional hair oil business has allowed the company to take periodic price increases without impacting volume growth or market share.

The company is also firmly ensconced in high potential FMCGs such as hair care, branded foods and male grooming, targeted at the affluent urban consumer. A healthy pipeline of new products and a successful retail services foray (Kaya Skin Care & Kaya Life) also have the potential to add significantly to earnings over the medium term.

The stock, trading at Rs 53 (16 times estimated FY-09 earnings), is at a valuation discount to the FMCG space (20 times forward earnings), not having participated in the recent up-move in the sector. The stock offers potential for a 15-20 per cent return, with relatively low downside risk.

Improving product mix

From relying mainly on coconut oil and edible oils for revenues, Marico Industries has in recent years expanded its portfolio through brand extensions and forays into lucrative niches such as post-wash conditioners, male grooming, skin care services and functional foods.

The hair oil portfolio, where Marico continues to be the national market leader, has been extended well beyond Parachute coconut oil, into value-added offerings such as Shanthi Amla, Hair & Care, Parachute Advansed and Parachute Jasmine.

With a 13 per cent growth in 2007-08, hair oil has been among the fastest growing segments within FMCGs over the past year, driven by consumer uptrading from plain to value-added oils and from unbranded to branded offerings.

Marico’s entry into the niche post-wash care market with Parachute After-Shower cream for men (42 per cent market share) and Silk N Shine for women (32 per cent) has resulted in strong market shares for Marico in both these markets.

The company has a strong new product pipeline in hair care, with nascent forays into cooling oils (Maha Thanda), hair care (Night repair cream) and kids shampoos and oil (Parachute Starz).

In edible oils, Marico has gradually exited the price-sensitive sunflower segment (Sweekar) and has focused on its premium Saffola franchise, which is strongly positioned on the health platform. Marico’s offerings of blended oils have delivered a 22 per cent volume growth in 2007-08 amidst rising edible oil prices, heavy competition and consumer down-trading to low-priced brands. Marico’s plans for Saffola include an expansion in blended edible oils and a foray into functional foods such as Saffola atta — targeted at diabetes and cholesterol management.

Changes in the product mix, with a higher proportion of premium products, have contributed to a sharp expansion in Marico’s operating profit margins from 9 to 14 per cent over the past five years.

A higher proportion of premium brands ensures that Marico retains strong pricing power to pass on input cost increases to consumers. Marico’s foray into the retail skin care services through Kaya Skin Clinics has showed good traction, growing 45 per cent over three years and attaining breakeven in 2007-08.
Inorganic route

Apart from nurturing a healthy pipeline of new products, Marico has also embraced inorganic growth through a string of domestic and overseas brand acquisitions. Domestic acquisitions have brought in strong regional brands such as Nihar and Oil of Malabar coconut oil and Manjal soap, which extend the company’s distribution reach. Marico’s overseas buys have focussed on building a brand and marketing presence in countries such as Bangladesh and the West Asian and African regions, which offer a large consumer market with good growth potential. This overseas presence entails some currency risks, but allows Marico to build brands in new geographies, with lower competitive pressures than in the Indian market.

Though some of these acquisitions (Sundari LLC, Enaleni Pharmaceuticals) are yet make a significant contribution to numbers, the international business has managed a sharp 50 per cent growth in 2007-08 (21 per cent organic).

The string of acquisitions, costing Rs 550 crore in all, has been funded by a QIP offer (Rs 151 crore) and pegged up debt on Marico’s balance-sheet. However, both the debt:equity and interest cover remain well within comfort zone.
Financials

The company closed 2007-08 with a 22 per cent growth in revenues (17 per cent organic) and a 27 per cent growth in sustainable net profits on a consolidated basis. Compounded sales and profit growth rates for the past five years, stand at 21 per cent and 30 per cent respectively.

via BL

Prime Focus

With a strong presence in the niche area of post-production services for films, a unique cross-border business model and a good pipeline of film projects, Prime Focus is a preferred pick within the media sector. A substantial correction in recent months has the stock trading at about 15 times its likely FY ’09 consolidated earnings per share, which is reasonable given the high visibility in earnings growth. An investment can be considered in the stock with a three-year perspective.

