Taking Stock - Equitymaster

This is inarguably not a good time for an investor who is sitting on cash waiting to enter the stockmarkets, as they trade near their all-time highs, or for one who is already fully invested and doesn't know when to sell, as they remain unaware of what's in store for India Inc. going forward. However, while we wouldn't be throwing light on how to time the markets (simply because we don't believe in this theory), we can say one thing for sure that India Inc. has once again proved its mettle, going by its FY05 performance, and continues to roar and march ahead in the face of adversities thrown up against it. We take a look at the likely possible scenario going forward and gauge whether this performance can atleast be sustained, if not improved upon.

As mentioned previously, robust YoY performance of about 300 companies (approx. 170 in 4QFY05) from our Quantum universe in the four quarters of the previous fiscal. Both, sales and net profit growth have been pretty strong in the period under consideration. Thus, for the full year (FY05), the consolidated YoY net profit growth was at 26% on the back of an 18% YoY topline growth. Another indication of the improving performance is the fact that the net profit margins have improved from about 8% in 1QFY05 to about 12% in 4QFY05. Further, our numbers reveal that for the full year, these have improved by about 70 basis points in FY05. This is commendable considering the fact that Indian companies (like other corporates around the globe) have had to face the odds in terms of high commodity and energy prices.

However, this performance is now a thing of the past and investments are made on the expected future performance of the market/stock. And there is more than one factor that goes into judging what the future course would be. Some of the factors that would determine the future performance of companies are reforms, monsoons, domestic interest rates and commodity & energy prices.

Reforms: There has been increasing positive intent being displayed by the government regarding the continuation of the reforms process. This was, in recent times, depicted by the FDI enhancement and divestment moves announced by it. Going forward, we believe that while the reforms process would by and large continue, one can expect hurdles on the way considering the coalition nature of the government.

Monsoons: This is being touted as the next 'big' trigger for the Indian stockmarkets. The relevance of monsoons can be gauged from the fact that almost 65% to 70% of the Indian population is dependant on agriculture for its livelihood. Thus, scanty/low and/or unevenly spread rainfall would affect crops and consequently the spending power of rural India, which is the key source of demand for many goods manufactured by Indian companies. Going forward, while the government has initiated plans pertaining to improving the irrigation facilities so as to decrease the dependence on rain Gods, the fact remains that this is a long drawn process and much of it depends on the government's will to implement the same, successfully. Till then, monsoons would continue to play an important role in determining the fate of the country's growth prospects.

Domestic interest rates: Though interest rates have been on the rise, the quantum of it has seemingly not stalled economic growth as yet. And considering that the government has time and again made public its intentions of maintaining a soft interest rate regime, Indian corporates would continue to benefit from the same. With demand and profit growth being strong, most of the companies have cleaned their balance sheets by reducing their debt flab. Thus, with debt servicing obligations being much lower than what it was 2-3 years ago, it augurs well for the shareholders.

Commodity & energy prices: The world has been witnessing a period of high commodity (ferrous and non-ferrous metals) and energy prices. However, most of the Indian companies have managed to tackle the situation well by taking concrete efforts at controlling other expenditure heads so as to mitigate the negative impact of rising input costs. Thus, going forward, with the operational efficiencies now having been achieved, any cool-off in commodity and energy prices, which is already being witnessed, would only aid margin growth for companies.

After considering all of the above, with monsoons being the only grey area, we believe that Indian equities would continue to deliver decent returns over the long term, as the above factors seem to be largely favoring continued growth for Indian companies, though the growth rates could stabilise at lower levels. Further, from the stock market perspective, it must be noted that at the current juncture, the P/E valuation of the Sensex is at about 15x trailing 12-month earnings and considering the past performance, it is very much possible that the average growth rate of Indian companies would be maintained above 15% per annum over the next 2-3 years. Thus, while the markets remain fairly attractive from the long-term perspective, considering the huge run up stock prices over the last couple of years, investors will have to work harder to identify a viable investment option.

Motilal Oswal - Colgate

Motilal Oswal puts a BUY on Colgate. Download the report here

Who needs Amitabh to become a crorepati?

Money doesn't grow on trees. It can only be acquired by proper investment and planning. If you want to be a crorepati through legitimate means then you have to put your money in such savings instruments that will appreciate your investments as well as provide for financial security to your near ones in case of your untimelydemise.

