Sharekhan Pre-Market Watch

Rising crude prices could dent market

Following gains of over 250 points in the last two sessions, the mood is likely to remain optimistic on expectations of good quarterly numbers going further. However, rising crude oil prices in the international market could make investors jittery from taking any fresh positions. The market may open weak as major Asian indices have fallen over 1% each.

The benchmark indices, the Nifty could test its recent high of 2927 on the upside while it has likely supports at 2867 and 2848 on the downside. The Sensex has a likely support at 9466 and could test resistance at 9556.

Disappointing numbers from General Electric and Citigroup followed with a 2% surge in the crude oil prices due to prevailing tensions over Iran's nuclear plans had a telling effect on the US indices. On Friday, the Dow Jones tanked 1.96% or 213 points at 10667 while the Nasdaq tumbled 2.35% or 54 points to close at 2248.

Except Dr Reddy's and VSNL, other Indian floats took a sharp hammering on the US bourses. Rediff led the slump with a loss of 6%. Among other major losers Satyam dropped nearly 6%, Wipro shed 3% and Infosys declined 2%. Tata Motors, ICICI Bank, HDFC Bank, Patni Computers and MTNL were down around 1-2% each.

Crude oil prices continued moving upwards over Iran's nuclear issue and Nigeria's oil facilities facing militant attacks. As a result, the Nymex light crude oil for February delivery rose $1.29 to settle at $68.48 a barrel, while the London Brent crude moved up by $1.20 at $66.43 per barrel. In the commodity segment, the Comex gold dropped $5 to close at $554 an ounce.

ITC declared its Q3 numbers after market hours on Friday. The company reported a 15% rise in its net profit at Rs536.83 crore for the third quarter ended December 31, 2005 as against Rs466.70 crore recorded during the same period last fiscal. The total income rose 36% to Rs2,604.92 crore in Q3FY2006 from Rs1,911.12 crore reported during Q3FY2005.

Stocks to watch
Reliance Industries is planning a capex of Rs5,000 crore for starting commercial gas production from coal bed methane blocks by mid-2008.

Bajaj Hindusthan is planning an investment of Rs700 crore and will raise funds through GDRs and FCCBs comprising Rs299.65 lakh shares.

Micro Inks may witness action on reports of signing a supply agreement with Hannanprint NSW for Australian $39 million.

Motilal Oswal - Biocon

Download here

Reliance Industrial Infrastructure - SP Tulsian

One can safely buy this share for over 100 % gain in next one year. The share is presently available at forwarding earning multiple of about 17 while peers command an average P/E of above 40 and Industry P/E of above 30.

Gujarat State Petronet

Get Set Go

Gujarat State Petronet (GSPL), promoted by Gujarat State Petroleum Corporation (GSPC), transmits natural gas. The company currently owns and operates 433 km of natural gas pipeline, from Hazira to Kalol, catering seven of the 25 districts in Gujarat, This is the second largest natural gas transmission network in India. GSPL is the first company in India to transport natural gas on an ‘open access’ basis: the company makes its gas transmission capacity available to any shipper on a non-discriminatory basis. It does not trade in natural gas and is not directly affected due to its fluctuating prices.

GSPL will establish another 742 km of natural gas pipeline, covering seven more districts of Gujarat, with an estimated capital expenditure of Rs. 1400 crore. The company hopes to mobilise around Rs. 370 crore from the present IPO. It has tied up with a consortium of banks/FIs for loans of Rs. 758 crore. The balance is to be financed by internal accruals. This expansion, which is expected to complete by July 2007, will enable GSPL to reach new customers in Vapi, Saurashtra, Mehsana and Himmatnagar among other markets.

The 18 customers of GSPL are mainly from the fertilizer and power sectors, including GPEC, Essar Steel, Essar Power, Iffco, AEC, GNFC, GSFC, and Arvind Mills. The expansion will allow the company to service even medium-sized companies and varied industries such as ceramics and chemicals. Currently, its pipeline transport 13 million metric standard cubic meters per day (mmscmd)) of natural gas of various suppliers, including Cairn Energy, GSPC – Niko, Hazira LNG, Petronet LNG, and PMT Gas. The existing pipeline is capable of transporting around 40 mmscmd of natural gas. The utilisation is expected to double to 26 mmscmd in three years.

The tariff structure is based on the distance as against fixed tariff of Gail (India). Nearly 90% of these charges are based on capacity booked. GSPL operates on a 15-day billing cycle. The next two billing cycles are insured.

