Dead Presidents! - India Equity Research

Saturday, October 11, 2008

The US government lent insurance major AIG an additional US $37.8bn. The insurer was seized last month and lent US $85bn. The company’s executives, meanwhile, got a rough ride in Congress for spending US $440,000 at a fancy resort the week after AIG was bailed out.

Bank of America reached a settlement with those states, including California and Illinois, that had brought lawsuits against the lending practices of Countrywide Financial, a beleaguered lender bought by the bank this year. The settlement rejigs the mortgages of around 400,000 homeowners and could cost up to US $8.6bn. Separately, Bank of America raised US $10bn in a share sale and said it would halve its dividend.

SAP, the world’s largest maker of software for business, said it had experienced a very sudden and unexpected drop in demand. And figures showed that the rate of growth in revenue from online advertising in the US in the first half of 2008 was considerably lower than in the same periods in 2007 and 2006. IBM, however, reported a 22% increase in quarterly profit.

GM, Ford shares fall on grim auto outlook

General Motors (GM) shares plunged 31% on Thursday and Ford Motor tumbled 21% on reports that auto sales will hit recession levels this year and get worse in 2009. Global auto market may experience an absolute collapse in 2009 amid growing concerns around availability of credit and general economic stress, said JD Power. The outlook represents the most dire warning yet on the auto industry in the wake of the financial turmoil that has rocked consumer confidence and virtually shut the door for many consumers to finance vehicle purchases. In response, S&P put GM and Ford's debt ratings on CreditWatch with a negative outlook. However, shares of the two US auto majors rebounded on the last day of the week. GM said it was not considering bankruptcy. Separately, GM also decided to stop production for a short time at several European plants, as part of its effort to reduce capacity. Other carmakers are also cutting back in Europe as they adapt to a sharp drop in demand.

Bankers to rescue Hindalco rights issue

The Rs50.47bn rights issue of Hindalco Industries is set to devolve on the underwriters. Although the quantum of the devolvement will be clear on Friday after the closure of the issue, reports said the figure is expected to be in the range of at least 15-20%. The five merchant banks are ABN Amro, Citigroup, Deutsche Bank, DSP Merrill Lynch and State Bank of India. The offer managed to attract subscription of only 45% (including a large chunk subscribed by the promoters) till Wednesday. This included GDR holders’ application to buy their entire entitlement of nearly 11%. The Aditya Birla group, the promoters, has promised to subscribe to 50% of the issue, against its entitlement of 31.4%. Domestic financial institutions have a combined 15% stake in the aluminium giant.

US withdraws motion against Ranbaxy

The US Department of Justice (DoJ) withdrew its motion in a local court against Ranbaxy after the Indian drug maker handed over the documents sought by the authorities. Ranbaxy said that the DoJ has been provided with a comprehensive set of audit documents based on instructions by the company, which will help resolve the questions raised by the U S government about the company's business practices and standards. Ranbaxy said that it remains confident that its pharmaceutical products are sale and effective and remains committed to cooperatively working with all regulatory and legislative authorities. Ranbaxy shares bucked the gloomy mood in the market, rising by 16% on the week.

Q1 wireless subscriber base up 10% QoQ

The total subscriber base of the wireline and wireless services reached 325.79mn for the quarter ended June as against 300.49mn for the quarter ending March, thus registering an increase of 8.4% during the quarter. The tele-density for the quarter ended June reached 28.33 compared to 26.22 for the quarter ending March. The subscriber base for wireless services increased from 261.07mn for the quarter ended March to 286.87mn for quarter ended June. Subscriber base of wireline service decreased from 39.42mn for the quarter ended March to 38.92mn for the quarter ended June. For GSM segment, all India blended ARPU per month decreased by 9.3% from Rs264 in March to Rs239 in June. For CDMA segment, all India blended ARPU for the quarter ended June was Rs139 compared to Rs159 for the quarter ended March.

