Wednesday, February 28, 2007
Budget only rubs salt into market wounds
The market was hammered post the Budget, as it turned out to be a big disappointment for India Inc., which did not have second thoughts in giving it a thumbs down. Let us not forget that today's steep fall was amid extremely high volatility.
The 30-shares BSE Sensex tumbled 540.74 points, to settle at 12,938.09, on heavy selling across the board. The barometer Sensex moved in a range of approximately 500 points; 13,298.52 on the higher side and 12,800.91 on the lower.
The S&P CNX Nifty was down 155.80 points, to 3,738.10.
The total turnover on BSE amounted to Rs 5683 crore.
The market-breadth was weak. There were close to four losers for every single gainer. On the BSE, 1,968 shares declined compared to 594 that advanced. Just 37 scrips remained unchanged.
All the 30-members of the Sensex pack ended in the red.
Satyam Computers was the top loser, down 8.38% to Rs 412.70, on a volume of 15.66 lakh shares.
Gujarat Ambuja Cements (down 7.48% to Rs 116.30), Wipro (down 7.15% to Rs 562) and ACC (down 6.25% to Rs 901) were the other losers.
Index heavyweight Reliance Industries (RIL) was down 3.65% to Rs 1353.80 on a volume of 23.76 lakh shares.
ITC was the star of the day's trading session, and was the top gainer among the BSE Sensex pack. The scrip rose 3.21% to Rs 170.50, on huge volumes of 48.89 lakh shares, under the reckoning that makers will be able to pass on the 5% hike in excise duty announced on cigarettes to customers. The excise duty on cigarettes has been raised by 5% in the Union Budget 2007-08.
The worst fears of the market were that cigarettes will be brought under value added tax with 12.5% VAT, spawning concerns that higher tax may lead to a shift in tobacco consumption, to low-end products such as bidis and chewing tobacco. The stock had also surged to a high of Rs 179.90, in intra-day trade.
SMS Pharmaceuticals, which debuted on BSE at Rs 349.90, settled at Rs 357.85 compared to its IPO price of Rs 380 per share. The counter clocked 34.57 lakh shares on BSE. It also struck a high of Rs 390, and fell to a low of Rs 285.30. The face value per share is Rs 10. The paid-up equity capital of the company is Rs 10 crore.
Markets across the globe were reeling. However, the Chinese market bounced back after plunging 8.84% on Tuesday (27 February 2007), on concerns that the government may crack down on illegal investments that helped drive market to record highs recently. China's Shanghai Composite was up 109.28 points (3.94%), to 2881.07. In the morning, the markets were extremely weak.
Hong Kong’s Hang Seng Index was down 2.26%, while Japan's Nikkei 225 Index slipped 2.85%.
Reactions from a section of the market raised concerns on lack of measures to increase productivity, and a lost opportunity to provide relief to the corporate sector.
This Budget is disappointing. There are no steps taken to increase productivity in agriculture, electricity and other sectors, which are not performing as is their potential," R Sesashayee, CII President said.
He feels since revenues from peak customs and excise were increasing, this could have been a time to reduce excise duty to 20%, if not 15% overall, which would have been in line with the Kelkar Committee Report.
FICCI President Habil Khorakiwala said a wrong signal has gone out to the corporate world, as the government has increased cess and dividend distribution tax.
The market had a bumpy ride to the day of the Budget. Lack of inflows at higher levels, high valuations, inflation and rising interest rates, fears of an earnings slowdown in coming quarters, and profit taking at higher levels returned to haunt the market. From an all-time high of 14,723.88 struck on 9 February 2007, the BSE Sensex had already tumbled 1,245 points, to 13,478.83 by 27 February 2007, a day before the Budgt. The defeat of the Congress in Uttarakhand and Punjab also did not help.
US stocks tumbled on Tuesday (27 February 2007), driving the Dow Jones industrial average down; its worst slide since the aftermath of the 9/11 attacks on the World Trade Centre, New York, as a sell-off in China's stock market raised concerns that equity valuations may be too high.