Strengths

• GSPL enjoys the first-mover advantage in the new pipeline that it is establishing and is expected to enjoy near-monopoly for an extended period of time in future.
• Global demand for natural gas is expected to grow at an average rate of 2.3% in the next 20 years, while the Indian demand for natural gas is expected to go up at around 5.4% per annum to 400 mmscmd, from the present 150 mmscmd in the same period. The weightage of natural gas in the energy basket of India is expected to increase from the present 8% to 20% by 2025. In fact, supply, and not demand, is a constraint.
• Gujarat, where GSPL is located, produces nearly 65% of the total natural gas production of India. The state hosts the only two LNG terminals in India. Also, of the 55 oil and gas exploration blocks offered under the upcoming sixth round of New Exploration Policy. majority are expected to be in the Krishna Godavari (KG) basin. So supply of gas will increase significantly, though timing and quantity is not ascertainable.
• Bulk buyers favour the "open access" system adopted by GSPL as it allows them the flexibility to choose the supplier for natural gas.

Weaknesses

• Impending government policies on regulating natural gas production and transmission may affect prospects. However, since GSPL is already operating on "open access" basis, which is one of the major motives behind the policy regulations, it is not expected to suffer heavily. These policies may put a cap on the maximum tariff chargeable.
• GSPL is establishing a pipeline infrastructure in anticipation of increasing availability of natural gas at reasonable prices in the future. Major contracts for import of LNG in India are expected to be functional from 2008/09 onwards, until then the natural gas supplies will depend mainly on existing contracts and domestic production. Thus, a shortage of natural gas may hamper the company’s growth targets in the short term.
• The process of acquiring land, rights of use (RoU) and rights of ways (RoW) for laying pipeline is prone to litigation and, therefore, highly time consuming.

Valuation:

*GSPL has set a price band of Rs. 23 to Rs. 27, which translates into a PE of 24 x to 28.2x annualised EPS in the half-year ended September 2005 on post-issue equity

*Gail (India) and Gujarat Gas (GGCL) are the only two companies operating in a business similar to that of GSPL. These companies are presently trading at PE multiples of 9.1 and 16.7, respectively, on their half-year annualised EPS. However, growth rates for GSPL are likely to be higher.

*GSPL is considering reducing the depreciation rate on pipelines from 8.33% to 3.17% in line with the new depreciation policy recognised by the Ministry of Company Affairs. Gail has adopted the new rate from the current year. The new rate will significantly boost net profit.

Motilal Oswal Reports - 20/01/2006

Ugar Sugar

Jaiprakash Associates

Jubliant Organosys

Era Constructions

Why track down Rooplaben?

A few months ago, when Manjunath was murdered, at first there was an uproarabout bad law and order. While concerns about bad law and order arecertainly well placed, in this case, the incentive for criminal activitiesclearly came from government-induced pricing distortions in petroleumproducts. Just as the problem of smuggling was caused by India's tradebarriers, which went on to corrode the police, the problem of Manjunath'smurder was caused by India's oil pricing policies, which went on to corrodethe police.

A similar situation has shaped up on the IPO market. The root of the rot isa pricing policy which gives supernormal returns to "individual investors".In the IPO market, a "small investor" is defined as someone applying forshares of less than Rs 50,000. In the Yes Bank IPO, the oversubscriptionfor such "small investors" was 9.96 times, while the oversubscription forthe remainder was 43.68 times. This gave "small investors" an allotment ofshares bigger by four times.

If you got shares of Yes Bank at the IPO and sold at first listing, thisgave you an instant profit of 36%. How do you think people will respond tosuch a situation? By tossing in more applications! A family of five willput in five different applications, each at Rs 49,999. A family of fivewill create five fake identities each, and thus have 25 applications. Andso on it will go, to a point where some people will muster thousands ofapplications. It is hypocritical to pour invective upon someone who puts in5,000 applications, while ignoring the ordinary household that puts in 25applications.

When the IPO market is structured in this fashion, there is endemicfalsfication, and ordinary citizens engage in fraudulent behaviour. When acertain activity endemically takes place amongst ordinary, middle-classhouseholds, no police force in the world can stop it. In a democracy, whenthere is a collision between law and mass behaviour, ultimately it is thelaw that has to budge.

In some countries, there are strong notions of citizen's identity, whichuniquely identifies each person. An enormous enforcement infrastructure hasbeen developed in those countries, to enforce stringent penalties againstpeople who have multiple identities. If such identity infrastructureexists, it becomes feasible to enforce rules such as "no more than oneapplication per citizen". But even there, it is unfair that a family of sixcan toss in six applications while a family of two can only put in twoapplications. In the Indian case, given the absence of identityinfrastructure, enforcement against multiple applications is justinfeasible.

