Don’t expect too much

A great obstacle to happiness is to expect too much happiness.

The bulls and most investors may been happy with last week’s gains. For the month, US stock indices (except Nasdaq) had their worst January on record, with the Dow losing 8.8%. Back home though, the Sensex and the Nifty fell by 2-3% in January. Still, one should not allow complacency to set in, as the outlook remains bleak. Much of the fears, relating to the health of the western financial systems and its global ramifications are still in place. A raging debate is underway on whether a bad bank be created to take toxic debt from troubled banks. While US President Barack Obama seems to be in favour of the plan, others like Joseph Stiglitz bag to differ. Obama’s much-hyped new stimulus is also facing stiff opposition from Republicans. Senate will take up the bill this week.

Global markets will be on edge this week ahead of monthly US jobs data. No big events are due in India for the time being. Politics will dominate headlines over the next few months. Today, we expect some softening after last week’s stellar gains.

RIL and RNRL will be in focus post the Bombay High Court order. Auto and cement companies will hog the limelight as they release monthly sales data. Satyam will continue to see action based on the news-flow.

FIIs were net sellers in the cash segment on Friday at Rs641.5mn (provisional) while the local institutions pumped in Rs3.98n. In the F&O segment, the foreign funds were net buyers at Rs668.2mn. On Thursday, FIIs were net buyers at Rs2.75bn in the cash segment.

Castrol India and Gujarat State Petronet will declare their results today.

L&T, BHEL, Wipro, HCL Tech and Bharat Electronics might gain amid news that Boeing Co. will buy aerospace structures and aviation electronics products worth at least $600mn, or Rs29.4bn, from seven India companies as part of the so-called offsets against winning a $2.1bn contract early in January to supply eight P-8I reconnaissance planes to the Indian Navy.

US stocks slid on Friday after government data showed that fourth-quarter GDP contracted at its fastest pace in well over two decades, capping the worst January for the Dow Jones Industrial Average and the S&P 500 index.

The Dow ended the day down 148 points, or 1.8%, at 8,000.86. The S&P 500 lost 19 points, or 2.3%, to 825.88. The Nasdaq Composite index shed 31 points, or 2%, to 1,476.42.

US stocks gained in the morning as investors welcomed news that fourth-quarter GDP report was not as bad as many economists had expected. Upbeat earnings from Amazon.com and a few other companies also helped stocks in early trading.

But the early euphoria soon fizzled out and stocks turned lower. Weak reports on manufacturing and consumer sentiment added to the grim sentiment, as did more layoff news. Speculation that Senate Republicans could derail the proposed US$819bn economic stimulus plan also weighed on the sentiment.

Stocks had tumbled on Thursday following bleak reports on earnings, housing and employment. That caused the Nasdaq and S&P 500 to break a four-session winning streak and the Dow to break a three-session advance.

It was the worst January ever for the Dow industrials and S&P 500, according to Stock Trader's Almanac data. The Dow lost 8.8% and the S&P 500 dropped 8.6% in the month. The Nasdaq's loss of 6.4% was eclipsed by last January's loss of 9.9%. That 2008 loss was the worst in the tech average's history.

Among the sector decliners during January, it was a particularly ugly month for bank stocks. According to some Wall Street observers, a weak January means a down year.

S&P market historian Sam Stovall has looked at the correlation going back to 1945. Since then, whenever the S&P 500 gained in January, the market continued to rise during the rest of the year 85% of the time, posting an average gain of 11.6% during those 11 months.

But, the statistics are less consistent when the market fell in January. Since 1945, a decline in that month yielded a decline in the next 11 months only 48% of the time, for an average loss in that period of 2.2%.

In the day's economic data, GDP growth plunged at a 3.8% annual rate in the fourth quarter of last year. It was the biggest drop in GDP since the first quarter of 1982, when it declined 6.4%. Economists had forecast that GDP would decline 5.4%.

In other economic news, the Chicago PMI, a regional reading on manufacturing, declined to 33.3 from a revised 35.1 in the prior month. Wall Street economists had expected the reading to come in at 34.9.

The revised reading on January consumer sentiment fell to 61.2 from an initial reading of 61.9, according to a University of Michigan report. Economists thought sentiment would hold steady. Confidence stood at 60.1 in December.

Amazon.com reported quarterly sales and earnings that topped analysts' forecasts after the market close on Thursday. Shares rallied 17% Friday afternoon, but failed to help the broader market.

Dow component Exxon Mobil reported the largest yearly profit in US history, earning US$45.22bn amid high oil prices. Its fourth-quarter profit fell 33% from a year ago. Nonetheless, results still topped analysts' forecasts.

