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Monday, November 26, 2007
Pre Market Watch
Indian market is likely to have positive opening as the global cues are in favor. On Friday, the market opened with heavy gains and closed on a impressive note due to heavy buying in the index heavyweights. Also the market got a boost as the India''s whole price index grew by 3.01% in the 12 months ended November 10, 2007 as compared to previous week rise of 3.11%. The Indian markets closed in a positive territory as BSE Sensex surged 326.55 points to close at 18,852.87 and NSE Nifty closed up by 89.25 points at 5,608.60. We expect the market may gain some ground during the trading session.
On Friday, the US market remains closed in green. The DJIA closed up by 181.84 points at 12,980.88. The Nasdaq and S&P 500 index grew by 34.45 points and 23.93 points at 2,596.60 and 1,440.70 respectively.
Indian ADRs ended in green. In technology sector, Satyam grew by (4.67%) along with Wipro by (2.96%) and Infosys by (1.14%). In banking sector, HDFC bank ICICI bank surged (7.74%) and (4.74%) respectively. VSNL and MTNL advanced by (2.66%) and (1.84%) respectively.
The major stock markets in Asia are trading strong. Hang Seng is trading up by 863.33 points at 27,404.42. Japan''s Nikkei is trading higher by 195.34 points at 15,084.11. Singapore Strait times is trading at 3,399.31 higher by 73.42 points. Taiwan weighted grew by 155.40 points to trade at 8,497.60 and Seoul Composite advanced by 54.20 points to trade at 1,827.08.
Today, Nifty has support at 5,567 and resistance at 5,718 and BSE Sensex has support at 18,696 and resistance at 19,229
Market may rise on positive global cues
The gains in the US markets, decline in Yen against dollar and positive opening in the most of the Asian indices may help the local market to add gains. However, bouts of high volatile moves and rising crude oil prices could dampen the sprit of the market. Among the key indices, the Nifty has a strong resistance at 5750 and has a key support at 5394 levels in the near-term. The Sensex has a likely support at 18250 and may face resistance at 19000.
US indices posted gains on Friday ahead of holiday season, as investors speculated a weak dollar will make exports more competitive. While the Dow Jones added 182 points at 12981, the Nasdaq was up 34 points at 2597.
Crude oil prices rose on the New York Mercantile Exchange on speculation that OPEC won't increase production and rise in household spending may boost consumption pull down the US stockpiles as peak winter demand approaches. The Nymex light crude oil for August delivery gaining by 32 cents to close at $71.41 a barrel. In the commodity space, the Comex gold for August series declined by $3.80 to settle at $655.40 a troy ounce
Reliance Industries to see action on RPL sale
Reliance Industries (RIL) has sold 4.01% of the equity share in its subsidiary company Reliance Petrochemical (RPL) by transactions through the stock exchanges. The aggregate sale consideration is Rs. 4,023 crore and post-sale RIL’s stake has come down to 70.99% from 75%. Reports suggest that the sale of 18.04 crore RPL shares would help maximise shareholder value and it monetised only a small share of Reliance Industries’ holding in RPL.
Leading investors Lehman Brothers, Citigroup, Merrill Lynch, Deutsche Bank and Reliance Capital have reportedly picked up 15% stake in Nitco Tiles, a leading tile manufacturing firm, for around Rs 170 crore. The institutional investors are believed to have picked up the stake at Rs 270 per share.
Power Grid Corporation of India, the country’s main transmission utility, has entered into a joint venture with Reliance Energy to execute about 300 km transmission lines from Parbati to Koldam and Koldam to Ludhiana. The company will have a 26% equity holding in the venture while Reliance Energy will have 74% stake.
US-based Xcel Telecom is learnt to be in talks to buy out the telecom tower business of cellular operator Spice.
Chennai-based Indowind Energy is reportedly in advanced stages of negotiations to acquire a wind energy company in Europe for an estimated price of around $100 million (Rs 400 crore). The acquisition, if successful, will help the wind energy and farming company to expand its footprint both in domestic and global markets.