Infosys Q2 net up 10% QoQ; cuts guidance

Infosys Technologies Ltd. announced financial results for the fiscal second quarter ended September 30, 2008. The Bangalore-based IT major has posted a consolidated net profit of Rs14.32bn versus Rs13.02bn in the previous quarter. This translates into a sequential growth of nearly 10%. Consolidated revenue for the reporting quarter is at Rs54.18bn, up 11.6% over the April-June quarter. Income was expected to be in the range of Rs52.29bn and Rs52.72bn. Earnings per share (EPS) for the second quarter has increased to Rs 25.02 from Rs22.75 in the first quarter. The EPS was expected to be in the range of Rs 23.52 and Rs 23.95.

Inflation coming down slightly

India's inflation, based on the wholesale price index (WPI), slowed to a 15-week low towards the end of September, as prices either declined or remained stable, the Government said. The annual point-to-point inflation stood at 11.8% in the week ended September 27 as against 11.99% in the previous week, the Commerce & Industry said in a statement. The rate was below a median forecast of 11.98%. The annual inflation rate was 3.36% during the corresponding week of the previous year. The WPI for 'all commodities' declined by 0.1% to 240.7 from 241.0 in the previous week. Inflation for the week ended Aug. 2 was revised up to 12.91% from a provisional estimate of 12.44% while the WPI for the same period was increased to 241.4 from the preliminary forecast of 240.4.

The index for Primary Articles group declined by 0.2% to 250.9 from 251.3 in the preceding week, while the annual point-to-point inflation declined to 11.17% from 11.29% reported in the previous week. The index for Fuel & Power group remained unchanged at its previous week's level of 375.3. The rate of inflation remained unchanged at 16.52% for this commodity group. The index for Manufactured Products declined by 0.1% to 207.2 from 207.5 in the previous week. The rate of inflation declined to 10.33% from 10.55% in the previous week. Inflation for 30 essential commodities increased marginally to 7.74% in the week ending September 27 from 7.7% in the previous week.

Industrial output plummets in August

The turmoil in the global financial markets now seems to have started affecting the Indian economy in a really bad way. India's industrial production plunged to its worst level in more than a decade in August, the Government said. The index of industrial production (IIP) fell sharply to 263.6 in August from 273.8 in July, with the corresponding growth rate sliding to a paltry 1.3% from a healthy 7.4% in July. Economists had expected IIP growth at 6% in August. The mining sector grew by 4% in August versus 3% in July, while manufacturing grew by 1.1% in August as against 8% in July, and electricity rose by 0.8% in August compared to 4.5% year ago. The Government also said that it has revised the July industrial production growth to 7.4% from a provisional figure of 7.1%. For the first five months of the current fiscal year, industrial output growth stood at 4.9% versus 10% in the corresponding period of the last fiscal year.

Expect global slowdown - IMF

The world economy is decelerating quickly—buffeted by an extraordinary financial shock and by still-high energy and commodity prices—and many advanced economies are close to or moving into recession, the IMF says in its latest World Economic Outlook (WEO).

The October 2008 report which was released two days prior to the IMF-World Bank Annual Meetings in Washington, said that growth in emerging economies is also weakening after years of strong growth, though it will still drive global growth.

Speaking at the WEO press conference, IMF Chief Economist Olivier Blanchard emphasized the importance of implementing joint financial and macroeconomic policies at this point "to stem the negative momentum on multiple fronts." On the financial side, "this implies the design of comprehensive programs to deal with systemic problems," while on the macroeconomic side, "this implies the use of monetary and fiscal policies to support growth and break negative feedback loops between the financial and real sectors," he said.

"With the right macro and financial policies—and these policies are available—we ca

Weekly Newsletter - Oct 11 2008

Headwinds seems to be a gentle word for the markets world over as indices continue to witness ruthless selling. We believe the market is yet to find a firm bottom and 3000 levels for the Nifty remain our next hope. Despite relatively attractive valuations, index heavyweights could succumb to the selling pressure of FIIs and domestic funds. The last ones standing could face more carnage as desperate investors look to cash out at any price. Redemption pressures are being talked about from various quarters and this could intensify if things don’t improve. Given the sharp fall this week, there is always hope that things turn around. We may see some positive ticks beginning Tuesday. However, that should not tempt you to take heavy positions. Remain light till there is more clarity.