Fellow oil company and Dow component Chevron reported higher quarterly earnings that topped estimates. Shares of both Exxon and Chevron ended lower.

Dow component P&G reported a higher quarterly profit that was nonetheless short of forecasts. The company also warned that full-year earnings would not meet its earlier forecast due to weakening demand. Shares fell 6.4%.

Caterpillar announced that it was cutting another 2,110 jobs at three Illinois production plant on top of the 20,000 job cuts announced earlier this week. Shares of the Dow component fell almost 3%.

US companies announced over 100,000 layoffs last week alone, including Starbucks, Boeing, Eastman Kodak and Target.

Treasury prices rose, lowering the yield on the benchmark 10-year note to 2.83% from 2.86% on Thursday. Treasury prices and yields move in opposite directions. Yields on the 2-year, 10-year and 30-year Treasurys all hit record lows last month.

Lending rates worsened. The 3-month Libor rate rose to 1.18% from 1.17%, according to Bloomberg.com. Overnight Libor rose to 0.30% from 0.22%. Gasoline prices rose three-tenths of a cent to a national average of US$1.846 a gallon.

US light crude oil for March delivery rose 42 cents to settle at US$41.86 a barrel on the New York Mercantile Exchange. Earlier it rose more than 4% to US$43.44. In a week of volatile trading, crude has fallen three out of five sessions. It ended the week down 10% and the month down 14%.

The dollar gained versus the euro and fell against the yen.

Gold futures rose, ending the week at their highest level in six months, as investors sought the safety of the metal amid grim economic reports, disappointing corporate earnings and mounting job losses. COMEX gold for April delivery rose US$21.90 to settle at US$928.40 an ounce. The benchmark contract has risen 3.5% this week and 4.9% this month.

Investors put money back into stock mutual funds over the past week, after withdrawing money in the previous week. For the week ended Jan. 28, investors poured US$6.5bn into stock funds. In the previous week, investors pulled US$138mn out of funds.

European stock indices ended higher after a volatile session, with BNP Paribas, Rio Tinto and Switzerland's Roche leading the gains amid deal-related news.

The Dow Jones Stoxx 600 index closed up 0.2% at 191.23, having bounced in and out of positive territory throughout the session. It declined earlier in the day after the release of unemployment data for the eurozone.

The French CAC 40 index closed down 1.2%, at 2,973.92, having dropped back below the 3,000 level earlier in the session. The UK's FTSE 100 index lost 1% to 4,149.64 and Germany's DAX 30 index fell 2% to 4,338.35.

Unemployment in the euro area rose to 8% in December from 7.9% in November. The latest reading represents a two-year high and compares to an unemployment level of 7.2% a year earlier. Inflation in the region, meanwhile, fell faster than expected, to a 1.1% rate in January from 1.6% in December.

European markets turned higher after figures showed that the US economy contracted less than expected in the fourth quarter. GDP growth plunged at a 3.8% annual rate in the fourth quarter of last year. It was the biggest drop in GDP since the first quarter of 1982, when it declined 6.4%. Economists had forecast that GDP would decline 5.4%.

Shares in France's BNP Paribas rose 1.7% in Paris. The bank agreed to a new deal to acquire parts of Fortis after the Belgian company's shareholders won a court battle to challenge an earlier deal. Under the revised agreement, BNP will take a much smaller stake in the Fortis insurance business than originally planned.

Other banks were also mostly higher, though shares of Dexia fell 7.2% after it announced a loss of about €2.3bn (US$3bn) in the final quarter of 2008. Dexia said it won't pay a dividend for the year and is also planning to cut 900 jobs and close its operations in several countries.

Markets ended the week with solid gains on Friday with the BSE benchmark Sensex rising over 2% and the NSE Nifty surging nearly 2%. The rally was led by the realty, metals’ and oil & gas stocks. However, the Pharma stocks were under pressure. Finally, the BSE benchmark Sensex rose 187 points to close at 9,424 and the Nifty rose 50 points to close at 2,874.

Among the 30-components of Sensex, 25 stocks ended in the green and only 5 stocks ended in the negative terrain. Among the major gainers in the Sensex were Reliance Industries, SBI, L&T and ITC. BHEL, Sun Pharma, Infosys and NTPC were among the major laggards.

Shares of Spice Communication shot up by over 80% to Rs47. The only available news was that BK Modi, Chairman, Spice Group was reported as saying that "Spice Innovation is interested in acquiring 51% stake in Satyam Computers." The scrip touched an intra-day high of Rs47 and a low of Rs27 and recorded volumes of over 9mn shares on BSE.