Videocon Industries, the oil-to-consumer durables company, has reportedly joined the race for the acquisition of the London-based Burren Energy, which recently rejected several approaches including one worth $3.5 billion (Rs 14,000 crore) from the Italian major ENI. Videocon has submitted an expression of interest for Burren, which produces oil in Congo and Turkmenistan, the report added.
Reliance Power, which is awaiting regulatory nod for its IPO, that could be the largest in the Indian history, is reportedly willing to convert the par value of its shares to Rs 10 from the current Rs 2. Last week the company wrote a letter to Sebi to this effect, the report suggested.
Reliance Communications (RCOM) reportedly plans to sell another 5% stake in its wireless tower business in the second such transaction in this calendar year.
Leading foreign investors like Goldman Sachs and Blackstone are reportedly in final stages of negotiations to buy 26% stake in India Infoline Distribution Co (IILD), the distribution subsidiary of the brokerage firm India Infoline. The investors are willing to offer $100 million for the strategic stake in IILD.
Balaji Telefilms reportedly plans to offload 10-15 stake in its wholly owned subsidiary Balaji Motion Pictures. Reports suggest that the company is valued at Rs 1,000 crore. Centrum Finance is said to be the financial advisor to the company. The company is reportedly in talks with private equity investors. It is considering roping in only one private equity, instead of a cluster of investors. However, the plan is at a nascent stage.
Foreign institutional investors (FIIs) were net sellers of equity worth Rs 541.88 crore on Friday, 23 November 2007, while domestic institutional investors bought Rs 525.86 crore of equity on that day, according to provisional data released by NSE.
Market to extend gains
The market is expected to extended Friday (23 November 2007)’s surge after US shares were buoyed on Friday (23 November 2007) by a strong start to the US holiday shopping period.
Friday’s US rally boosted stocks across Asia. Key benchmark indices in Hong Kong, China, Japan, South Korea, Singapore and Taiwan were up by between 0.6% to 3.5%.
The Dow Jones industrial average jumped 181.84 points, or 1.42%, to close at 12,980.88 on Friday, 23 November 2007. The Standard & Poor's 500 Index gained 23.93 points, or 1.69% to finish at 1,440.70. The Nasdaq Composite Index advanced 34.45 points, or 1.34%, to end at 2,596.60.
Bargain hunting had triggered a surge in Sensex on Friday, 23 November 2007. The 30-share BSE Sensex rose 326.55 points or 1.76% at 18,852.87. FII sales caused by redemption pressure in their home countries and fears of a US recession arising from housing slump and credit crisis had spooked stocks across Asian over the past few days. Concerns about the health of the US economy remain.
As per provisional data, FIIs sold shares worth a net Rs 542 crore on Friday, 23 November 2007. Domestic funds bought shares worth a net Rs 525.86 crore on that day.
FII outflow in November 2007, till 22 November 2007, reached Rs 4455.40 crore. FIIs had made heavy purchases in September 2007 and October 2007. FIIs had bought shares worth a net Rs 16132.60 crore in September 2007 and Rs 20590.90 crore in October 2007.
India's wholesale price index rose 3.01% in the 12 months to 10 November 2007, below the previous week's rise of 3.11%, government data released on Friday, 23 November 2007 showed. The annual inflation rate was 5.39% during the corresponding week of the previous year.
Trading Calls
Nifty (5609) Sup 5525 Res 5741
Buy GMR Infra (244) SL 239 Tgt 252, 255
Buy DLF (869) SL 863 Tgt 884, 888
Buy Hero Honda (715) SL 709 Tgt 726, 730
Sell Corp Bank (419) SL 424 Tgt 409, 406
Sell Dishman Pharma (266) SL 270 Tgt 258, 256
The R-factor to heat markets
The R-factor of a surface determines how quickly heat is conducted across it.
For the markets, the R-factors include Reliance and Randomness. Both will come into play. Over the weekend, Reliance disclosed that it has sold RPL shares to broad base the shareholding. Reports caution that when an ‘insider’, quietly offloads shares it’s time to think whether the share price has become over-valued. The real story may be its just a move to get it off the F&O curb and increase the floating stock. Then there is the other R, which is Reliance Power. Reports say Anil Ambani group has sought SEBI's nod to float Reliance Power's IPO at a face value of Rs 10 a share instead of Rs 2. This may be yet another attempt to speed up the IPO process.