Considering the unprecedented carnage in the global financial markets and uncertainty over the fate of the US and other major economies, we would like to refrain from giving any investment ideas. We continue to advise caution at this stage. Investors should stay on the sidelines till the global selloff abates and markets stabilise. One should not get carried away if there is any kind of a relief rally, as further selling is expected. Any advance in Indian stocks can only be sustained if global markets recover.

Indian markets too remain under stress

The global mess kept pounding Indian markets, which twice avoided trading freeze this week. The Sensex tumbled 16% and the Nifty lost 14% after sinking to 17-year lows of 10,239 and 3198, respectively. The Government, SEBI and RBI announced measures to ease the pain in the markets, but the same met with limited success, as the massacre continued unabated. The Government expanded the scope of infrastructure to allow companies in mining, exploration and refinery sectors to raise overseas loans through the ECB route. Capital market regulator SEBI removed restrictions on offshore derivative instruments (ODIs) in both, the cash as well as futures & options segments of the market. SEBI chief C.B. Bhave said the 40% cap on ODIs, including participatory notes (PNs), out of the total assets under custody in the cash market will also be done away with.

But, the biggest step was taken by the RBI, which slashed CRR by 150 basis points to 7.5% to boost liquidity. The reduction in the CRR comes into effect on Saturday and will pump Rs600bn into the banking system. Also, the Government canceled bond auctions worth US$2bn. The central bank sprung into action after call rates in the inter-bank overnight market soared to a 19-month high of 23%, and the rupee hit an all-time low of 49.30 bringing this year's losses to 20% before it regained some ground.

Finance Minister P. Chidambaram and other top government officials reiterated the strength of the Indian economy and promised to take further steps to provide more funds to the banking sector. "We will take steps to infuse liquidity because we recognise that the flow of credit smoothly and efficiently through the system is vital to the stability of the financial system," Chidambaram said.

Finance Secretary Arun Ramanathan said that the RBI has assured the government it was keeping a close watch on the market and would take appropriate steps. The Government set up a panel, which includes representatives from the RBI, to assess the liquidity problem and report back within a week, he said. The RBI blamed the money market squeeze squarely on international conditions and assured investors that the Indian economy was in good health.

Global markets continue to singe...

The mayhem in global markets continued this week, as the financial contagion deepened in Europe, and even spread to Japan later in the week. Equity markets across the globe plunged badly amid mounting fears that the worst financial crisis since the Great Depression would result in a prolonged and painful global recession. The incessant carnage prompted governments and regulators to take more emergency steps to try and stop the bloodshed.

But, all the efforts yielded little results, as the MSCI World Index suffered its worst week in more than three decades. The Nikkei in Japan lost a fourth of its value while the Hang Seng dropped 16%. The FTSE 100 in London fell below 4,000 for the first time in more than five years. The Dow Jones Industrial Average sank under 9,000 for the first time since 2003. The Nasdaq fell below 1,700 and the S&P 500 plunged into triple digits.

Russian stock exchanges delayed the opening of trading and Indonesia extended a two-day halt. Iceland suspended equity trading until Oct. 13 after the government seized Kaupthing hf, the country's biggest bank. Russia's government said it will start buying stocks of domestic companies next week to help support prices. Consob, Italy's securities-market regulator, banned all short sales on the country's stocks.

The cost of borrowing in dollars in London for three months rose as cash injections and interest-rate cuts by 10 major central banks failed to unlock the frozen money markets. The cost to protect corporate bonds from default soared to records around the world on investor concerns that the deepening credit crisis will trigger more failures as companies struggle to finance their businesses.

Dead Presidents! - India Equity Research

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