Weekly Close: Rebounce but Fear of CRR haunts!

Lack of negatives across the globe led to strong start for the week. Markets across the globe were near there highs..Indian market too traded near its high but hesitated to touch the high. Overall sessions were volatile and jittery. Sensex gained marginally by 0.4% for the week mainly dragged by cement and banking counter. There were market buzz that RBI may hike CRR on the road to bring inflation 4-4.5%...However, no such action was seen. Cement Cos reduced the prices by Rs 3-4 per bag in Andra Pradesh in order to pass the excise duty benefits to consumers. Ahead of the rains cement prices will come off and this may be a natural effect. But we continue to expect stronger cement prices. China increased the interest rates and also increased the free float band for the Yuan which saw Yuan at a record high against the Dollar..Rupee appreciation continued to be the root cause of weakness in IT. Some comments from market experts turn out to be reason for selling across the globe. Former ex Chairman Alan Greenspan indicated the feared a 'dramatic contraction' in the Chinese stock market.

Sensex gained by 0.4%. Gains for week was led by Suzlon 24%; RNRL 15%; ZEEL 10%; REL Cap 8%; Tata Tea 8.6%; Essar Oil 6.9%; HLL 5.29%; TISCO 5%. Gains were erased by Sun -7.3%; Arvind -6%; Bajaj -5%; ACC -1.94%; Gujarat Ambuja -4.4%; Grasim -1.7%; India Cement -2.7%.; BPCL -2.82%; IOC -5.36%; HPCL -7%.

Cement Companies cuts prices by Rs 3-4 per bag in Andra Pradesh... The Govt has changed excise duty to 12% those who sell above Rs 190 per bag, instead of Rs 600 per ton which has fixed in budget. Immediately after the budget companies have raised the prices by Rs 10-12 per bag. So the companies now agreed to pass the benefits to customers. Ahead of the rains cement prices come off and this may be a natural effect. We continue to expect stronger cement prices..

On the economy front, there were rumours of a CRR hike this week. Fuelling that, was the fact that the RBI had been rumoured to be buying Dollars to keep the Rupee from appreciating further. The bank stocks are inflation sensitive. This counter was also dragged on back of rumours that RBI may hike CRR inorder to keep inflation under control and bring it to there target level of 4-4.5%. But rumours are never true and case was no different here. No CRR hike was seen. But liquidity crunch is still and issue and we would prefer to wait and watch here !

Reliance continued to be on fire. Some paper reported that Anil Ambani apparently told some market experts that RIL holds far more gas than what has been already certified of 80 million cubic meters per day. It could be over 200 MCMD. The gas finds, Anil said, will be commercially exploited by the second half of 2008, and will see India emerging as the cheapest producer of fertilisers and electricity in the next 3-4 years. Anil also added that the way things were going; the Rupee could touch Rs 30-35 per dollar some time this year. We have little reason to disbelieve. We also heard that apart from the KG6 discovery, the MN 4 would be a big surprise as well. This would need to be if this statement that India would be the cheapest producer for electricity and Fertilisers.

Under normal valuation parameters, Reliance have run up far more than fundamentals. As per analyst reports, the price of the upstream assuming 50 TCF reserves and 80mmscmd peak production capacity the valuation arrived at is around Rs 600 per share for Reliance. CLSA says that going by Nikko resources valuation (Nikko has 10% stake in KG D-6 and 15% in MN-D4) the valuation attributed is closer to Rs 900 per share. However, going by the above.. These Valuations could see a significant upward rerating. The catch here remains the quantum of the Gas and its realisability. More than that, the placement of 12 cr warrants to the promoters at Rs 1400 post such a strong run up is something which is unprecedented for a large cap company. Money to be invested by the Promoters is 17000 crores. The holding increases to 55% from 51%. Why would a promoter do this and at this stage.. ? Does Anils revelation carry the answers?

Suzlon was high on energy! The company won the bid for RE Power after Areva got out of the bidding process. It was a do or die for Suzlon and this win ensures the long term story for Suzlon. The stock surged on back of the acquisition but the near term is likely to face earnings pressure. The management indicated that the acquisition was not EPS dilutive but that really needs to be seen.

Tata Tea was another hot story for the week. Tata Tea sold its 30% holding in Energy Brands Inc; USA ("EBI") through its indirect UK subsidiary Tata Tea (GB) Investments Ltd to Coco Cola company for $1.2 bn. This deal was done for USD $677mn based on an enterprise valuation of US $ 1.2 Billion of EBI. Great profits !

Educomp rallied on the back of the fact that FII holdings were just about to reach the caution limit of 24% the maximum permissible. FIIs probably fell head over heals over each other trying to catch it before it gets into the restricted list. However, we think that the stock should come off now as its now restricted for buying. Further buying would need RBI permission.

HLL gained 5% for the week. Prices of detergent brands Surf Excel Blue and Rin Advance by 2.5%. HLL also implemented a re-grammage exercise on two SKUs of 100 gm and 300 gm of Lifebouy which would increase prices by 11%. Price hike is certainly good...However increasing competition and ad spent really makes things tough here and this hike is really to pass on increasing cost pressures. We like Godrej Consumer in this space. The company is a player in the soaps, Toiletories and hair color market. Previous year margins were softer given the increased Palm oil prices which are up over 35% and other raw material prices. Soap and Hair colour prices was increased this March. Overall the growth is what makes Godrej an interesting play in the FMCG space. The company has entered into a JV for feminine Hygene where it will also have Snuggies, the diaper product. Recent acquisitions of International brands were the big drivers for growth. The segments of Hair color and toiletories is an interesting one and fast growing. Going ahead the risks remain from increasing marketing costs.

Among mid caps SKF rallied on the back of rumours of SKF buyback offer. The parent holds about 54% stake in the company. Interesting to note that the company actually had an IT expense of Rs 21 crore as revenue expense. The figure was Rs 12 crore for last year. This was for implementation of SAP. The company implemented SAP this year. More than the benefits of SAP.. the bases of such a large number from the expense would be the big kicker next year. The company's Direct consumer Delivery (DCD) model is one which makes SKF as a one window for any product made by SKF globally. This ensures higher revenues. Near term the margins will fall off as the March quarter margins were helped by a stronger rupee and the kick off in the DCD model. Lower duties for imported bearings came in the first quarter itself but will no longer be there henceforth. Another negative is that slower growth of 2 wheeler impacts them and thats been the story for now. FAG bearings also saw interest on the back of SKF. We think FAG is a good story as well though we like SKF more for its replacement market. More interest stories in mid caps are under interpretation. We will continue to bring interest stories to you with sound fundamental. Keep watching !