Prime Focus has an estimated 60 per cent market share in India. With six facilities across Mumbai, Hyderabad and Chennai, its domestic business continues to grow at a fast pace, as the use of visual and special effects in Indian films is on the rise. The business is highly profitable with operating margins at 50-60 per cent, although higher employee costs have moderated margins in recent quarters. A large pipeline of 8-10 film projects in FY 09 should ensure a steady stream of revenues for the domestic operations.

Prime Focus has built an international presence with facilities spanning the UK, US and Canada. Its first acquisition in the UK (VTR) has paid off, with Prime Focus successfully turning around the company and the facility has begun to outsource work to India. As the London operation works more on advertising film projects, it has been affected by the advertising slowdown witnessed in these markets in recent times.

Prime Focus acquired Frantic Films and Post Logic Studios for $43 million in late 2007, which gave it access to facilities and talent pools in key markets of Los Angeles, New York, Vancouver and Winnipeg. The targets have combined revenue of $25 million (Rs 107 crore) and have been associated with films such as Spiderman 3, Fantastic Four and Superman Returns. These businesses are yet to be consolidated with Prime Focus and may not contribute to profits in the next one year. However, the presence of cross border facilities have helped create a unique business model, where a significantly higher amount of work can be carried out by facilities across time zones in a cost efficient manner. Prime Focus’s tie up with Warner Bros’ Motion Picture Imaging appears to be recognition of the merits of this international operation. The benefits of the strategy are likely to pay off from FY ’10. An unexpected slowdown in domestic operations is a key risk to earnings estimates. The stock’s small-cap status may call for careful timing of investments.

Market - long term outlook

We had expected the four-year long bull-phase to terminate in the first quarter of 2008 in our long-term outlook at the beginning of this year.

Our outermost target for the Sensex for 2008 was at 13700. Now that this level has been conclusively breached, a review of the long-term counts is called for.

The signs of a significant bull-market top were littered all over in the last quarter of 2007 – irrational price movement, excessive speculation, unjustifiable valuations, bottom-rung stocks coming out of wilderness to enjoy their days in the sun, surfeit of exorbitantly priced IPOs and so on. The party had to come to an end and it did at the peak at 21206 on January 11.

As explained in our yearly outlook, it is possible to anticipate a correction but difficult to judge the nature of the correction. We had taken the more optimistic view at the beginning of this year and anticipated the corrective move to halt at the first long-term support at 13700.

A halt here would have implied a sideways move between 13700 and 21000 for a couple of years before the up-trend resumed to take the Sensex beyond 30K.

But the decline below 13700 brings the next long-term supports for the Sensex at 11900 (50 per cent retracement of the up-move from 2001) and then 9703 (61.8 per cent retracement) in to focus.

We stay with our long-term count that the current down-move is the fourth part of the long-term cycle that began in 1980.

The fifth leg (upward) would then take the index beyond 25000 again. Caveat - decline below 9703 would need recasting of the counts.

The more difficult question is, how long would this down-trend last? As per Elliott Wave theory, corrections can extend from anywhere between 0.33 to 1.618 times the time consumed by the previous up-move.

The previous up-move lasted four years. That gives us the range between 16 to 77 months. Since the previous long-term correction from 1994 to 2003 was a long-drawn one, applying rules of alteration, the correction this time can be a sharp and swift one that ends in one to one- and- a- half years.
Second half of 2008

Though the Sensex appears to be hurtling lower in to an abyss right now, a three wave A-B-C movement downwards is drawing close to termination. A 1:1 relation between the A wave and the C wave gives us the target at 11206. Fifty per cent retracement of the bull market from 2001 gives us the support at 11900. The decline from January can halt somewhere between these two levels.

However, it needs to be borne in mind that the down-move from 21206 could be the first leg of the long-term correction. But once this leg ends, we would have an intermediate term up-trend that would provide some respite to the battered stocks.

The preferred view is that the index would halt in the zone between 11000 and 12000 and spend the rest of 2008 in a range between 12000 and 16500. Our outer targets for the year would be 18000 and 9700. We await clues from subsequent rallies to tell us how the rest of this correction will shape-up.

via Businessline