The outlook for today is a positive open on the back of buying witnessed on Friday. With F&O expiry this week wild swings could set in anytime. While FIIs have been covering their shorts, they were net sellers in the cash segment. Domestic Mutual Funds on the other hand turned net buyers.
Expect some action in Hexaware today. R-Com could gain on reports of further stake sale in its tower business. Videocon is another counter which could see gains in the near term. Besides buzz of a placement at higher levels, reports say the company is in the fray to acquire London-based Burren Energy. UCO Bank could remain in action on reports that it plans to raise Rs4.5bn through a follow on public offer. Kalindee Rail could gain on reports that the company could bag some major orders soon. Nucleus Software could be in action on reports that it could benefit from the subprime crisis thanks to its loan originating software.
Following are reports from the various media:
Indian companies raised US$12bn through external borrowings in first five months of fiscal 2008.
Inflation falls to 3.01% on decline in food prices for week ended November 10th.
Government plans to reduce assured return on equity on negotiated projects for power generation companies.
Container train operators request railway ministry to lower the access fee charged for usage of container terminals by 10-15%.
Government approves 22 FDI proposals worth Rs5.1bn.
Investments to the tune of Rs380bn planned in the cement sector over the next three to five years.
Government likely to reduce 16% central excise duty on ethanol and classify it as a declared good in a move to impose a uniform levy on the product across the country.Bulls look to continue momentum!
Markets ended their six day losing streak as bulls were back on bourses led by gains in the index frontrunners like Reliance Industries, L&T, HDFC and Reliance Energy. Key indices almost lost their gains as markets reacted sharply to blast which took place in the U.P. region. But showed strong resilience as benchmark Sensex recovered almost 300 points from its day’s low finally closing at 18,852 and the Nifty closed 89 points higher at 5,608.
DS Kulkarni gained 2% to Rs276 after the company announced that it would develop 250Acre of SEZ along with GTC Real Estate. The scrip touched an intra-day high of Rs300 and a low of Rs268 and recorded volumes of over 99,000 shares on NSE.
Reliance Industries surged by 3% to Rs2811 after reports stated that the company completed the purchase of the assets of Hualon Corp. of
NTPC advanced 4.5% to Rs236 after the company announced that it formed a subsidiary Company under the name and style of "Bhartiya Rail Bijlee Company Ltd" on November 22, 2007 for setting up a captive power plant of 1000 MW (2X250MW) at Nabinagar,
The company would be establishing and operating 2X660 MW coal based thermal power project at Meja Tehsil or any other suitable site in
Siemens advanced over 2.5% to Rs1978 after the local unit of
Hindustan Copper was locked at 5% lower circuit to Rs475.2. The company announced that it was considering entering into two joint ventures with overseas partners, according to reports.
The reports added that the company applied for licences of prospecting and have decided to look for foreign partners to enter into copper prospecting and exploration in
XL Telecom slipped 2% to Rs335. The company declared that the company secured Rs658mn export order. The scrip touched an intra-day high of Rs357 and a low of Rs330 and recorded volumes of over 46,000 shares on NSE.
ICRA was marginally up by 0.5% down 939. The company announced that the company signed MoU with United Bank of
PTC India is frozen at 10% upper circuit to Rs149.05 following reports that the company’s arm would sell 40% stake to two FIIs. The scrip touched an intra-day high of Rs149.05 and a low of Rs135 and recorded volumes of over 15,00,000 shares on NSE.
Simplex Infrastructure dropped by over 2% to Rs601. The company declared that they secured a contract worth Rs5.87bn from DP World. The scrip touched an intra-day high of Rs647 and a low of Rs583 and recorded volumes of over 68,000 shares on NSE.
Stocks in News:
Supreme Court has denied approval to the Rs40bn alumina refinery project of Sterlite Industries and Vedanta Alumina in Orissa.
BEML to buy government owned mining equipment plant for Rs1bn.