Shares of Akruti City declined by over 6% to Rs816 after the company registered a net profit of Rs190.80mn (down 79%) for the quarter ended December 31, 2008 as compared to Rs924.10mn for the quarter ended December 31, 2007.

The total Income decreased from Rs1,400.2mn for the quarter ended December 31, 2007 to Rs516.8mn for the quarter ended December 31, 2008.On Consolidated basis, the Group posted a net profit of Rs217mn for the quarter ended December 31, 2008 as compared to Rs1,017.70mn for the quarter ended December 31, 2007.

The total Income decreased from Rs1,363.50mn for the quarter ended December 31, 2007 to Rs495.90mn for the quarter ended December 31, 2008.

Shares of Tata Power ended flat at Rs761. The company posted a net profit after tax of Rs1.01bn (down 48%) for the quarter ended December 31, 2008 as compared to Rs1.97bn for the quarter ended December 31, 2007.

However, Total Income increased from Rs14.562bn for the quarter ended December 31, 2007 to Rs18.228bn for the quarter ended December 31, 2008. The scrip touched an intra-day high of Rs771 and a low of Rs729 and recorded volumes of over 1,00,000 shares on BSE.

Shares of BHEL declined by over 2.5% to Rs1320 after the company posted a net profit of Rs7.90bn for the quarter ended December 31, 2008 as compared to Rs7.71bn for the quarter ended December 31, 2007.

Total Income has increased from Rs52.290bn for the quarter ended December 31, 2007 to Rs63.285bn for the quarter ended December 31, 2008.

Shares of Cairn India gained by 3% to Rs164 after the company reported a profit of Rs2.4bn in the fourth quarter compared with a loss of Rs139.1mn a year earlier. The scrip touched an intra-day high of Rs166 and a low of Rs158 and recorded volumes of over 6,00,000 shares on BSE.

Shares of Jindal Steel & Power surged by over 13% to Rs1037 after the company posted a net profit of Rs3251.7mn for the quarter ended December 31, 2008 as compared to Rs3190.5mn for the quarter ended December 31, 2007.

Total income increased from Rs14074.1mn for the quarter ended December 31, 2007 to Rs17914.6mn for the quarter ended December 31, 2008. The scrip touched an intra-day high of Rs1060 and a low of Rs896 and recorded volumes of over 7,00,000 shares on BSE.

Markets might drift lower in the coming week with the US economy contracting at the fastest pace in nearly three decades in the fourth quarter of last year sentiments continue to remain weak.

Sesa Goa

We recommend a buy in Sesa Goa from a short-term trading perspective. It is apparent from the charts of Sesa Goa that it has been trending up since its 52-week low of Rs 60, recorded in late November 2008. The stock recently found support around Rs 68 and bounced up. On January 28, the stock jumped by 10 per cent, accompanied with heavy volume. This steep gain has reinforced the bullish momentum. Furthermore, on January 30, the stock breached its 21- and 50-day moving averages by gaining 4 per cent, with above-average volume. The daily relative strength index is rising in the neutral region towards the bullish zone and the weekly RSI has just entered the neutral region. The daily moving average convergence and divergence is signalling a buy. The price rate of change indicator has entered the positive territory. We are bullish on the stock from a short-term horizon. We expect the stock to move up until it hits our price target of Rs 94. Traders with short-term perspective can buy the stock while maintaining a stop-loss at Rs 80.

Weekly Stock Picks - Feb 2 2009

Buy Indiabulls Real Estate

Buy Axis Bank

Buy KFA

Buy Power Grid

Buy Divis Labs

Weekly Newsletter - Feb 2 2009

It was a winning week but a losing month. Even as the main indices recorded their first green week in 2009, the sentiment remains weak, A number of earlier issues including those of crude prices, inflation and interest rates are more or less under control. But the fear that something could go wrong again is giving bears an edge quite too often. The coming week has no major events except for the ongoing results. But expecting the unexpected is something markets have got used to during the last year or so. Stay guarded and watch the events as they unfold. Heavyweights like Reliance may again lead the market, be it up or down.

Progress on the US government's plan to absorb banks' rotten assets could provide some relief. Global investors are also hoping for some more clarity on the fate of President Obama's massive stimulus package. But, any positive news from Washington could be countered by bad corporate news, especially on job cuts. In this context, next week's data on US unemployment for January will be keenly followed. January sales figures from the US auto industry and retailers could also have a bearing on the global market's direction. Back home, we will get the latest sales figures from auto and cement companies. Companies that announced their results over the weekend will also be in focus.