Compounding is the oldest trick in the investment book and the best and smartest way to increase your returns. So you should take the advantage of compounding at an early age. Here are some tips to becomea crorepati, without changing your present life style.

When you start investing, insurance is the first thing that comes to your mind. It gives you safe returns as well as protection to your family. It's not always right that only the experts can master theprinciples of investing. Anyone can manage his or her investments.

All one has to do is to be cautious and not to take undue risks. In insurance there are several options. While all other insurance investments give a blend of insurance and investments, term insuranceplan gives a pure insurance option.

According to different term insurance plans, it costs you around Rs 2,500 per annum to get an insurance cover of Rs 10 lakh. However, if you will go for any endowment or whole life plans it will cost you awhopping Rs 25,000.

One should use the insurance policies for protecting his family. If you can save the nearly Rs 23,000 premium and put it in some better savings instruments like mutual funds which can give you a return of20-25 per cent in the long term.

Another important thing is to protect yourself from the growing medical expenses.

Every human being is exposed to various health hazards. Medical emergency can strike anyone without warning. You can lose all yoursavings if you don't have a health insurance policy.

If you are spending Rs 10,000 per annum on your health, you can reduce it significantly by paying only Rs 2,000 which can give you a healthinsurance policy worth Rs 1 lakh.

What it means is that not only do you save Rs 8,000 every year but your medical expenses are taken care of by the policy. In the long run if you invest this money in some saving instrument it can give youbetter returns.

If you will add the above two figures and calculate with a compound interest of 15 per cent, then it will come to around Rs 1 crore in 20years.

If you are moderate risk taker you can also invest in mutual funds rather than investing in pure debt funds. While, the debt funds give you a return of around 4-5 per cent, any mutual fund can give a higherreturn of around 20 per cent per annum.

You can also take the systematic investment plan (SIP) route. It won't make hole in you pocket as you need to invest a small amount everymonth.

If you start putting Rs 2,000 every month at the age of 25 then you will have around Rs 1 crore at the age of 50 (assuming an averageannual return of 10 per cent).

Today Indians are living longer and they are also facing difficulty to save money.

As government jobs are shrinking, more and more people are moving towards private sector jobs where there is little job security.

Thus, it has become inevitable to plan your retirements accordingly to meet your future expenses. Also investments can grow to a very large sum if you manage them effectively.

Pension plans are attractive investment vehicles for building up retirement savings, mainly because of their automatic re-balancingfeature and tax efficiency.

Generally, they maintain a 60-40 debt-equity allocation at all times, thus, reducing your headache of constantly re-balancing your portfolio. In pension plans you also have to shell out less premiums
than life insurance plans.

Once you understand where you stand financially and a rough idea of how you will get there where you want to go, then you can startearning from your investments which is called as passive income.

Weekly Technical Analysis

Ok. Finally the Verdict is Out. Markets have really been strong and we have definitely broken the downtrend. Look for good weeks ahead.

Positives

• All indicators maintaining their uptrend.
• MACD Cross above 0.

Negatives

• None in particular. Still extremely Overbought.

Analysis

After a few weeks of "Do Not trade" and "have patience" words, we mentioned in our previous newsletter that last week(week ending 27th May) would be a decisive week. And it really was. We also clearly stated to go LONG if we broke the 6500 level. Which was decisively broken last week. Since we have left the 50 DMA way back and have never looked at it again, there is every reason to believe that we are now in a Bullish zone. The downtrend and downward waves are over and it is now time to create the upward waves.

Outlook

Ok, we are again at the most difficult question. What would happen in the coming week. Since we broke past all resistances and key levels and moving averages, we are in a good strong bullish zone. But at the same time, we are Extremely overbought. As much as we would want to go long, we are tempted to go Short too. Short, Not because the market might go down. But because a correction is long due. Again, if we look back. Indian markets have a tendency to stretch the overbought-ness to few weeks. So what do we do. Since a Correction is due, it is advised to go Long only with strict stop-losses around the strong support levels. We would strongly suggest you trade only in the second half of the week, by which time we expect some correction to have happened or to start.

The Flavour Of Oil

Valuations of oil stocks are likely to greatly improve in the long run. And then oil will truly smell sweet.

