Daily Technical Analysis - July 16 2007
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Monday, July 16, 2007
Kingfisher Girls on Deccan :)
UB Group could strengthen its position in Air Deccan by raising its stake in the low cost carrier to 51% in the next few months—making the price warrior a subsidiary company of the group.
The Bangalore-based liquor conglomerate, which runs Kingfisher Airlines, bought a 26% stake in Air Deccan in early June and is on schedule to make an open offer for 20% more that opens next week. Besides this, sources say, other investors are willing to sell about 4-5% stake, taking the UB group holding up to 51%.
The open offer price of Rs 155 is Rs 14 higher than the Deccan Aviation stock price on Friday. The stock has been rising since the two firms shook hands to clinch the deal, and it is widely expected that the alliance will help the airline cut losses.
An absolute majority will enable the Kingfisher group to take major decisions to synergise operations of the two carriers. Airline sources said, one of the major decisions is expected to be in respect to whether the Air Deccan brand will be retained for future operations.
Asked about it, Kingfisher chairman Vijay Mallya said a decision on the issue will be taken only after a formal market evaluation. Kingfisher is in the process of commissioning a market study on the value of the Air Deccan brand in terms of the customer perception in various parts of the country.
“Our liquor business is all about brands and we have a good understanding of their value. We wouldn’t like to go in for a re-branding if there is value in the existing brand,” Mr Mallya said. The airline industry has been abuzz with rumours for the past fortnight that Air Deccan will be rebranded as Kingstar of KingAir.
Air Deccan chairman GR Gopinath dismisses any talk about re-branding of Air Deccan. Speaking to ET, he said, “The Air Deccan brand is synonymous with low-cost travel in India.”
Captain Gopinath said the joint marketing campaigns to drive home the strengths of the Kingfisher-Air Deccan group would continue, he said. “We would like to impress on air travellers the advantages they get while flying the Kingfisher-Air Deccan combo,” he added.
Earlier this month, the group unleashed a ‘King Power’ campaign in newspapers and hoardings all over the country. The branding focuses on the combined strength of the two airlines in terms of their common network and reach.
The colours used were Kingfisher’s bold red and white with no trace of Air Deccan’s blue and yellow.
Industry analysts feel that the Air Deccan has substantial brand equity in smaller towns and cities across the country, given its connectivity to 65 destinations across the country—majority in Tier II and III cities—with over 350 flights a day.
Currently teams from both Air Deccan and Kingfisher are constantly looking at ways to reduce operating costs through sharing of resources and getting better bargains from suppliers. “We have gained significant discounts on insurance payouts due to our joint approach,” the Air Deccan chief said.
Similarly, talks with other suppliers are also on to get a better deal. Re-scheduling of routes is the other priority of area for both the teams, he added. The Kingfisher-Air Deccan group currently has a fleet of 71 aircraft, including 41 Airbus aircraft and 30 ATR aircraft. The group offers about 537 daily flights, connecting 69 cities.
EXCLUSIVE - Equibrain Report - July 16 2007
EXCLUSIVE - Equibrain Report - July 16 2007
Sunday, July 15, 2007
RBI may retain interest rates
The Reserve Bank is likely to keep key interest rates unchanged in its quarterly review of credit policy on July 31, but may increase the requirement for banks to keep cash with it to absorb excess liquidity in the system, economists and industry players feel.
"Inflation concerns have been mitigated and interest rates are at peak. However, the desire to mop up liquidity remains and a hike in Cash Reserve Ratio (CRR) cannot be ruled out," Abn Amro Country Executive (India) Romesh Sobti said.
After touching a 14-month low of 4.03 percent, inflation has been on an upward trend on account of rising prices of food, especially vegetables. For the week ended June 30, the wholesale price index stood at 4.27 percent. Even at this level, the index is within RBI's limit of five percent for this fiscal and medium term target of 4-4.5 percent.
On the other hand, there is ample liquidity in banking system. The overnight rate at which banks borrow from each other in the call money market has been below one per cent for sometime now. On July 13, the rate was 0.49 percent.
"I expect RBI to raise CRR in the policy review to manage liquidity," HDFC Bank Chief Economist Abheek Barua said.
Cash Reserve Ratio (CRR), the requirement for banks to keep a certain portion of their deposits with RBI, stands at 6.5 percent. Between December 2006 and March 2007, the ratio was increased thrice by half a percentage point each, which sucked more than Rs 45,000 crore from the system.
Barua said the advantage of a CRR hike was that it worked dynamically. While the initial impact is to absorb liquidity, it dampens the entire process of money creation that works through successive rounds of lending, he said.