Bullish on bullion

It's the beginning of the new year, but will that mean good news for your investments? By all accounts, 2009 is not going to be very bright. With one exception. Gold. The metal has managed to retain its sheen even through the darkest of times. So it's a smart move to invest in companies that mine gold, isn't it? After all, it would be like investing in the mother lode.

Mutual fund houses thought so and launched gold equity funds to invest in companies involved in gold mining and allied activities. These funds were launched because of the popularity of gold exchange traded funds (ETFs), which invest in gold bullion. Sadly, the results have not been the same. Take the DSP Black Rock's World Gold fund, which was launched in August 2007. In the past one year, it has delivered a negative return of 22% compared with a positive return of 25% by the Gold ETF.

Satyam says staff will get January salaries

The government-appointed Board of Satyam Computer Services announced that employees will get January salaries on time. The salaries would be paid as scheduled and that would be achieved from the company’s internal accruals and receivables. The Board has appointed the Boston Consulting Group as the management advisor to support the Directors and Satyam leadership team and Goldman Sachs and Avendus as investment bankers. The advisor and bankers have been entrusted with the task of identifying strategic investors, obtaining expressions of interest and ensuring a fair, transparent approach to the entire process. The Satyam board also said that it has received several proposals from corporate entities and private equity firms, but ruled out selling the company by unbundling it into different parts.

Meanwhile, Larsen & Toubro Ltd. (L&T) said that it may increase its stake in Satyam to 15% because it expects the value to increase. "There may be a counter-bid," L&T Chairman A.M. Naik told analysts on a conference call. On January 23, the engineering giant raised its holding in Satyam to 12% from 4% to have greater say in the software maker’s rescue. The average price of L&T's stake in Satyam has dipped to Rs80 a share from the Rs174 it paid, Naik said. L&T is looking to expand its software unit by trebling its stake in fraud-hit Satyam, Naik added.

Fidelity Investments raised its holding in Satyam to 6.79%. Fidelity, which held 3.17%, bought 3.62% on Jan. 28, Satyam said in a filing to the stock exchanges. Stock exchanges said late on Wednesday that two Fidelity funds had bought a 2.5% stake in Satyam in block deals worth US$18.7mn. Separately, the Hinduja group and B.K. Modi group thrown in their hats for buying the scam-tainted IT major. The Spice group said it is ready to invest about Rs20bn (US$408mn) in Satyam. Other suitors in the race for Satyam include Tech Mahindra, iGate Global and private equity firms.

In a related development, the regional officers of the Provident Fund Organisation lodged a complaint against the Rajus for not depositing Rs75mn which was the employees' share of PF for December. They also confirmed that Satyam's total headcount is 43,622, and not in excess of 52,000 as claimed by the promoters and even the government nominated board.

Also, the Company Law Board (CLB) passed an order providing immunity to six government appointed board members and other new directors of Satyam from all legal action relating to Rs70bn fraud. The CLB's order will help the new board take a decision on the appointment of a new chief executive officer and chief financial officer. "We will act like court officials discharging public service," said C Achutan, a member of the new Satyam board. Satyam is facing two class action law suits in the US. These were filed by two US-based law firms, Izard Nobel LLP and Vianale & Vianale LLP.

Reports also said that former MD of Tata Chemicals, Homi Khusrokhan and ex-group finance director of the Murugappa group, Partho S Datta could be named Satyam's CEO and CFO, respectively. The new board was likely to announce on Saturday the names of its new CEO and CFO. Among the other Satyam related news, General Electric (GE) and Bombardier said they will continue their business association with Satyam, while National Australia Bank said it was reviewing its outsourcing plans with Satyam. At the same time, reports said that Citigroup, Merrill Lynch, Novartis and GlaxoSmithKline may discontinue their deals with Satyam. T

RBI maintains status quo

The Reserve Bank of India (RBI) maintained a status quo on key policy rates after aggressively easing its monetary stance since October, as the central bank ascertains the impact of its previous measures on the Indian economy. The repo rate is unchanged at 5.5% while the reverse repo rate is static at 4% and the cash reserve ratio (CRR) has also been left steady at 5%.

The Bank Rate has been kept unchanged at 6%. The RBI also slashed its estimate on FY09 GDP growth to 7% from 7.5-8% earlier with a negative bias. The outlook on real GDP growth has been affected further and the downside risks to growth have amplified because of slowdown of industrial activity and weakening of external demand as reflected in decline in exports, the RBI said. Services sector activities are likely to further decelerate in the second half of 2008-09, it added.

"There is now distinct evidence of further slowdown as a consequence of the global downturn. The knock-on effects of the global financial crisis, economic slowdown, and falling commodity prices are affecting the Indian economy in several ways," the RBI said.