Power Grid Corp, in a JV with Reliance Energy, would set up 300km of transmission lines.
PTC India to float offshore arm, jointly with strategic partners, to acquire coal assets abroad.
Tata Chemicals has lined up a capital expenditure of Rs10bn for expanding capacities at its facilities in India, Kenya and the UK.
Vodafone Essar to raise US$500mn overseas to roll out network infrastructure and expansions into newer towns.
Air India incurs loss of Rs4.5bn in year ended March 2007 on rising fuel costs and wage arrears.
PTC India would sell 40% stake in its newly-formed financial services arm for Rs1.5bn to Goldman Sachs and Macquarie, Singapore.
Zydus Cadilla plans to launch 100 generic drugs that are expected to go off patent in the next five years in US and Europe
Future Group, Future Logistics Solutions will invest Rs4bn in next three years to operate additional mega merchandising hubs and warehouses.
SBI seeks government approval for merger of State Bank of Saurashtra with itself.
UCO Bank plans to raise Rs4.5bn through a follow on public offer; may approach SEBI by end of December
Balaji Telefilms may offload 15% stake in its wholly owned motion pictures arm
Kamat Hotels is working on a plan to set up 50 hotel properties in five-star, four-star and fort segments by 2012 at an investment of Rs5bn.
Upper Circuit
Walchand Industries, PTC India, Usha Martin, GTC Industries, Kothari Products, Marg Construction, Prakash Industries, Mukta Arts.
Lower Circuit
National Fertilizer, MMTC, Marathon Nextgen
Poll Results - Sector to trade/invest now...
Capital Goods 82 (28%)
Oil 44 (15%)
Banking 59 (20%)
IT :) 44 (15%)
Real Estate 58 (20%)
OVERALL - 287 votes
Confused !
Reliance Communications to sell stake in tower business
Reliance Communications (RCOM) plans to sell another 5% stake in its wireless tower business in the second such transaction in this calendar year. JP Morgan, which advised RCOM in the last transaction announced in July this year, invited bids from financial investors last week amidst indications that the deal will be bigger than the previous one, which fetched a value of $6.75 billion for the tower business.
Reliance wants the business to be valued at about $9 billion. It believes that the profitability of the tower business will increase as tenants increase. For instance, the roll-out of RCOM’s GSM business in 16 circles will be considered another tenant. The introduction of 3G and WiMax next year will give opportunities for further tenancies. The bidders are likely to be financial investors such as hedge funds and institutional firms. Reliance Communications spokesperson declined comment on the issue. The wireless tower business is witnessing frenetic activity as companies begin to see immense benefits in spinning off the asset and are either listing it separately, or selling a small stake to investors at a premium.
A wireless tower enables smooth passage of signals across a wide expanse of territory and is crucial in helping telecom companies achieve penetration. Big telecom companies own thousands of towers, but it need not always be on their books. The companies can spin off the tower business and lease space on them to other telecom companies, their competitors.
The tower business becomes an independent company with its own revenue stream and a relatively stable business model.
The telecom operators benefit as they get much-needed cash from such a spin-off for their operations. Their shareholders also benefit from an increase in share price and market capitalisation. Companies with no major infrastructure to boast of can ride piggyback on those with towers after paying rental and other pass-through charges.
Reliance Communications has spun off its business earlier this year and sold a 5% stake to investors such as Fortress Capital, HSBC Principal Investors, GLG Capital, Quantum Fund, New Silk Route Advisors, Galleon Group and DA Capital.
Other telecom companies have quickly followed suit. Bharti Airtel, the country’s largest wireless services provider, has announced the spin off of its business. The firm is also in talks with Vodafone and Idea Cellular to create a single mega business. Spice Telecom has decided to sell the business while Tata Teleservices wants to sell a substantial stake.
A tower business needs to have at least two tenants in order to be profitable.
RTIL now has Reliance Communications’ CDMA business as one of its major clients. Its other tenant is Reliance Telecom which runs GSM services in the seven circles. A third tenant will be added when RCOM rolls out GSM services in the remaining 16 circles. It has already got a licence and is waiting for spectrum to be allocated.