Is it the right time to invest in oil stocks? Let us examine a few facts. India, as a market, has a humungous appetite for oil. However, only 30 per cent of its requirement of nearly 110 million metric tonnes per annum is met by domestic producers. The downstream companies that refine and market crude, thus, have to import a major portion of their requirements. This is hugely expensive, as global crude prices have been ruling at $50-plus (Rs 2,200-plus) for some months now. They then process this crude and sell it at government-determined low prices. Who makes up the deficit? No one. It's a straight hit to their bottom lines. Will the government raise prices? Probably. But it is unlikely to raise them enough to make good the entire loss anytime soon.

Sounds bad? Yes. Does it still make sense to invest in these companies? Yes. Here's why: the current situation cannot go on for ever. Something has got to give. Either global prices will come down (which appears unlikely at present), or the government will have to raise prices. Once the oil companies (particularly the refining and marketing companies) are allowed to sell their products-especially kerosene and LPG-at market-determined prices (or at rates close to them), their bottom lines are likely to improve substantially. The profits of exploration and production major ONGC (Oil and Natural Gas Corporation) will shoot up too as it will not have to share a part of the implied subsidy burden with the refining and marketing companies. Then again, the stocks of most of these companies (with the possible exception of ONGC) are hugely undervalued, and any change in the scenario is likely to improve their valuations considerably. Here's a more detailed look at the oil sector from an investment perspective.

Exploration And Production

All over the world, increases in crude prices bring joy to oil exploration and production companies. The scenario is different in India, though. India's biggest exploration and production company, ONGC-also India's most valuable company, with a market cap of over Rs 1,25,000 crore-has not really been able to benefit from the global surge in crude prices due to domestic political compulsions. Bowing to the demands of the refining companies and unable to take the burden on itself, the Union government in 2004 decided that ONGC and GAIL (India) Ltd. would have to share the subsidy burden on LPG and kerosene with the refining and marketing companies. Today, that translates to an outgo equal to one-third of the total subsidy component on LPG and kerosene for ONGC. This is adversely affecting its bottom line. For instance, in 2004-05, ONGC had to fork out Rs 3,114 crore to IOC, HPCL and BPCL as subsidies for LPG and kerosene.

Is ONGC still a good bet? Sanjiv Prasad, analyst at Kotak Securities, reckons it is probably a better bet than the refining companies. On a turnover of Rs 35,450.75 crore (for the first nine months of 2004-05), it raked in profits of Rs 9,075.94 crore. This is after shelling out the subsidy to the refining companies. Moreover, increased investments in infrastructure, new gas discoveries, improving import facilities and continuing high prices are seen as positives for the company. Analysts expect the deregulation of the gas sector to add Rs 1,500 crore to ONGC's bottom line every year. Further, it now has permission to set up around 1,100 retail outlets (it set up its first outlet in Mangalore recently), which is likely to add to its overall growth in the near future. So, if you have stocks of ONGC, just hold on to them for dear life.

Refining And Marketing

The subsidy burden takes its highest toll on the public sector integrated downstream companies (which refine and market petroleum products) such as IOC (Indian Oil Corp.), BPCL (Bharat Petroleum Corp.) and HPCL (Hindustan Petroleum Corp.). These companies buy their crude either from ONGC (which bears one-third of the subsidy burden) or from global markets at prevailing international prices. However, they are unable to sell their products at market prices and, thus, have to bear huge losses. The total under-recoveries borne by the PSUs have gone up from Rs 9,370 crore in 2003-04 to Rs 19,900 crore in 2004-05. According to the Ministry of Petroleum, this is expected to touch Rs 37,000 crore this fiscal, while the oil companies put the figure at Rs 50,000 crore. And while they do benefit from higher refining margins of $12.15 (Rs 534.60) per barrel, they lose out because they are unable to sell their final products-kerosene, diesel and LPG-at market prices, thus, directly affecting their bottom lines.

So, what should your approach as an investor be? Should you buy, sell, or hold these stocks? Opinions differ, but analysts of all hues agree that over the long term, oil stocks are a veritable gold mine. Says Gul Tekchandani, Chief Investment Officer, Sun F&C: "Valuations are extremely attractive because going forward, there will be substantial returns for equity holders. The subsidy issue, too, should get sorted out soon." Tekchandani's logic: these stocks have hit rock-bottom prices, and you're unlikely to get them at such low values later. The outlook for the future is positive as well: India is an energy-deficient country, and demand for oil will certainly increase. Besides, all these companies have strong fundamentals.