A US Government report showing a bigger-than-expected drop in January's new orders for US-made durable goods added to investors' concerns about the outlook for economic growth and corporate profits. Those worries added more fuel to the sell-off, and helped contribute to a loss of about $600 billion in market value for the day.
The Dow Jones industrial average slid 416.02 points, or 3.29%, to end at 12,216.24. The Standard & Poor's 500 Index dropped 50.33 points, or 3.47%, to finish at 1,399.04. The Nasdaq Composite Index sank 96.65 points, or 3.86%, to close at 2,407.87.
As per provisional data, FIIs were net sellers to the tune of Rs 503 crore on Tuesday (27 February 2007), the day when the Sensex lost 171 points. FIIs were net sellers to the tune of Rs 688 crore in index-based futures on that day. They were net sellers to the tune of Rs 40 crore in individual stock futures. Nifty March futures settled at 3886.65 on Tuesday, a discount of 7.25 points over the spot Nifty closing of 3,893.90.
Market battered amid budgetary woes
A fall in the global markets and pre-budget expectation of a possible hike in the security transaction tax triggered a heavy fall in early trades. The Sensex, which slipped below 13000 in early trades, recovered more than 425 points shortly after the announcement of the Union Budget. However the market was disappointed by the increase in the dividend distribution tax, IT companies entering into the minimum alternative tax (MAT) bracket, 1% increase in the education cess and no change in the security transaction tax. As a result the Sensex slipped deep into the red in the afternoon. The Sensex managed to recover some losses but ended the session with losses of 541 points at 12938. The Nifty shed 149 points and closed at 3745.
Except the BSE FMCG index all the sectoral indices were hammered. Among the major losers the BSE IT index plunged 5.85%, the BSE Teck index shed 4.65% and the BSE Metal index declined 4.64%. In the broader market, the losers outnumbered the gainers. Of the 2,530 stocks traded on the BSE, 1,900 stocks declined, 598 stocks advanced and 32 stocks remained unchanged.
Except ITC all the stocks in the Sensex basket ended with steep losses. Satyam Computers tanked 8.42% at Rs413, Gujarat Ambuja slumped 7.76% at Rs116, Wipro tumbled 7.34% at Rs561, HDFC plunged 6.60% at Rs1,502, ACC crashed 6.35% at Rs900, TCS plummeted 6.07% at Rs1,188, Tata Steel fell 5.72% at Rs443, Maruti declined 5.40% at Rs840, Grasim lost 5.13% at Rs2,213 and Infosys slipped 5% at Rs2,078. The other front-line stocks shed 3-5% each. However ITC surged 4.03% at Rs172.
Information technology stocks witnessed substantial selling. HCL Technologies plunged 9.74% at Rs596, Mphasis plummeted 7.04% at Rs259 and Tech Mahindra shed 4.07% at Rs211. Metal stocks, too, took a sharp beating. Sesa Goa plunged 8.45% at Rs1,783, Nalco slumped 6.64% at Rs210 and Sterlite slipped 6.21% at Rs469.
Over 1.23 crore IDFC changed hands on the BSE followed by Power Finance Corporation (56.63 lakh shares), ITC (48.92 lakh shares), Reliance Communications (45.50 lakh shares) and Gujarat Ambuja Cement (45.04 lakh shares).
Value-wise Reliance Industries registered a turnover of Rs325 crore on the BSE followed by Reliance Communications (Rs187 crore), Infosys (Rs173 crore), ACC (Rs119 crore) and IDFC (Rs116 crore).
Sell off likely
We will probably get discounts today - If you get a moment, where Infosys is 1500 BUY :) - these discount SALES come once in a while.
Don't panic - people who bought at 4500 in May 2004 made money.
Be sensible and don't add to the discount sale and yes, don't look at Udayan and Mitali flirting and scaring you.
And, Marc Faber is an a.....e - he magically appears on TV when market falls.