The only positive that one can draw comfort from is that the headline inflation has decelerated, though consumer price inflation is yet to show moderation, the central bank said. Inflation, based on the WPI, will fall sharply by the end of March to 3% from its earlier forecast of 7%. "Inflation on account of primary articles still remains at the double digit level, reflecting sustained price pressures, particularly on food articles," the RBI said. WPI inflation, excluding food and fuel, too remains higher this year as compared with the previous year, it added.

Since mid-September 2008, the RBI has taken a number of monetary easing and liquidity enhancing measures. At the same time, the Government has also launched two fiscal stimulus packages to boost aggregate demand. But, their effectiveness will be known only a few months down the line. There is a period of painful adjustment ahead of us, the RBI said. However, once the global economy begins to recover, India’s turnaround will be sharper and swifter, it added. The challenge for the Government and the central bank is to manage the adjustment with as little pain as possible, the RBI said.

For monetary policy to have demand inducing effects, lending rates will have to come down, the RBI said, hinting that banks will have to slash rates further. The current deposit and lending rates have significant room for further reduction, the central bank said. Interest rates in the money and bond markets have already declined perceptibly since their peaks in October. Banks’ cost of funds would come down, and this should encourage banks to reduce their lending rates in the coming months, the RBI said.

Taking into account the diminished upside risk to inflation, the projection of money supply (M3) growth for 2008-09 is raised to 19% from 16.5-17% earlier. The aggregate deposit growth for 2008-09 is revised to 19% from 17% earlier. The projection of growth of adjusted non-food credit for 2008-09 is revised to 24% from 20% earlier.

Dena Bank

Dena Bank

PNB

PNB

Mundra Port & SEZ: Buy

Investors with a 3-5 year perspective can consider adding the stock of Mundra Port & SEZ (MPSEZ), the only non-captive private sector port player in the listed space.

MPSEZ’s strong cargo volume growth, ability to handle a diversified range of cargo, long-term contracts that ensure some steady revenue flows and sufficient funds in hand (from the IPO) provide the company with an edge over most other infrastructure players. At the current market price, MPSEZ trades at about 17 times its estimated per share earnings for FY10. While this valuation may seem expensive in relation to the market, the port segment, especially in the private sector, is at a nascent stage and holds huge growth potential; perhaps why the market has continued to accord the stock premium valuations. To obtain better prices, investors may phase out their purchases of the stock, to capitalise on broad market declines.

MPSEZ registered a 29 per cent increase in cargo volume handled over the nine months to December, compared to a similar period a year ago. The cargo volume growth for major ports over this period was about 7.4 per cent. Growth for the last quarter too has been at a healthy 12 per cent for the company. The strong growth comes on the back of MPSEZ’s diversified cargo handling capacity which deals with commodities such as coal, oil and fertilisers. Further, Mundra has secured a number of long-term contracts that ensure steady stream of revenue. Further, dedicated coal terminals for massive coal-based (mostly imported) power projects in Gujarat are also likely to ensure steady import-traffic.

The robust volume clocked by the port enabled a 46 per cent revenue growth and 92 per cent profit growth for the December quarter on y-o-y basis. Operating profits too improved by 200 basis points to 63 per cent. Even as volumes have aided growth, MPSEZ can also derive comfort from the fact that it can set its tariffs in line with market rates as it is not governed by the Tariff Authority for Major Ports.

Over the long-term, MPSEZ’s cargo volume is likely to be driven by its captive SEZ which would house export and import-oriented industries. Lease income from the SEZ can also accelerate revenue growth. However, we have not considered any significant contribution from the company’s SEZ for now, given the slowing capex plans of many corporates. Over the next two quarters however, investors may have to be prepared for more sedate volume growth as the slowdown in exports in recent times may intensify.

Crompton Greaves: Buy

At a time when corporate earnings have begun to mirror the slowdown felt by the economy, Crompton Greaves has managed to sustain sales and earnings growth, amidst stiff raw material costs and marginal slowdown in demand. In what could be termed as a tough quarter (December 2008), the company posted a 49-percent growth in net profits on a year-on-year basis.

That the company’s order inflows have been healthy and there have been no cancellations so far from slowing markets such as Europe and the US also suggests that the medium-term earnings visibility remains relatively strong.

Investors can consider accumulating the stock of Crompton given the sharp correction it has undergone, even as its prospects are relatively unaffected. At the current market price of Rs 130, the stock trades at 9.7 times its annualised consolidated per share earnings for FY-09 and 8.5 times its expected earnings for FY-10.