Others are cautiously optimistic. Ramdeo Agarwal, Managing Director, Motilal Oswal Securities, says: "There is no significant upside in the short run unless the government revises oil prices," but admits in the same breath that it could well be a good time for the retail investor to get his feet wet because these stocks have already bottomed out.

So, if you don't have stocks of oil refining and marketing companies, the time to get in is now. And if you already own them, the right strategy will be to hold on to them, despite the negative sentiments currently surrounding the sector. Among the refiners, analysts are most bullish on IOC, simply because it owns and operates the country's largest crude oil and product pipeline network of nearly 80,000 km. Marketing companies using this network have to pay IOC access and transit fees, thus, giving it another revenue stream.

Then, there's Reliance. India's biggest private sector refiner, with 27 million tonnes per annum of refining capacity at Jamnagar, does not have to bear the burden of subsidies. Says Jigar Shah, Head of Research at K.R. Choksey Shares and Securities: "The infighting within the Ambani family has pushed its valuation down. This makes it even more attractive."

Whichever way you look at it, the energy sector in India looks good for the future. And if you've managed to stand your ground on slippery turf, the flavour of oil will be one to savour, and remember

Business Today

Traditional items propel export growth

The 24.13 per cent export growth in dollar terms during 2004-05 owed itself largely to the robust performance by five traditional products - agriculture and allied products, ores and minerals, gems and jewellery, chemicals and related products and engineering goods - which together constitute a preponderant 65 per cent of the aggregate exports of the country.

Latest foreign trade data collated by the Directorate General of Commercial Intelligence & Statistics and compiled by the Economic Division of the Commerce Department for the fiscal year 2004-05 show that the country's exports touched $79,247.05 million, against $63,842.97 million in 2003-04, reflecting a growth of 24.13 per cent.

Agriculture and allied exports with a weight of 7.61 per cent in total exports posted a reasonably high growth of 11.60 per cent during 2004-05 at $6,033.94 million, against $5,406.70 million in 2003-04, while ores and minerals exports (weight 5.29 per cent) logged a growth of 77.03 per cent at $4,193.44 million, against $2,368.73 million in the previous year.

While exports of gems and jewellery (17.29 per cent) notched up a growth of 29.62 per cent at $13,705.44 million in 2004-05, against $10,573.38 million, exports of chemicals and related products registered a growth of 27.28 per cent at $12,677.21 million, against $9,960.12 million in 2003-04.

Engineering goods exports (18.41 per cent) acquitted themselves well by posting a growth of 38.71 per cent at $14,587.37 million, against $10,516.45 million in 2003-04. Textile exports with a dwindling share of 15.16 per cent in overall exports put up a tepid show by notching up a negative growth of 1.53 per cent at $12,017.46 million, against $12,2204.71 million in the previous year. The dip in exports assumes significance in the light of the fact that the quota regime in global trade in textiles and clothing ended in the final quarter of the last fiscal but this did not get reflected in any marked rise in export receipts.

Destination-wise, India's exports continued its growth story with Asia and Oceania as this region absorbed 47.41 per cent of its total exports and recorded a rate of growth of 27 per cent at $37,573.37 million in 2004-05, against $29,621.10 million in the previous year. Exports to West Europe (23.80 per cent) grew by 19.72 per cent at $18,859.10 million in 2004-05, against $15,752.10 million in the previous year, while exports to the Americas (20.42 per cent) logged a growth of 20.50 per cent at $16,181.76 million during 2004-05, against $13,428.35 million in 2003-04.

Though East Europe, Africa and Latin America account for a meagre share of India's exports, these regions displayed bullish trends by registering a reasonably higher export growth with India during 2004-05, reflecting the diversified nature of India's export efforts.

Among the top 15 countries for exports, Singapore recorded the highest growth of 79 per cent at $3,795.51 million during 2004-05, against $2,124,84 million in 2003-04, followed by China of 55 per cent at $4,586.28 million ($2,955.10 million) and the United Arab Emirates of 38 per cent at $7,098.14 million ($5,125.61 million).

On the import front, the 37 per cent growth in imports during 2004-05 saw the import bill touching $1,07,066.11 million, against $78,149.62 million during 2003-04. Bulk imports with a weight of 39.09 in aggregate imports grew by a hefty 43.03 per cent during 2004-05 at $41,851.00 million, against $29,259.46 million in 2003-04. Petroleum, crude and lubricants which account for 27.87 per cent of total import grew by a whopping 45.09 per cent at $29,844.10 million in 2004-05, against $20,569.60 million in the previous year, partly fuelled by a flare-up in world crude prices which cruised to a level of $50 per barrel.