Market may remain cautious
Today finance minister will unfold the budget and expectations are it will be a populist budget. Rumors are that FM is unlikely to announce any big changes in the direct tax structure.The market is likely to remain under pressure following an overnight fall in the US indices and weakness in the Asian markets in ongoing trades. Among the key local indices, the Nifty has a key support at 3880 and a slip below this level could see it test lower levels around 3840, while on the upside the index could test 3980. The Sensex has a likely support at 13400 and may face resistance at 13600.
U.S. stocks fell sharply in on Tuesday after Chinese stocks suffered their worst one-day sell-off coupled with a weak U.S. economic report concerns about a slowdown in global growth. While the Dow Jones tumbled 416 points at 12216, the Nasdaq dropped 97 points to close at 2408.
All the Indian ADRs were battered on the US bourses. ICICI Bank led the slump and crashed over 10% while VSNL and Rediff tumbled over 7-8% each. Infosys, Wipro, Satyam, ICICI Bank, HDFC Bank, MTNL, Tata Motors and Dr Reddy's slumped 3-6% each.
Crude oil prices edged higher, with the Nymex light crude oil for April delivery moving up by 11 cents at $61.39 a barrel.
Investsmart - Morning Call
Market Grape Wine :
In House :
Markets to open weak with 300 to 250 points down and to see selling at all
pull backs .
Pressure to continue in the market as global cues are bad .
Nifty at a support of 3827 & 3769 & 3659 levels with resistance at 3906 &
4001
Sell : Escorts at 134 levels 128 s/l 136.5
Sell : BankIndia below 168 target 160 s/l 171
Out House :
Sensex at a support of 13011 & 12798 levels with resistance at 13542 &
13786 levels .
Maintain strict stop loss for your trades as Budget Day Today with Global
Markets Bleeding Heavily .
IT surcharge cut expected with reduction in excise duites across the board
.
STT to go up by 20 % to 25% expected with increase in sectors under
service tax .
Infra to ripe benefits from the Budget expected & Handicraft and Jewellery
Industry to get rebates .
Stay calm and dont jump the gun with news with profit booking at higher
levels not ruled out .
Asian Stocks Add to Global Rout After China's Slump; BHP Drops
Asian stocks fell the most in more than eight months, extending a global selloff sparked by the biggest plunge in Chinese shares in a decade. BHP Billiton Ltd. and Posco led declines.
In the U.S, the Dow Jones Industrial Average dropped as much as 546 points, the most since the first trading day after the Sept. 11, 2001, terrorist attacks. Chinese stocks yesterday fell the most since 1997 after the government took measures to crack down on excess speculation that had driven shares to records.
``This will reverberate in Asian markets again today,'' said Shane Oliver, who helps manage about $64 billion at AMP Ltd. in Sydney. ``China's market has been poised for a correction for some time, which has made other Asian markets vulnerable too.''
The Morgan Stanley Capital International Asia-Pacific Index fell 3.3 percent to 143.80 at 11.30 a.m. in Tokyo after rising to a record yesterday. The gauge was set for its biggest drop since June 13. Chinese markets opened down, and swung between gains and losses.
Japan's Nikkei 225 Stock Average slumped 3.6 percent, set for the biggest drop since June 13. Toyota Motor Co. added to declines after the yen strengthened against the dollar in New York, eroding the value of exporters' sales.
Singapore's Straits Times Index plunged 5.3 percent while Malaysia's Kuala Lumpur composite Index tumbled 8.1 percent, leading declines elsewhere in the region. Stocks in China and Hong Kong may also slide for a second day, after the American depositary receipts of China Mobile Ltd., the world's largest mobile-phone operator by users, slumped 10 percent.
The Dow fell 3.3 percent while the Standard & Poor's 500 Index lost 3.5 percent, wiping out their year-to-date gains. The Nasdaq Composite Index slid 3.9 percent, its steepest drop since July 2002. Europe's Dow Jones Stoxx 600 Index slid 3 percent and emerging markets dropped.