Investors should, however, note that companies such as Crompton that manage a handful of foreign subsidiaries would face a more challenging cost environment compared to those with domestic operations alone. Risks of demand slowdown are also higher in the countries in which these subsidiaries operate. Under these circumstances, pressure on profit margins to keep the volume robust may be a plausible response by corporates to tackle the slowdown.

Crompton appears to have come up with such a response, especially for its industrial segment and consumer products, two segments whose demand is under pressure.

Profit margin pressure would, therefore, remain a risk for the company especially its subsidiaries. However, we believe that Crompton, with a return on equity (40 per cent as of March 2008) that is superior to industry average, can afford to take a dent in profitability to counter a slowdown.
How it managed

Crompton’s consolidated revenues for the latest ended quarter grew 25 per cent even as net profits grew at twice this pace.

Crompton’s diversified presence across geographies as well as its wide product offerings have been the key reasons for the company sustaining growth during tough times.

The company’s foreign subsidiaries have largely enabled such a diversification; the acquisition of these companies over the last two years, therefore, appear well-timed in retrospect.

The performance over the quarter has, however, not been smooth. Crompton saw a 0.5 percentage point dip in its operating profit margins to 10.4 per cent as a result of muted performance in its industrial systems and consumer product segment.

The management has admitted that pricing has remained under pressure for these segments, on the back of an attempt to maintain growth. The consumer segment too, despite witnessing revenue growth, saw decline in profit margins.

We expect these two segments, especially industrial systems, to remain under pressure over the next few quarters on the back of reduced/postponed capex plans of industries locally and abroad.

The positive feature remains that the company has not had any order cancellations even in the industrial segment.

Power segment, the biggest contributor to revenues, however stole the limelight with a 2.7 percentage point increase in EBIT margin to 15.1 per cent. Here again, the demand for distribution transformers (DT) has been turbulent. Demand for DTs, which is the final link to supplying power to the consumer, has been affected by slowdown in housing.

However, the management has stated that growth in this segment has been made up by wind energy transformers. While volume from this segment may not have been significant, the emphasis on ‘green’ energy in Europe and the US (with the new Government) could translate into sizeable demand for wind transformers over the long-term.

The power segment growth is expected to be steady over the next nine-12 months as well, since over 90 per cent of the order backlog arises from this division.

The company’s overall consolidated order book at Rs 6,700 crore grew 28 per cent on a Y-o-Y basis. Order inflows for the quarter at 23 per cent over December 2007 also suggests healthy demand scenario.

The current orders combined with the fact that there have been no cancellations so far is likely to provide revenue visibility for the company over the next one year.

Investors may have to watch for order inflows from hereon to gauge the long-term revenue prospects of the company. For now, orders of over Rs 300 crore (in the line of Crompton’s business) are expected to be floated by Power Grid Corporation over the next couple of months.

On the net profit front, Crompton has received some relief from reduced depreciation rates as a result of switching from Belgian GAAP standards followed by its subsidiaries. Forex loss accounting in compliance with Accounting Standard 11 has, on the other hand, depressed earnings by Rs 35 crore for the quarter.
Continuing capex

Crompton has been a steady investor in capital expenditure programmes with a 10-15 per cent expansion in its transformer capacity every year over the past few years, including the current one.

The company has planned a capex of Rs 250-300 crore over the next couple of years. Being comfortable on cash, Crompton may not face the nagging issue of fund availability, be it for capacity expansion or acquisitions, the latter being its more successful strategy in recent times.

The company has also been proactive in the development of large-sized transformers to suit new programmes of the Government for bulk transmission of power. For instance, the company is gearing itself to meet the 1200 kV ultra high voltage power transmission system envisaged by Power Grid Corporation.

Crompton recently announced the successful development of the 1,200kV capacitive voltage transformer towards meeting the new challenges.

India Cements: Hold

Shareholders of India Cements can hold the stock. Continuing strong demand, healthy despatches and the moderation in input prices point to an improving earnings picture for the company in the coming quarters.

Also, as new capacities in the Southern region take time to flag off, the region (South) is unlikely to see a surplus supply situation in the near term. The company’s new plant in Rajasthan, which will commence operations in 2010, will also help the company tap the high-potential western market.

With the stock (Rs 102) trading at six times the trailing earnings per share, the market appears to have already factored in the possible negatives (of reduced demand and cost pressures). The enterprise value per tonne too is down significantly from Rs 6,423 per tonne in June 2008 to Rs 4063 per tonne now.
Demand still strong

India Cements caters predominantly to the southern markets and the demand growth in this region has been quite strong, even amid the slowdown over the past two quarters.