Reliance RPL Deal - what's cooking ?
On Friday, Reliance Industries (RIL) undertook the biggest stock market operation by an Indian company when it offloaded a 4.01% stake in its 75% subsidiary Reliance Petroleum (RPL) for Rs 4,203 crore.
An RIL spokesman said the sale would reduce volatility in the stock and further broadbase shareholding in RPL.
But when one of the major index drivers sees its promoter, an insider, quietly offloading shares on unwary investors, it’s time to think whether the share price has become over-valued.
Analysts said that RPL will find a higher representation in the BSE Sensex, which represents the floating stock of 30 leading companies.
Mutual funds could now buy more of RPL, in view of the higher representation.
With promoters selling, the floating stock (owned by non-promoters) in RPL increased by 4.01% to 24%. Chevron owns 5%. The number of RPL shareholders since IPO has increased from 12 lakh to 16 lakh.
However, the modus operandi of the sale is still not known.
Whether RPL shares were sold in small lots or in huge block deals to small investors or private equity firms is still a matter of conjecture.
These details were neither available in the block or bulk trade details of BSE and NSE, nor was it put on the stock exchange notice board till Saturday night.
The details were neither available in the block or bulk trades of BSE and NSE nor was it put on the stock exchange notice board till Saturday night.
Since the two exchanges are closed on Saturdays and Sundays, the the company will be able to keep the secret till Monday.
Sebi rules say that any person holding 5% shares or voting rights in a listed company shall disclose to the company in Form C, if such change exceeds 2% of the total shareholding.
The disclosure, according to the rules, shall be made in four working days and the listed company should, within five days from the receipt, disclose to all exchanges. The companies in question have the same management at the helm.
Legally, they may still be on the right side as Sebi’s insider trading norms give enough time for an insider to sell, but morally the ‘blind faith’ many investors have reposed on Reliance for decades may get tested after the event.
RPL shares hit a high of Rs 295 on November 1. The counter surrendered value and moved downhill ever since, when curbs on fresh positions in futures & options were instituted by the regulators. The market-wide limit of 95% had breached in the RPL counter.
Earlier this month, the RPL share was on the rise on a market rumour that Chevron could pay $6 billion for 21% in RPL.
The US oil major promptly repudiated the news, but the Indian company was slack in denying it. RPL shares climbed northwards probably on this rumour, to a 52-week high of Rs 295. Suddenly thereafter, sellers emerged. Who were the sellers in the F&O segment? Did they know something that others didn’t? For instance, that at least for now, Chevron was not planning to buy shares.
Market observers were amazed by the way Reliance Petroleum, a refinery which is still under construction and to be ready by only next fiscal, has overtaken the combined shareholder wealth of the three PSU refiners-cum-marketers - IOC, HPCL and BPCL. These are exuberant times, one may say.
Reliance Natural Resources controlled by Anil Ambani is also commanding huge values.
That’s not all. A company slated for delisting, Essar Oil, suddenly decided against it and wants to enjoy the maddening roller-coaster ride in the stock markets.
Has the tide in the markets changed? Or, are some insiders in the know booking profits and holding cash as they know for sure that share prices have become too ripe? Or is this a one-off operation in stock market?
What might embitter small investors is that the entire transaction was done under cover. The promoter sold the shares on unwary investors who apparently had no clue that last week it was the main promoter, RIL that was selling RPL shares.
If Sebi is curious, it may well want to see the short sale positions in RPL counter. To be fair to RIL, what with its legal eagles guiding them, it may well be on the right side legally. On corporate governance issues and the moral angle, it may well be another matter.
Via DNA
SKF India
We recommend a buy in SKF India at current price levels. It is evident from the weekly chart of SKF that it has been on a long-term uptrend since June 2003 low of Rs 210. However, after touching a life-time high of Rs 513, the stock was on a medium-term downtrend. The stock’s downtrend retraced 61 per cent of the fibonacci retracement level of its prior uptrend and found support at Rs 360 levels, which also coincides with 200-day moving average line. Subsequently, th e stock resumed the long-term uptrend and penetrated the medium-term down trendline on November 19. The daily momentum indicators are signalling a buy. The immediate support for the stock is at Rs 390 and the next support is at Rs 360. Investors with short-term horizon can buy the stock with stop-loss at Rs 400. We expect the stock to move up further to Rs 500 level in the short-term, with a minor pausing at around Rs 475 levels.