China Tumbles
Shares also fell after U.S. durable goods orders fell 7.8 percent in January, reflecting the biggest slide in business equipment demand in three years, according to figures released yesterday by the Commerce Department in Washington.
China's Shanghai and Shenzhen 300 Index yesterday slumped 9.2 percent, also from a record. It had jumped 13 percent in the previous six sessions. The Shanghai Composite Index, which tracks the bigger of China's stock exchanges, plunged 8.8 percent, the steepest drop since Feb. 18, 1997. The rout wiped out $107.8 billion from the market value of China's companies, which had doubled in the past year.
Stocks fell after the State Council, China's highest ruling body, approved a special task force to clamp down on illegal share offerings and other banned activities in the market.
Commodities Hit
China's government has introduced several measures over the past year to calm the stock market. Banks were urged to stop lending money for stock investments and to recall outstanding loans, the China Banking Regulatory Commission said Dec. 31. The People's Bank of China, the central bank, ordered banks to boost reserves four times in the past year to reduce money available for investment.
``With capital flows being so global it's hard for action in a large country like China not to have an effect on other markets,'' said Amanda Smith, who helps manage $6 billion at ING New Zealand Ltd. in Auckland.
BHP, the world's biggest mining company by market value and production, lost 5 percent to A$27.40. Fiscal first-half sales to China rose 36 percent to $4 billion from a year earlier, the company said. Rio Tinto Group, the second-biggest by market value and third by production, dropped 3.9 percent to A$76.49. It generated 16 percent of its total sales from China in 2006.
`Worry'
``Commodities stocks are the losers because whenever something like this happens, investors worry about the implications for global growth,'' said Tom Murphy, who manages about $1 billion in Asian assets at Deutsche Bank AG in Sydney.
Posco, the world's third-largest steelmaker, slumped 4.3 percent to 356,500 won. China was the company's largest market after South Korea in 2005.
Korea Zinc Co., the world's biggest smelter of the metal, fell 3.8 percent to 90,600 won. Nippon Mining Holdings Inc., Japan's biggest copper producer, dropped 6.8 percent to 972 yen.
Toyota, Japan's largest automaker, dropped 4.1 percent to 8,000 yen. Matsushita Electric Industrial Co., the world's No. 1 maker of consumer electronics, lost 3.5 percent to 2,380 yen, while Sony Corp., the second largest, tumbled 6 percent to 6,130 yen.
The yen rose the most in more than 19 months against the dollar amid a sell-off in U.S. stocks and as investors shunned emerging-market assets, prompting an unwinding of trades betting on a decline in the Japanese currency.
The currency rose 2.3 percent to 117.93 against the dollar late in New York yesterday, the biggest gain since July 2005. It was little changed at 118.15 recently.
China ADRs Slump
``China's drop yesterday shocked risk-money investors, as did the yen's climb,'' said Mitsushige Akino, who oversees about $468 million in assets at Ichiyoshi Investment Management Co. in Tokyo. ``Stocks should fall across the board.''
China Mobile's ADRs fell 10 percent to $44.16 in New York. Its Hong Kong-traded stock yesterday slipped 2.9 percent to HK$74.90. ADRs of China Life Insurance Co., the country's biggest life insurer, fell 8.8 percent to $38.48. The stock fell 3.8 percent to HK$21.65 in Hong Kong yesterday and lost 9 percent to 33.89 yuan on the mainland.
Brilliance China Automotive Holdings Ltd., the Chinese partner of Bayerische Motoren Werke AG, tumbled 12 percent to $24.30 in New York. The stock fell 6.9 percent in Hong Kong yesterday.
Hong Kong's Hang Seng Index yesterday lost 1.8 percent. The Hang Seng China Enterprises Index, which tracks the so-called H shares of 37 mainland companies, fell 3.1 percent.
``It's not just a one-day drop,'' said Andy Mantel, managing director of Pacific Sun Investment Management in Hong Kong. ``There's more room in the downside. My strategy is to increase in cash and shorts.''