The last quarter saw an average 10 per cent growth in demand Y-o-Y in this region. New capacities coming up in the region are being postponed and cement offtake from the infrastructure-projects in Andhra Pradesh and Tamil Nadu continues to remain strong. This suggests that the demand outlook for the coming few quarters, at least, is positive.

India Cements, however, could not completely cash in on the growth in demand over the past quarter due to stoppage of work at two of its plants — Vishnupuram and Dalvoi — due to rains and maintenance work. India Cement’s despatches were lower by two lakh tonnes or 8.3 per cent for the quarter compared to the previous year.

With the plants likely to run at full capacity from the current quarter, volume growth will normalise from here on.
Prices hold high

The southern market is where cement prices have managed to hold up since last year. Even as prices in the South rule at Rs 260 per bag since January 2008, all other regions have seen over a Rs 5-10 per bag drop in prices.

Strong prices in the region have helped the company manage margins to some extent. In West (Gujarat), a one kg bag is sold at Rs 220.
Expansion

In the last quarter, the company commenced operation of its new one-million tonne grinding capacity in Chennai. The capacity up-gradation in units at Malkapur, Andhra Pradesh (1.2 million tonne) and Parli, Maharashtra (1 million tonne) are in progress.

The company’s 1.5-million tonne capacity coming up in Rajasthan, also promises to widen India Cements’ addressable market. The proximity of this location to Gujarat, where several new infrastructure initiatives are taking shape, is an advantage. The West is set to emerge as a region of high demand potential for cement companies in the coming quarters.

As far as the capex plans are concerned, the company has spent Rs 350 crore of the budgeted Rs 500 crore in the Rajasthan facility.

With the remaining capex to be spent in the next two months (February-March 2009), the company expects the plant to commence production in March 2010. The two-million tonne capacity planned in Himachal Pradesh has been deferred for now due to economic slowdown. This decision may actually stand the company in good stead, given that the picture about the longevity of the current slowdown and the cement market remains clouded as of now.

If this project is pursued, the company will be spending Rs 400 crore on the project in FY-10 and Rs 200 crore each in FY-11 and FY-12 respectively.
Cost pressures to subside

India Cements saw its net sales rising by just 2 per cent in the last quarter on extended plant shutdowns. New additions to the capacity have seen depreciation too rising in the last quarter (depreciation cost higher by 65 per cent). Net profits dipped 51 per cent to Rs 61.91 crore in the last quarter. High power and fuel costs have been weighing on the company’s profit for the last few quarters and contributed to a sharp shrinkage in margins in the December quarter.

The December quarter saw the company’s power and fuel cost rising 33 per cent Y-o-Y. But these costs are set to subside with the correction in international coal and crude prices.

Imported coal prices have corrected from $195 in July last year to around $90 now. India Cements imports nearly 75 per cent of its coal requirements and the drop in coal prices can, thus, be expected to substantially ease margin pressures for the company.

FII Investment Losses

Name of Co.	Invested at (Rs.)	CMP (Rs.)	Loss %
Ansal API	505.00	24.20	95.66
Asian	230.00	23.40	90.60
Mahindra Lifespaces	800.00	136.35	84.14
SKNL	78.00	20.20	76.46
EMCO	120.00	31.65	75.62
IVRCL	370.00	107.65	73.47
Deccan Chronicle	128.00	38.50	72.53
Kalpataru	727.00	266.05	65.33
McLeod Russel	120.00	50.00	62.10
Pantaloon	377.00	162.00	60.96
NITCO	270.00	31.05	58.17
AIA	245.00	115.35	57.12
United Phosphorus	175.00	103.50	45.26
Apollo Tyres	31.00	18.50	44.95
Ashapura Group	27.53	22.20	24.11
Marico	52.20	56.70	1.22
Suzlon	383.40	49.85	89.53
Phoenix	400.00	65.80	82.46
Peninsula	120.00	21.75	85.40
Logix	315.00	57.01	85.29
Parekh Aluminex	225.00	49.85	82.16
Simplex	625.00	145.05	81.40
Pritish Nandy	70.00	14.30	79.86
Network 18	325.00	80.90	77.62
Visaka Inds.	136.00	36.15	76.04
Kotak	950.00	293.70	75.24
Godrej	215.00	67.35	74.95
Pratibha	253.00	54.95	80.15
GMR	240.00	62.35	74.70
Escorts	112.00	75.75	72.70
The India Cements	285.00	36.85	70.74
Punj Lloyd	275.00	103.50	68.99
PSL	197.35	100.75	66.87
South Indian Bank	130.04	72.55	65.90
West Coast Paper	85.00	36.35	65.46
ING	310.00	137.00	64.61
MAX	240.00	106.95	64.36
IDFC	127.00	56.30	63.48
BRFL	210.00	95.20	59.08
Sadbhav Engg.	575.00	334.40	52.10
GVK	32.50	19.90	48.97
Axix Bank	620.00	407.95	46.06
Bartronics	110.00	74.70	38.89
Renuka Sugars	75.00	67.75	27.69
Sunil Hi-tech	360.00	76.85	82.93
Sintex	470.00	136.50	76.59
Dynamatic Tech	1234.00	389.00	73.12
Bank of India	360.00	240.20	46.03