Echoing similar views, Crisil Principal Economist D K Joshi said there was no need to change key lending rates, but a CRR hike was a possibility to rein in liquidity.
Oriental Bank of Commerce Executive Director Allen C A Periera also said interest rates should be left unchanged for the time being.
Although economists and banking experts agreed that some action from the RBI to curb liquidity was due, they differed on the methodology it should adopt. Some experts said a CRR hike will be too much for the banking sector to take.
Joshi also said instead of a CRR hike, the RBI might use another tool -- Monetary Stabilisation Scheme (MSS) -- more aggressively for liquidity management.
Rbi Governor Y V Reddy had recently said that taking into account high expansion of money supply worldwide, and given the monetary overhang of 2006-07, it was important to contain monetary expansion at around 17 percent this fiscal, in consonance with the outlook on growth and inflation.
High funds inflow, which is leading to excess liquidity, might see some moderation due to tightening of norms for external commercial borrowings by the government recently and pick up in credit off take by August.
"In the given scenario there is no need for tinkering with the interest rate as well as CRR rate as inflation is low and credit demand has slowed down," Punjab National Bank Executive Director K Raghuraman said.
MSS auction is a better option to manage liquidity since an increase in CRR could push up interest rates. This could lead to higher inflow of foreign funds as they would find Indian market more attractive. This would lead to further appreciation of rupee, he said.
Rakesh Jhunjhunwala - Sensex to cross 50,000 mark by 2020
Sensex hitting 50,000 is right now only a serious prediction for Morgan Stanley and a laughable target for others but believe it or not Brazil's 50 share benchmark index 'Bovespa' went past 50,000 mark in May this year.
Sensex crossing 15,000 was also unimaginable two years back but today it is a reality and very close to what former Sebi whole time member Madhukar uttered, predicting that Sensex will cross 16,000 mark also.
After acheiving this record landmark analyst feel that Sensex will cross 25,000 mark by 2010, which big bull Rakesh Jhunjhunwala predicted in 2005 only.
Another brave statement from world's leading investment bank Morgan Stanley predicts Sensex to cross 50,000 mark 12 years from now in 2020. Morgan Stanley's prediction came in February only and they still hold on to what they predicted earlier.
"You just need to factor in India's GDP growth of 8 per cent along with an inflation of 5-6 per cent and the cost of manufacturing and assuming Sensex stocks will grow by 17-18 per cent till 2020, then it will work out to more than what Morgan Stanley has predicted," Angel Broking's CMD, Dinesh Thakkar said.
Also, the Sensex crossing 50,000 mark is in the realm of possibility with Brazil's Sao Paulo Stock Exchange's benchmark index Bovespa hitting 50,000 mark first time ever on May 3 and closing around 55,000 mark last week.
The landmark on the Indian bourses that will now be keenly awaited is NSE Nifty's 5,000 mark which is just 614 points from yesterday's close at 4,384 points.
Sensex with yesterday's close at 14,964 is yet to record its first ever close above 15,000 mark, and when it does it will join an exclusive club of world bourses that currently trade above 15,000.
Besides Bovespa, on Friday Japanese index Nikkei closed at 18,140 and Hong Kong's index Hang Seng closed at 22,000 level.
There are 50 companies listed in the blue-chip Bovespa stock index as compared to 30 companies on the Sensex. Brazil is a mirror image of India in terms of natural resources and also it has largest number of people living in poverty in all of Latin America.
Still, Brazil's arrival as a global economic power is linked to its vast natural resources like iron ore, offshore oil fields and the country's extensive use of ethanol.
Brazil has also become self-sufficient in energy, ending decades of foreign oil imports.
Like India, Brazil's economy is linked to agriculture, and it's the world's largest exporter of coffee, sugar, cattle, orange juice, and has surpassed the US as the biggest exporter of soybeans in January 2006.
"Sensex is in exuberance right now and it will continue for next few months," Thakkar says.
Meanwhile analysts believe that Bovespa may hit 60,000 mark by end of 2007.
CII - State of the Economy Report
On almost all parametres ,the corporate sector is doing better during Q4, in comparison to the same quarter in the previous financial year. Bulk of this growth and high performance is on account of the efficiencies and productivity of the service sector.
According to the recently released 2007 CII “State of the Economy Report”, the impressive performance of the corporate sector is consistent and is led by the services sector. It surveyed and analyzed results of 3283 firms comprising 1971 firms from manufacturing and 1312 firms from services.
The analysis showed that net sales has recorded a growth rate of 19.35% in the fourth quarter (Q4) as compared to a growth rate of 17.86% achieved during the same quarter in the financial year 2005-06. The profit after tax (PAT) has registered a significant increase in growth from 13.68% in Q4 of 2005-06 to 19.12% in Q4 of 2006-07, owing to a lower rate of growth in input cost and operating expenditures.