The finance minister has promised a crackdown on the "IPO scam". Hundredsof staffpersons at the ministry of finance, the RBI, Sebi, NSDL, etc. arenow expending their energies in hunting down multiple applications inrecent IPOs. Is this an efficient use of scarce regulatory and governancecapacity?

The core problem lies elsewhere. It lies in a pricing distortion that hasbeen created by Sebi. The solution that is required is to eliminate thisdistortion.

There is no case for special allocations for "individual investors". Theultimate aim of a good IPO mechanism is that the price discovered in theIPO auction should be practically the same as the price at first listing.If an IPO takes place on Friday, and trading starts next Monday, onaverage, the Monday closing price should be the same as the IPO price.

Once this is done, there is no "special profit" in buying at the IPO, whichcan be politically allocated to "individual investors". Individualinvestors who didn't obtain shares in the auction would be able to buy themon the secondary market on Monday at essentially the same price.

The way forward, thus, consists of removing the frictions that are in ourIPO process, which are generating a gap between the IPO price and the firstlisting price. Our the IPO mechanism has made enormous progress compared tothe bad old days, when people filled out forms and sent them out with acheque attached, by post. We have started using computer technology toreduce the frictions. But partly owing to the business interests ofinvestment bankers, we have stopped short of the logical destination: IPOby pure auction through the NSE and BSE.

Here is how it would work. The investment banker would help the company towrite the prospectus, and do roadshows across India, but have no other rolein the IPO. On a Friday, the auction would take place from 9:55 to 3:30. Aswith secondary market trading, there is no need for a "price band", whichonly limits price discovery. Investors would go to a broker to place ordersin the auction. All brokers in India would be able to accept orders for theIPO, exactly as is the case with the secondary market today. Exactly aswith the secondary market, the broker would be held financially responsiblefor the orders placed by investors.

The screen would continually display the market-clearing price and demandschedule. Investors would have the ability to revise their bids if theychange their minds based on looking at the demand curve. At 3:30 PM, thecomputer would calculate the cut-off price, and apply it to all successfulbidders. By definition, there would be no oversubscription.

The greatness of India's secondary market for equity has been that allinvestors_retail or institutional_participate in a single unified pricediscovery. The success of unification of all orders in the secondary marketshows that this is feasible in the IPO auction also. A financial market isabout prices, where the highest bidder gets the securities sold in theauction, and not about the identity of the participant.

The ultimate cause of smuggling was our trade barriers. The ultimate causeof Manjunath's death is our pricing distortions on petroleum products. Theultimate cause of the "IPO scam" is mistakes in the design of the IPOmarket. Instead of expending thousands of man-hours of staff time in hotpursuit of Roopalben, we should solve the problem at the source. Thisrequires moving up to the next level: an IPO market based on pure auction.Everyone benefits in such a scheme, except for the investment banker whomakes less in fees.

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Himalaya International

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Sharekhan Trading Call - GE Shipping

New Trading Call
Date: 18/01/2006 | Company Name: GESHIP | Call Type: Go Short
Stop Loss/ Reversal: 254.0000
Buy/Sell Price Rs.: 243.00
Current Price Rs.: 243.80
Potential P/L%: 0.3200
Target: 223-210
Remark:
Investment Argument: The stock has formed a wedge like pattern. Go short with a stop loss at Rs254 for the targets of Rs223 and Rs 210.

Sharekhan Trading Call

Date: 18/01/2006 | Company Name: IFLEX | Call Type: Go Short
Stop Loss/ Reversal: 1150.0000
Buy/Sell Price Rs.: 1120.00
Current Price Rs.: 1124.70
Potential P/L%: 0.4100
Target: 1010-950
Remark:
Investment Argument: This call is to be initiated after the stock breaks the level of Rs1,100. The stop loss would be at Rs1,150. The targets are Rs1,010 and 950.

Sharekhan Investor's Eye

Sintex Industries
Cluster: Apple Green
Recommendation: Buy
Price target: Rs192.5
Current market price: Rs162