Via HK Gupta

Sobha Developers

Sobha Developers, the Bangalore-based real estate developer, has reported a 88 per cent drop in net profit to Rs 7.5 crore for the third quarter ended December 31, 2008, as compared to Rs 61 crore in the corresponding period of last fiscal

The topline too declined 48 per cent to Rs 183 crore as against Rs 355 crore. The operating profit too fell 52 per cent as the company was caught in a grip of "most challenging environment."

J C Sharma, managing director, Sobha Developers said: "The present quarter in these trying times have seen demand shrinking resulting in liquidity crunch, which is further impacted by the banks taking a conservative approach in lending to the realty sector."

He added that in spite of many proactive measures taken by the government and RBI including rate cuts, stimulus packages for selective sectors it has not helped the realty sector so far.

"We have been taking exceptional steps in de-resking the company from slowdown, by introducing several measures like cost reduction, reduction of the prices of our products, aggresive marketing, introducing attractive payment terms ensuring that the customer gets the maximum value," Sharma detailed.

He noted that these measures have been positive and the present realty prices have come to a realistic level where potential customers can look for value buying.

IPO Analysis - Gemini Engi-Fab

Investors can give the initial public offering of Gemini Engi-Fab, which is engaged in manufacturing and salvaging of process equipment, a definite miss.

Besides the macro-economic concerns regarding the impact of the economic downturn on the revenue and profitability of both Gemini and its user industries, our recommendation is also driven by the ambitious pricing of this offer.

At the price band of Rs 75- 80, the company is valued at about 10-11 times its estimated (annualised) FY09 per share earnings on its post-offer equity base.

Not only is this at a premium to the market, it also compares poorly with pure-play capital goods and engineering companies, which are currently available at lower valuations in the secondary market.
Company details

Gemini Engi-Fab has been in the business of manufacturing and salvaging of process equipment for well over a decade now.

The company fabricates heat exchangers, tower and column internals, reactors and vessels for a fairly diversified user industry base.

It plans to use the proceeds of the public offer to expand its operation and set up a manufacturing workshop in Umbergaon, Gujarat.

As on September 30, 2008, the company had an order book of over Rs 17 crore (0.8 times its FY08 revenues).
Investment argument

The worsening economic situation may take a higher toll on Gemini Engi-Fab considering the small scale of its operations and dependence on few customers.

While the company did manage to grow its revenues (86 per cent CAGR) and profits (249 per cent) at enviable rates in the last four years, it is to be borne in mind that the growth was on a smaller base and during a period of rapid economic growth.

Replicating these growth rates in the present times when the economic outlook is anything but promising would be difficult.

To add to problems, companies that constitute its user industry are contemplating (some have already begun) scaling down their capex and expansion plans significantly, which may also tell on future revenues.

The company may also have to grapple with margin pressure with the shrinking revenue-pie and the highly competitive and unorganised nature of the fabrication industry.

However, the company’s presence in salvaging business may hold more promise in times such as these when companies are tightening belts.

Salvaging, which involves changing or reworking of the corroded portion of equipment instead of completely overhauling it, may certainly find more takers. But here again, Gemini may not be able to command a high pricing power since this business too is unorganised and has low entry barriers. That most large companies have in-house fabrication units may also act as a challenge.
Valuation matters

But what argues strongly against investing in the IPO is the pricing. This Rs 21-crore company has been valued at about 10-11 times its annualised FY09 per share earnings (post-offer equity) in the given price band, failing to price in the many business risks.

Much larger companies today suffer lower multiples owing to uncertainties on order flows, higher debt incidence or increasing pressure on working capital; even the Sensex-30 or Nifty-50 basket of stocks are available at lower valuations.
Offer details

The initial public offer is open during February 3-8. The company seeks to raise Rs 41-44 crore through this offer.

Almondz Global Securities is the book-running lead manager and Karvy Computershare Private Ltd is the registrar to the issue.