It is mainly the performance of the services sector that has resulted in the overall increase in the profits growth of the corporate sector. It recorded a significant decline in the growth of operating expenditure from 16.33% to 10.41% while showing an increase in the growth rate in net sales from 16.48% to 24.74%.
Though interest payments increased significantly, showing a growth from 21.63% to 47.68% in Q4 of 2006-07, service sector companies registered growth rate in PAT to the extent of 45.68% against the growth in profit at the rate of 10.32% in the Q4 of 2005-06. The growth rate of PAT of manufacturing has declined during the same period from 15.17% to 7.91%.
However, oilseeds production was found to be dragging and rupee appreciation continued to impact manufacturing negatively. There has been an overall decrease in agriculture, especially with regard to oilseeds production which registered a negative growth rate of 14.79%.
This is likely to lead to increase in the import of edible oil due to its reduced domestic production and rising demand. The demand is rising owing to the rising income levels and growing popularity of fast foods among the rich and upper middle class.
The report recommends a restructuring of domestic pricing policy of various crops as farmers are switching from oilseeds crops like mustard to more lucrative alternatives like wheat and gram.
The recently released Index of Industrial Production has shown declining growth rate for manufacturing to 11.9% in May 2007 from 15.1% in April 2007. The ‘CII State of the Economy’ also reports the negative impact of appreciating rupee on profit margins of textile and leather sectors. The CII survey of textiles and apparel companies engaged in exports revealed that there has been a decline in total revenue, operating income and profit margin to the tune of 7.9%, 8.9% and 7.9% respectively and further, there could be an erosion of profit margins to the extent of 10.4% during the next six months only on account of appreciation of the rupee.
If the impact of rise in interest rates on the profit margin is considered, there is a further decline of another 1.5%. Impact of appreciation is worse in leather and leather products sector. Erosion of profits expected in the next six months is 13.7% and the industry is already facing an erosion of 8.8% on its profit margin.
On the whole, the report expects GDP growth to be 9.2% during 2007-08; with agriculture growing at 3%, industry at 9.4% and services at 11.2%.
Don't destroy BSNL
Calls for inquiry into "a sinister campaign" by 'vested interests'.
Dayanidhi Maran, who was forced by DMK to quit the communications ministry, today struck back by asking Prime Minister Manmohan Singh to inquire into attempts by an NRI businessman and other vested interests to stall the tendering process of Bharat Sanchar Nigam Limited.
The letter sent by the Lok Sabha MP to the PM earlier today, seeks to find out the truth regarding “the false propaganda being carried out to tarnish my name, plant doubts in the minds of the public regarding my integrity and the ulterior motive to destroy BSNL”.
Maran’s letter, his first public comment after his ouster from the ministry, is sure to create complications for his successor A Raja, who has been pushing for a review of BSNL’s mammoth 45 million GSM connections order on the grounds that the company is overpaying by as much as Rs 10,000 crore.
The two-page letter, without naming either Raja or the NRI businessman, goes on to say that “a sinister campaign is being carried out systematically against me through the media by certain vested interests.
As a minister, it was always my practice to stay out of the tendering process of not only BSNL but also MTNL. The tender, in question, was finalised only by the BSNL board”.
Maran alleged that the NRI businessman, in trying to stall BSNL’s growth, was facilitating the undue growth of private operators.
Although news of Maran’s letter broke in the evening, Raja had earlier during the day told reporters in Chennai that he would resign if the BSNL employee union’s allegations that his actions were hurting the company were proved.
“Unions owing allegiance to the Left parties have misunderstood me on the issue. I want to know if my actions had affected BSNL. Did I cancel the tender? I only asked them to revise the financial bid, which will save a lot of money,” he said.
It remains to be seen as to what view the prime minister takes on Maran’s letter. The political consensus is that the letter is a vain effort and would only add to Maran’s isolation within his party.
The DMK is a powerful constituent of the UPA government and has made it clear that it will run the communications ministry without any interference.
India Economy to slow down
The Indian economy is expected to slow down further in 2007-08 due to surging interest rates, appreciating rupee and poor infrastructure, says a survey.
During the fourth quarter of 2006-07 ending in March 2007 the economy grew at 9.4 per cent compared to 10 per cent in the same quarter of 2005-06. The GDP is now pegged at 9.2 per cent.
So even though positive growth is expected for sectors such as agriculture, industry and services, the economy would face a downward pull, CII said in its survey - State of the Economy.