Price target revised to Rs192.5

Result highlights

* Sintex Industries Ltd (SIL) reported a revenue growth of 14.4% year on year (yoy) in Q3FY2006 to Rs210.3 crore. The revenue growth was marginally lower than our expectation, mainly because the plastic business grew at a slower growth rate of 5.2% yoy.
* The operating profit margin (OPM) saw a phenomenal improvement of 140 basis points yoy and of 80 basis points quarter on quarter (qoq) to 18.6%. The growth in the OPM was above our expectation. Accordingly, the operating profit (OP) saw a strong growth of 31.8% yoy to Rs39.2 crore.
* The revenues of the textile division grew at a robust 28.5% yoy in Q3FY2006 to Rs72 crore on the back of a strong growth in the Canclini business. Even the profit before interest and tax (PBIT) margin saw an improvement of 460 basis points yoy to 20.3%.
* The plastic division saw a slower growth of 5.2% yoy to Rs140.4 crore, mainly on account of a 28.1% decline in the tank business. The robust growth in the businesses of pre-fabricated structures (Pre-Fab) and custom mouldings (CM) helped the PBIT margin to improve by 550 basis points yoy.
* The strong volume growth in the Pre-Fab and CM businesses coupled with a 406.4% year-on-year (y-o-y) jump in the sales to the Canclini joint venture (JV) caused the profit after tax (PAT) to grow by 31% to Rs20.3 crore in the quarter.
*The company's earnings per share (EPS) for Q3FY2006 stood at Rs2.2 per share, in line with our expectations.
*We have introduced the consolidated earnings estimates for the FY2006-08 period and arrived at EPS estimates of Rs11.1 and Rs13.7 for FY2007 and FY2008 respectively. We have rolled over our price target to FY2008E consolidated earnings and arrived at the price target of Rs192.5, valuing the company at 14x.



Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs458
Current market price: Rs376

Price target revised to Rs458

Result highlights

* Jaiprakash Associates Ltd's (JAL's) Q3FY2006 stand-alone net profit at Rs57 crore was below our expectations of a net profit of Rs66 crore. The primary reasons were higher interest costs and lower other income. The net sales for the quarter were up 19.7% to Rs797 crore driven by a sharp 30% growth in the company's cement revenues.
* The operating profit margin (OPM) jumped by 340 basis points to 21% due to a sharp jump in the margins of the construction business. The OPM for the cement business fell marginally by 40 basis points during the quarter due to higher fuel costs. Overall, the operating profit during the quarter jumped by 43% to Rs167 crore.
* As the company commissioned a new 1-million-tonne grinding unit at its Tanda plant and a captive power plant during the quarter, its depreciation charge jumped by19% and interest cost increased by 15.5% during the period. Overall, its net profit during the quarter jumped by 27% to Rs57 crore.
* At the current market price of Rs376, the stock is discounting its FY2007 consolidated earnings by 13.5x and its FY2007 consolidated earnings before interest, depreciation, tax and amortisation (EBIDTA) by 7.1x. We maintain our Buy recommendation on the stock with a revised price target of Rs458. Our price target is based on the sum-of-parts valuation of the company.

Pre-Market Watch

Market may remain weak

Although the market rebounded from its five straight losses in yesterday's trades, nervousness is likely to continue on concerns of FIIs turning net sellers in the last few sessions. Also the investors are waiting for a clear picture from the Reliance Industries demerger process that would commence in a short while in a special trading session arranged by the SEBI today.

The Nifty could test 2790 levels on the downside while it has a likely support at 2824 during intra-day trades. The Sensex has a likely support at 9240 and could test resistance at 9321.

After remaining closed on Monday, the US indices took a sharp beating on Tuesday as crude oil prices flared up nearly 4% on reports of further attacks on Nigeria's oil industry by the militants. As a result, the Dow Jones dropped 64 points at 10896 and the Nasdaq declined 14 points to close at 2303. The US market is likely to remain under pressure on Wednesday following a lower-than-expected quarterly numbers from IBM, Intel and Yahoo.

Indian ADRs, too, were hammered on the US bourses. Leading the slump Rediff tanked 10.51%, while VSNL, MTNL, ICICI Bank and Tata Motors dropped 3-4% each. Among other laggards HDFC Bank, Dr Reddy's, Infosys, Satyam, Wipro and Patni Computers were down 1-2% each.

Crude oil prices rose sharply, with the Nymex light crude oil for February delivery soaring by $2.39 to settle at $66.31 a barrel. The London Brent crude was down 43 cents at $65.33 per barrel. In the commodity segment, the Comex gold dropped $2.70 to close at $554.30 an ounce.

Stocks to watch
Bajaj Auto to buyout 27% stake in Maharashtra Scooters for Rs151.63 crore.

Tata Consultancy Services to invest Rs6.3 crore in a joint venture partnership with the Madhya Pradesh State Electronic Development Corporation.

Praj Industries is eyeing business in developed markets like the European Union and the US.