China stocks open down but quickly recover
China's main stock index opened lower on Wednesday but recovered quickly and moved into positive territory as heavily weighted financial blue chips climbed.
The benchmark Shanghai Composite Index (.SSEC: Quote, Profile, Research) opened down 1.34 percent, but after five minutes stood 1.18 percent higher at 2,804.454 points.
On Tuesday the market plunged 8.84 percent, its biggest fall in a decade, in a sell-off that jolted global financial markets.
Analysts said Chinese investors remained nervous after Tuesday's rout but recently created funds had entered the market to accumulate shares for long-term investment.
Officials denied various rumors that fueled Tuesday's tumble, including talk that China might impose a stock capital gains tax and that the head of the securities regulator might step down.
In addition, investors believe the government, which wants to list big state firms on the market this year, will not permit a collapse that could endanger those plans, traders said.
Many see good technical support for the index at the February low of 2,541, from which it bounced sharply early in the month.
"The situation is not too bad. The market should stay in a range of 2,500 to 3,000 for a while," said Zhang Qi, analyst at Haitong Securities, adding that Tuesday's drop was probably not the start of a bear market.
Wall Street bleeds on a turbulent Tuesday
Dow posts biggest one day loss in over five years plunging 416 points
U.S. stock market witnessed its worst one-day performance since 2001 on Tuesday, with the Dow Jones Industrial Average, at one point, losing 200 points in less than a minute just an hour before closing bells were to ring. After a sell-off in China fueled concerns about growth, Wall Street was bruised and was left bleeding for the entire day. Dow, Nasdaq and S&P 500 tumbled 3.3%, 3.9% and 3.4% respectively for the day.
Concerns that tighter credit conditions in China and Japan might dampen global growth first sent Shanghai sliding 9% overnight before the sell-off spread to other markets. Higher oil prices and some disappointing economic news just worsened the situation further. Today's Dow loss was also the biggest percentage decline since the index fell 3.67% on 24 March, 2003 just before the United States invaded Iraq.
The suicide bombing attack at the main U.S. military base in Afghanistan just as Vice President Dick Cheney was visiting also rattled markets.
The Dow was down as much as 546 points (-4.3%) at one point, before bouncing back to close down 416 points. That was still the biggest one-day point decline since the markets reopened on 17 September, 2001 (after 9/11) when it fell by 684 points. With today’s trading, market decline wiped out all of the year's gains for the Dow and the S&P 500.
Ultimately for the day, The Dow Jones Industrial Average closed lower by 416.02 points at 12216.24, Nasdaq lower by 96.66 points at 2407.86 and S&P 500 lower by 50.33 points at 1399.04.
All 30 stocks in the Dow ended lower for the day along with 497 stocks in the S&P 500. The only winners were RadioShack and Questar. While Walt Disney was Dow’s biggest loser, the Dow component that suffered minimal loss was GE.
Trading volumes hit record levels on the New York Stock Exchange, where more than 2.3 billion shares exchanged hands. More than 3 billion shares traded on the tech-heavy Nasdaq stock market. Declining issues outpaced gainers by 29 to 4 on the NYSE and by 14 to 1 on the Nasdaq.
In addition, the New York Stock Exchange said that trading was disrupted by "intermittent technical problems" toward the end of the day. Most traders translated that to mean that the exchange's computers were overwhelmed by the volume of trading, and there were fears the problems would spill over into tomorrow's trading.
Swiftness of Dow Drop Due to Computers
A computer glitch triggered a sudden plunge in the Dow Jones industrial average at mid-afternoon Tuesday, turning an already bad day in stocks into a head-turning spectacle. Dow Jones & Co., the media company that manages the well-known index of 30 blue chip stocks, said it discovered shortly before 2 p.m. that its computers weren't properly handling the day's huge volume in trades at the New York Stock Exchange.
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It switched to a backup computer, and the result was a massive swoon in the index as the secondary system took over processing shortly before 3 p.m.