Via Businessline
Market to recover on short covering
| Prices likely to recover till Nifty 5750 ahead of settlement. |
| Four negative sessions were followed by a partial recovery on Friday but week-on-week, the market lost considerable ground. The Nifty ended down 5.05 per cent at 5608 points after hitting an intra-day low of 5394 on Thursday. |
| The Sensex was down 4.29 per cent. The Defty lost 5.75 per cent as the rupee softened somewhat. The FIIs were massive sellers while the Indian mutual funds were almost neutral. Breadth was negative on week-on-week basis but it was positive on Friday. |
| The broad BSE 500 was down 4.06 per cent while the CNX Midcap lost 4.07 per cent. The Nifty Junior was the best performing index with a loss of only 1.55 per cent. Volumes were low through the week and lowest on Friday during the recovery. |
| Outlook: The market is most likely to swing through the range of Nifty 5350-5750 through settlement week. Monday is quite likely to be uptrending but there is powerful resistance starting at 5675. Intra-day volatility is likely to be in the 250-300 Nifty range. |
| Rationale: Friday’s upmove was driven by short-covering in both cash and derivatives. This week is likely to see profit-booking by the “shorts” in the F&O segment. That could push prices up but there seems insufficient volume to cause a full-fledged recovery. |
| The market has performed a double (actually multiple) top, which is bearish. On the downside, support at 5400 seems strong. If that breaks, the next reliable support is 5200. |
| Counter-view: If FII attitude changes to positive or volumes jump beyond expected levels with the short-covering, the market could swing beyond 5750 and all the way to 5950. This doesn’t seem likely but it could happen. |
| Bulls & bears: Quite a few stocks made strong recoveries on Friday but most of the price gains were obviously due to short covering. The IT sector saw some hope in the rupee correction and Infosys and Tech Mahindra were among the best performers. Among other stocks, Tata Tele and Bajaj Auto looked genuinely promising. |
| MICRO TECHNICALS |
| AUROBINDO PHARMA Current Price: 502 Target Price: 480 |
| The stock broke an important support at 520 and it saw a volume expansion on the downside breakout. It is already at a 20-month low and it has a likely target of 480. Keep a stop at 515 and go short. |
| BAJAJ AUTO Current Price: 2543 Target Price: 2675 |
| One stock that rose steadily through a bearish week. It has a possible target of 2675. Keep a stop at 2530 and go long. Book partial profits at 2575 where there is some resistance. The stock is showing signs of coming out of a long bearish phase, so it may be worth keeping a delivery position for another six weeks. |
| INFOSYS Current Price: 1558 Target Price: 1650 |
| After hitting a 15-month low, Infy developed a promising short-term formation in the last three sessions. It has the potential to bounce till the 1650 level but this is very likely to be a correction inside a long-term bearish trend. Keep a stop at 1535 and go long. Book partial profits at above 1605. |
| NEYVELI LIGNITE Current Price: 214 Target Price: 225, 260 |
| The stock rose strongly on Friday with a big volume expansion. It will hit a resistance between 220-225 and that's a minimum intra-day target. If it closes above 225, the stock has a target of 260. Keep a stop at 205 and go long. Book partial profits above 220. |
| TECH MAHINDRA Current Price: 1028 Target Price: 1100 |
| The stock has made a bottoming formation at current levels after seeing a 50 per cent correction. It could move back up till the level of 1100 before it hits serious resistance again. Keep a stop at 1020 and go long. |
Crude ends week substantially higher
Low volume but record high crude price
Crude-oil future prices for sweet light crude for January delivery which had ended at $93.84/bbl last week (16 November) finished $4.34 (4.4%) higher this week (23 November) at $98.18/bbl. Price increased during the week after OPEC kept production levels unchanged and traders scrutinized every detail of the weekly inventory report released by the Energy Department.