Andhra Bank - FPO

Better than the peers

Stands out on quality of assets, productivity and profitability

Andhra Bank (ANDB), established in 1923, was nationalised in April 1980. The bank made its maiden public issue of 15 crore equity shares of Rs 10 each for cash at par, aggregating Rs 150 crore, in March 2001. The government of India (GoI) currently holds 62.5% of the pre-issue paid-up equity share capital (Rs 400 crore), which will come down to 51.5% after the issue.

On September 2005, ANDB had 1,177 branches in India, serving 1.39 crore customers. However, 854 of its branches (72.5%) are in Andhra Pradesh (AP). Sixty-three per cent of the bank’s outstanding domestic loans are to corporate & commercial businesses (includes small and medium enterprises comprising 12%). The share of the housing & retail sector constitutes 19%, and agriculture the remaining 18%.

The main objectives of the second IPO include augmenting the capital base to meet the future capital requirements arising from the implementation of the Basel II standards. Funds are also required to sustain the growth in credit in tune with the expansion of the Indian economy. On September 2005, ANDB’s capital adequacy ratio (CAR) stood at 11.95% compared to the Reserve Bank of India (RBI)-stipulated 9%. The bank intends to grow by expanding geographically in India and internationally, by increasing its volume of retail business and cross-selling various fee-based financial products and services to its customers.

Strengths

*ANDB’s asset quality is the best in its peer group, with net NPA ratio at 0.26% and gross NPA ratio at 2.27% on September 05. The bank also has a well-diversified portfolio with maximum funded exposure to the power sector (20%), followed by the textile sector (9%).

*All branches are computerised, with 88% of the business on the core banking solution platform, which will help the bank to reduce its operating expenses in the long run and confront stiff competition from private banks.

*ANDB is fully prepared to meet the Basel II requirement.

* The credit growth is a healthy at above 30%, with incremental credit deposit ratio above 100% for FY 2005. In H1FY 2006, it was 80%. With the busy season ahead, numbers could be better than last year.

*The net interest margin (NIM) had improved from 3.79% in FY 2004 to 3.95% in FY 2005. However, with a fall in yield on earning assets, NIM end September 2005 stood at 3.62%, considered quite healthy in the banking sector.

Weaknesses

*Treasury contributed above 40% of the total revenue like most other PSU banks. In a rising interest rate scenario, banks have reduced the duration of their portfolio to minimise interest-rate risks by selling high yield, long-term securities, hitting the yield on investment and restricting the net interest-income growth. However, credit growth remains buoyant and the fall in yields will be made up after a time lag.

*Operating expenses, as a percentage of net total income (OE/NTI), end September 2005 was 51%, which is comparatively higher than its peer group. The OE/NTI ratio is expected to remain at the higher end with expansion plans on the horizon.

* 72.5% of ANDB’s branches in AP generated around 58% of the advances end September 2005. The bank needs to have a larger share of business in other parts of the country to maintain the growth momentum.

Valuation

In the first half ended September 2005, ANDB’s net interest income witnessed a growth of only 4% to Rs 563 crore due to a more than 10% fall to Rs 378 crore in its interest on investments. `Other income’ fell 57% to Rs 195 crore mainly due to a 90% fall in the treasury income to Rs 33 crore end September 2005, from Rs 300 crore a year ago. However, commission income showed a promising growth of 31% to Rs 80 crore, from Rs 61 crore. The 57% fall in `other income’ weighed heavily on the net profit, which registered a fall of 29% to Rs 203 crore.

The last one-year and six-month average price of the scrip is Rs 97, whereas for the last three months, it is Rs 94.

ANDB’s annualized EPS for H1FY06 on post-IPO equity works out to Rs 8.4/ Considering the higher price band, post-IPO book value (BV) is Rs 58 and adjusted book value (ABV) is Rs 57. At the price band of Rs 82 to Rs 90, P/E is 9.8 to 10.7, which is a bit higher compared to most of its peers. P/BV and P/ABV are both around 1.6, which is in line with its peers.

Besides quality of assets, ANDB scores higher on certain other grounds compared to its peers Allahabad Bank, Corporation Bank, Indian Overseas Bank, Syndicate Bank and Vijaya Bank. Its productivity and profitability are comparatively higher than most of to its peer group members, barring Corporation Bank.

Sharekhan Trading Call

Date: 17/01/2006 | Company Name: CRESCOMM | Call Type: Go Long
Stop Loss/ Reversal: 142.0000
Buy/Sell Price Rs.: 155.00
Current Price Rs.: 157.90
Potential P/L%: 0.1900
Target: 180-194
Remark:
Investment Argument: The stock has completed a complex correction wherein a break-out has taken place at Rs152. Buy the stock with a stop loss of Rs142 for targets of Rs180 and Rs194.

Motilal Oswal Reports

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