The Dow plunged about 200 points almost instantly, and was down as much as 546 points -- its worst single-session decline in more than five years, and one that sent the blue chips into negative territory for the year.
"I've never seen a collapse like that, and I've only been doing this for 47 years," said Alfred E. Goldman, chief market strategist at A.G. Edwards & Sons Inc.
The heavy volume of some 4.5 billion trades, almost double the average, came on a day in which investors worldwide were rattled by a nearly 9 percent drop in Chinese stocks overnight. Investors, draped in concerns that stocks were overvalued and that economic weakness was at hand, began crying "sell" from the outset.
"The market's extraordinary trading volume caused a delay in the Dow Jones data systems," said Dow Jones spokeswoman Sybille Reitz. "We decided to switch over to the backup system, and the result was a rapid catch-up in the published value of the Dow Jones industrial average."
The sheer number of sell orders caused a bottleneck, where some traders reported that systems were slow to respond.
Despite the delays, the closing prices on Tuesday were accurate, the exchanges said.
The NYSE said none of the delays were related to its hybrid trading system, which combines trades executed by floor brokers with those that are fully automated. The Big Board suspended its electronic platform to bring about an orderly close, and reverted trading to floor brokers.
A spokesman said the exchange expects an orderly opening on Wednesday.
The Dow closed down 416.02, or 3.29 percent, at 12,216.24; the Standard & Poor's 500 index fell 50.33, or 3.47 percent, to 1,399.04; and the tech-dominated Nasdaq composite index was off 96.66, or 3.86 percent, at 2,407.86.
"It was literally seconds. I had never seen anything like that before," said Ryan Larson, senior equity trader at Voyager Asset Management, a subsidiary of RBC Dain Rauscher. "The nature of a trader is you're very skeptical of everything. I just needed to find to find out that it was real."
To the chagrin of many investors, the drop was indeed real.
Todd Leone, managing director of equity trading at Cowen & Co., said trading became difficult.
"Some of the books froze up," he said, referring to the systems in which traders place their orders. "You couldn't really trade. You couldn't really make sales." He said orders appeared to become backed up. "Once they unfroze the Dow fell."
There are safeguards to keep such pullbacks from getting out of hand.
One measure, known as trading collars, kicked into effect Tuesday shortly after 1 p.m. when the New York Stock Exchange Composite index lost more than 180 points. That index ended the day down 342.03 points, or 3.6 percent.
The collars put a chokehold on certain orders, forbidding transactions that capitalize on discrepancies in prices.
There are also more draconian measures that weren't invoked Tuesday. Known as "circuit breakers," these safeguards force traders to take a time-out. The Big Board developed these measures following the October 1987 crash and a mini-crash in October 1989.
The drop Tuesday, however unnerving, wasn't the 1,250 point decline in the Dow industrials that would've been required to suspend trading. While the rules vary depending on the time of day and the severity of the drop, the exchange can halt trading for as little as a half hour to two hours, or in some cases, end the day's session early.
Sharekhan Investor's Eye dated February 27, 2007
PULSE TRACK
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Economic Survey 2006-07
STOCK UPDATE
Aban Offshore
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs2,387
Current market price: Rs1,855
Price target revised to Rs2,387
Key points
- Aban Offshore Ltd (AOL) has successfully increased its stake in Sinvest ASA to 97% through the completion of the mandatory open offer. With a majority control in Sinvest, AOL would have control over 28 assets (including the six under construction) and has emerged as one of the Top 10 offshore drilling companies globally.
- The acquisition of the additional 57% stake in Sinvest for around $775 million will be earnings accretive. It would boost the earnings by $41.8 million in FY2008 and by $70 million in FY2009. Moreover, AOL would get access to the huge cash flows of around $750-800 million expected to be generated by Sinvest over the next three years.
- We maintain our Buy call on the stock with a one-year revised price target of Rs2,387 (8x FY2009E earnings which is at a slight premium to the valuations of the other comparable global players due to the company's strong cash flows and a relatively higher return on equity [RoE]).