Machinery imports with a weight of 10 per cent in total imports grew by a moderate 15.11 per cent at $10,709.87 million during 2004-05, against $9,303.90 million during 2003-04.

Equally with a share of 10.11 per cent in aggregate imports, import of gold and silver registered a rate of 57.87 per cent at $10,824.38 million during 2004-05, against $6,856.42 million in the previous year, marking a recrudescence of interest in bullion as a safe haven for investment by the public.

Destination-wise, India's imports from Asia and Oceania, which accounts for a share of 35.40 per cent in total imports, grew by close to 40 per cent at $37,899.26 million, against $27,151.41 million in the previous year. Import from West Europe (22.60 per cent) was up by 29.45 per cent at $24,194.92 million, against $18,690.45 million in 2003-04. Imports from the Americas (8.36 per cent) grew by a robust 29.18 per cent at $8,947.03 million, against $6,926.20 million in 2003-04.

Among the top 15 countries for imports, the highest growth last fiscal was logged by UAE of 122 per cent at $4,581.96 million ($2,059.85 million), followed by Switzerland of 76 per cent at $5,817.92 million ($3,312.75 million) and China of 66 per cent at $6,746.66 million ($4,053.23 million).

Sharekhan Stock Idea

Television Eighteen India 
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs350
Current market price: Rs280

Profit has a new destination

Key points

• Television Eighteen (TV18) is India's leading business news broadcaster, running the English business news channel CNBC TV18. 
• The news advertising space is likely to grow at a compounded annual growth rate (CAGR) of 25% over the next two to three years.
• With its new Hindi business channel called Awaaz and the launch of a general English news channel in the near future, TV18 would be best placed to garner a higher share of the news advertisement market.
• New distribution agreements could bring in pay revenues at a substantial premium to that as per the existing agreement. 
• At 10.3x FY2007E earnings and 5.3x FY2007E EV/EBITDA, TV18 is the most attractive media stock both on growth basis and on valuation basis.
• We recommend a Buy with a price target of Rs350.

Weekly Analysis

Positives

• All indicators resuming their uptrend.
• Good Relative Strength.

Negatives

• None in particular, except that we must take out the emotional 6500 Mark, which has been eluding us for a while now.

Analysis

One good thing about the market is that it has broken it's downtrend a couple of weeks back. Now it is in a state of consolidation. But one must always have a very close eye on the moving averages along with support/resistance levels, because they have a major influence along with other factors. Since we are so close to 50 DMA and that we have had good rally over the past couple of weeks, we are in a sort of catch-22 situation. We want the indices to consolidate, which is good for a healthy uptrend. But at the same time, we do NOT want the indices to move back below 50 DMA. So, what do we do. Again, as we mentioned, this Coming Week would be a very crucial one. And it may decide the fate of where the market is headed in the following weeks to come.

Outlook

This should be the last week of patience. We believe the coming week would give us a clearer picture of what is in store ahead. Since the market could go either way, it is strictly advised to stay away from trading. Keep a close eye on two levels. 50 DMA and 6500 levels. If we break 50 DMA and move down, short immediately for a short-term gain. If we move above 6500 and stay there, then go long.

Source : DLNgroup

Hindu Businessline Recommendations

Buy  >> Tata Tea
Sell  >> Raymond, Goodyear India, Zee Telefilms
Hold >> Tata Motors

Research Summary - Motilal Oswal

Motilal Oswal - Download the research summary - Research Summary

Motilal Oswal - Eveready Industries

Motilal Oswal recommends a BUY on Eveready Industries. Download here

Kotakstreet - Siemens - Stock India

Kotak recommends a BUY on Siemes with a target of Rs. 2632. Download the report here

Watch for the following stocks

Scrips  with Targets

Kaveri Telecom   >>     200
TCFC                  >>     50
Sterling Resort    >>     75
Thirumalai           >>     250
Fairfield Atlas      >>     150
Patel Engg           >>     400

Hindu Businessline Recommendations

Buy >> Maruti Udyog, Container Corporation,
>> TISCO, Sun Pharma, Harrisons Malayalam

Hold >> I-Flex Solutions, P&G

Indian investors follow 'beacon'

Read here