The agricultural sector is expected to grow to three per cent from the current 2.7 per cent due to the efforts adopted to produce primary articles to boost their supply in an effort to check inflation.
However, the study also indicated a declining trend in the agricultural sector with the decrease in oilseed production, which has shown a decline of 14.79 per cent. This according to CII would lead to increase in import of edible oil owing to its huge demand.
"Total oilseeds production has declined and recorded 23.26 million tonnes against the target of 29.40 million tonnes in 2006-07, registering a negative growth rate of 14.79 percent," the survey said.
The body has thus suggested restructuring the domestic pricing policy of various crops as more and more farmers are switching from oilseeds to producing wheat and gram that are more lucrative options.
Growth of the Indian industry is also expected to face a downward trend on the backdrop of some rigid monetary measures taken by the Reserve Bank of India (RBI).
The services sector, according to CII, is expected to grow marginally than 2006-07 due to high demand specifically in financial services and business services, which includes the information technology (IT) and IT-enabled services (ITeS).
"The three major components of the service sector namely, trade, hotels and communications; financing, insurance, real estate and business; and community, social and personal services grew at 13.0 percent, 10.6 percent and 7.8 percent respectively," CII said.
On the issue of the Indian rupee appreciating by the day, the chamber said it had made a negative impact on the profit margins and bottom lines of the textile and leather sectors.
Mutual Funds sell tobacco stocks
Whether or not smokers take warnings against tobacco use seriously, mutual funds have been slowly kicking the habit - by halving their exposure to stocks of cigarette and chewing tobacco firms this year.
While tobacco usage continues to grow despite various campaigns being carried out across the world, a slew of measures in India such as increased excise duty and value added tax is likely to hit the coffers of such firms, analysts believe.
Fearing further negative impact on the earnings of these companies in the long term when anti-tobacco campaigns start taking their toll on the consumption, the fund houses have been paring their exposure to these stocks in the past few months.
An analysis of the portfolios of various equity mutual funds shows that amount invested in the shares of tobacco and pan masala companies comprised just one per cent of their net assets at the end of June, as against more than two per cent at the beginning of this year.
The listed tobacco firms in India include ITC, Dalmia Group's GTC Industries, Godfrey Phillips India, VST Industries and Kothari Products.
While ITC has been an all-time favorite of equity funds and still finds place in the top-ten portfolios of a number of MF schemes, almost all of them seem to be losing their charm.
The equity funds held shares worth about Rs 960 crore in these companies at the end of last month, down from about Rs 1,088 crore in May, which accounted for 1.1 per cent of their net assets, data compiled by brokerage house Sharekhan shows.
At the end of December 2006, the funds held Rs 1,835- crore stock of tobacco processors, which accounted for 2.01 per cent of their net assets.
ITC's products include popular cigarette brands like Navy Cut, Classic and Gold Flake while GTC (formerly Golden Tobacco Company) has brands like Panama, Chancellor and Esquire. VST Industries sells Charminar and Charms brands under the product category.
Earlier in April, the funds held stocks worth Rs 1,055 crore or 1.16 per cent of net assets in the tobacco processing firms, down from Rs 1,387 crore or 1.44 per cent of net assets a month ago.
At the end of January, the funds held stocks worth Rs 1,620 crore or 1.7 per cent of net assets.
The analysts also argue that significant gains registered by these stocks in the recent past, despite hike in excise duty in this year's union budget and additional value-added tax in states like Delhi, have also led to the funds booking profits in these stocks.
Stocks like Godfrey Phillips, Kothari Products and GTC have outperformed the overall market since the beginning of 2007 with Kothari Products and GTC rising more than the benchmark Sensex in the last one year.
While the Sensex has gained nearly 40 per cent in past one year, share price of Kothari Products has nearly doubled and that of GTC gained by more than 50 per cent. Kothari Products' share price reached an all-time high last week.
Although, ITC and VST Industries have lost value in past one year, they moved higher since the beginning of 2007.
The analysts believe companies themselves have expanded into a number of new sectors and this could be a possible hedging exercise against any drop in tobacco revenues.
While ITC has forayed into spaces like apparel, retail, FMCG and hospitality, GTC has diversified into petrochemicals, paper, marine, hospitality and communications businesses.
Among the major funds, UTI Mutual Fund's Variable Investment Scheme has slashed its exposure to ITC in the past few months. It held about 39,000 shares worth about Rs 60 lakh in the company at the end of last month, down from 64,000 shares of about Rs 94 lakh in February.
However, UTI MF's another scheme, UTI Wealth Builder, has increased its exposure to ITC and currently holds about 11.7 lakh shares worth about Rs 17.8 crore, up from about eight lakh shares of Rs 14.8 crore in November 2006.
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