SKF India
Cluster: Apple Green
Recommendation: Buy
Price target: Rs406
Current market price: Rs327
Expansion to drive growth
Result highlights
- SKF India's Q4CY2006 net sales stood at Rs379.3 crore, marking a growth of 52.25% year on year (yoy). The company had increased the capacity at its Bangalore and Pune units during Q3CY2006. The combined capacity has been enhanced to 100 million ball bearings per year from 74 million ball bearings and the company is increasing its taper roller bearing capacity to 20 million units per year.
- The operating profit margin (OPM) for the fourth quarter declined by 70 basis points to 13.5% on a like-to-like basis. However, on a sequential basis, the margin marked a significant improvement of 210 basis points. The operating profit for the quarter increased by 45.5% yoy to Rs51.4 crore.
- The pre-exceptional net profit stood at Rs31.7 crore against Rs10.3 crore in the fourth quarter of last year. However, the last year's numbers had contained two extraordinary items of Rs10.2 crore, relating to the cost of traded goods for the previous quarters, and a Rs4-crore contribution to the superannuation fund due to a change in the accounting practices. Hence, the adjusted profit after tax (PAT) for Q4CY2006 grew by 29% yoy to Rs31.7 crore.
- For CY2006 the sales have grown by 71.8% to Rs1,342 crore. The OPM for the year is down to 12.8% from 14.8% in CY2005. The CY2006 sales and profit margin numbers are not exactly comparable with those of CY2005 due to a change in the method of accounting for indenting business as commission income to the direct customer delivery model in this year. The PAT for CY2006 is at Rs102 crore, a growth of 62%.
- We maintain our positive outlook on SKF India in view of the strong demand and expansion in the company's user segments like automobiles and industry. We are introducing our estimates for CY2008. At the current market price of Rs327 the stock is discounting its CY2008 earnings estimate by 9.8x and its earnings before interest, depreciation, tax and amortisation (EBIDTA) estimate by 5.1x. We maintain our Buy recommendation on the stock with a price target of Rs406.
Deepak Fertilisers & Petrochemicals Corporation
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs126
Current market price: Rs95
Strong profits in the pipeline
Result highlights
- The revenues of Deepak Fertilisers and Petrochemical Ltd (DFPCL) grew by 69.7% year on year (yoy) to Rs243.3 crore in Q3FY2007 driven by the strong performance of both its chemicals and fertilisers divisions. The robust growth in manufactured chemicals due to the isopropyl alcohol (IPA) plant becoming operational drove the growth in the revenues in the chemicals business, while the fertiliser segment witnessed a surge in its revenues from traded goods. The sales last year were lower due to lack of availability of gas and the floods, which further gives a positive bias to the year-on-year (y-o-y) growth figures.
- The operating profit grew by 47.3% yoy to Rs40.6 crore due to the firm naphtha prices & higher revenues from traded goods. The profit before interest and tax (PBIT) margin of the chemicals division declined by 300 basis points while the fertilisers business continued to make losses having a PBIT margin of -16%.
- The net profit for Q3FY2007 grew by 55.4% yoy, due to lower tax provisioning compared to the last year. The net profit was up 55.4% in spite of a higher depreciation charge, higher interest cost and lower other income.
- Ishanya, DFPCL's specialty mall coming up in Pune will stabilise its operations from April 2007. Around 76% of the leasable area has already been leased out for Ishanya and after making the changes required by the new clients the mall is likely to be launched in a phased manner by April 2007.
- The progress on the ammonium nitrate (AN) plant in Orissa is on schedule and the plant is set to begin production in Q1FY2009.
- We believe that DFPCL's valuations at 6.3x FY2008E earnings per share (EPS) are attractive, given the fact that the company has undertaken capital expenditure (capex) of Rs700 crore without diluting its equity and return on equity (RoE). We maintain our Buy recommendation on the stock with a price target of Rs126.
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