In the currency market also, the dollar was lower across the board, hitting a new low against the euro and the same also spurred up crude price.
On Friday, 23 November, crude oil for December delivery rose $0.89 to end at $98.19 a barrel on the New York Mercantile Exchange. The session saw an intraday low of $96.55 and touched an intraday high of $98.45 earlier in electronic trading.
Prices rose on Monday, 19 November after Organization of Petroleum Exporting Countries (OPEC) left production unchanged at a weekend meeting in Riyadh. As per OPEC, the oil market was well-supplied and recent gains were due to speculation and beyond the group's control. OPEC is scheduled to discuss oil production for the first quarter of 2008 at a meeting in Abu Dhabi on 5 December.
As per the weekly inventory report by the Energy Department on Wednesday, 21 November, crude stockpiles dropped by 1.1 million barrels in the week ending 16 November as against an expected build-up. Crude oil for January delivery rose 55 cents to $98.60 a barrel after the report. But then price fell after traders realized that crude at Cushing, Oklahoma, the delivery point for crude traded on the Nymex, rose 1.2 million barrels to 14.6 million in the latest week.
OPEC has reduced its fourth-quarter estimate of global oil demand growth to 1.97%, down from 2.1%, citing warmer winter weather in the Northern Hemisphere and the higher price of gasoline. The cartel also trimmed this year's world oil demand growth to 1.4% from 1.5%, but the cartel kept the first quarter of next year unchanged at 1.8%.
US Markets gain on friday
Indices drop more than 1% in the holiday shortened week as investors worry about consumer spending
It was a holiday shortened week in the US Market. In recognition of the Thanksgiving holiday, the markets were closed on Thursday, 23 November. Trading took place for half day on Friday, 24 November and market closed at 1.00 p.m E.T. Though US stocks registered good gains on that day, the indices slipped more than 1% for the week ending on Friday, 23 November, 2007.
Concerns about overall economy weighed on investor sentiment during the whole week as disappointing earning reports came from a couple of retailers. Traders continued to worry about consumer spending in coming months. Persisting weakness in the housing market, further credit write-downs, and rising oil prices added further woes and worries.
The Dow Jones Industrial Average lost 196 points for the week. Tech - heavy Nasdaq lost 40 points. S&P 500 lost 18 points.
Market started off on a shaky note on Monday, 19 November, 2007 after the financial sector came under pressure once Citigroup was downgraded to sell from neutral by Goldman Sachs. The investment banker said that it foresees up to $15 billion in write-downs from collateralized debt obligations during the next two quarters. Dow shed 218 points on that day. General Motors added further fuel to the downslide after the stocks slipped by 8.5% on reports that GMAC Financial Services, the old General Motors Acceptance, is seeing more delinquencies among its auto loans.
On Tuesday, 20 November, Freddie Mac shares dropped by almost 30% today after the U.S. mortgage lender reported a $2 billion quarterly loss and said it might slash its fourth-quarter dividend. Fellow mortgage investor Fannie Mae also came under selling pressure and the news weighed on the overall financials sector. After quite a few zig-zag rides, Dow managed to gain 51 points.
On Wednesday, 21 November, the financial sector once again came under pressure and Dow gave up another 211 points after Lehman Brothers said investors should brace for more write-downs from AIG.
But on Friday, 23 November, stocks rebounded sharply in a bargain hunting trade that was led by financial and retail stocks. Dow and Nasdaq added 181 points and 34 points respectively to their kitty.
On the earnings front, H-P came out with its quarterly result beating market expectations. The company’s fiscal-fourth-quarter profit rose 28% from a year ago. The company also raised guidance for the current quarter.
But retailers disappointed. Home retailer, Lowe's posted a lower third quarter profit that was slightly ahead of analysts' expectations, but the company lowered its outlook for the current period in anticipation of further weakness in housing. On the other hand, Target reported earnings missing expectations also led to some negative sentiments among traders.
Among major economic news hitting the market during the week, new claims for unemployment for the week ended 16 November fell to 330,000 from 341,000 the week before. The November University of Michigan Consumer Sentiment Index was revised to 76.1 from 75.0. The other report, October Leading Indicators, fell to -0.5%, compared to last month's reading of 0.3%. Economists expected the reading to come in at -0.3%.
Other than the above, the minutes from the 31 October meeting were released on Tuesday, 20 November. The same prompted some mixed interpretations. It included the downgrade of the Fed's GDP forecast for 2008 to 1.8% -2.5% from 2.5%-2.75%. The minutes noted that the risks to inflation balance the risks to the economy and discussed the possibility of leaving rates unchanged.
Executive Summary
For the week, indices registered losses. DJIx closed down by 1.5% and S&P 500 closed down by 1.2%. Nasdaq too shed 1.5%. Disappointing earning reports and guidance from a couple of retailers, Target and Lowes, sent trader sentiments to new lows.
Good news from H-P regarding its earnings report failed to keep up the indices in good spirit. Crude prices continued to stay at high levels while dollar continued to slip against most of its rival currencies.
For the year, Dow is up by 42%, Nasdaq is up by 7.5% and S&P 500 is up by 1.6%.
Stocks you can pick up: Indian Hotels, Tata Motors, Rico Auto, Vijaya Bank
Indian Hotels Research: Morgan Stanley Rating: Overweight CMP: Rs 137 Morgan Stanley has maintained its ‘overweight’ rating on Indian Hotels. It believes that trends in the hospitality industry remain strong, with increase in average room rate (ARR) leading growth in revenue per available room (RevPAR). Further, room supply from other industry players seems to have been pushed into FY10/11, and hence, the demand-supply mismatch may continue for at least the next 18 months. While Citigroup forecast a 29% a compound annual growth rate (CAGR) in earnings for FY07-09, earnings per share (EPS) will be diluted due to the planned rights offering. Subsidiary companies constituted about 36% of consolidated revenue in FY07, but recorded very low profitability, largely due to international properties. Any improvement in the financial performance of these properties can boost the overall profitability. For instance, a turnaround in Pierre Hotel alone can push up overall net margins by more than 180 basis points. The company intends to raise Rs 1,440 crore through a rights issue of equity shares and non-convertible debentures. Further, it will issue warrants that will be convertible into equity 12 months after the rights offering. This should raise an additional Rs 780-90 crore. However, these rights offerings will dilute earnings by 30%. The stock has underperformed by 35% year-to-date (YTD) and in the past 12 months, largely due to acquisitions of international properties. IHCL’s valuations are cheaper than that of its Asian peers on most metrics. Tata Motors Research: CLSA Rating: Buy CMP: Rs 715 CLSA has maintained its ‘buy’ rating on Tata Motors. However, near-term risk for the stock continues to be the potential acquisition of Jaguar and Land Rover. Freight rates witnessed an improvement in October. CLSA’s Index of Freight Rates went up 2% in October on a month-on-month basis. The index tracks freight rates across 25 major routes across India. While part of the improvement can be attributed to the pick-up in construction and industrial activity after the rainy season, CLSA also believes that demand-supply in the commercial vehicle (CV) industry is returning to normal after the lacklustre volume growth in the first half (H1) of FY08. Improving freight rates typically act as an incentive for truck operators as the latter start buying trucks and the rates also point toward an improvement in the CV cycle. Historically, CLSA’s Index of Freight Operator Profitability has acted as a good leading indicator of the CV cycle. Truck finance rates have dropped ~ 300 bps in the past 2-3 months to about 11% from a peak of 14% in April. Large truck operators are even getting deals at 10%. The conducive factors for CV industry recovery are now in place. CLSA maintains its view that the current weakness in medium and heavy CV (M&HCV) sales will be limited to the current fiscal and that the industry will return to growth in FY09. Rico Auto Research: Merrill Lynch Rating: Buy CMP: Rs 33 Merrill Lynch has reiterated its bullish stance on Rico Auto, albeit it has lowered its price target to Rs 60 from Rs 66. Negatives related to high input costs (aluminium, power, labour), exchange fluctuations and low capacity utilisation will be largely reflected in this fiscal performance. |
Growth will be driven by a ramp-up in exports to outsource requirements by Honeywell, Caterpillar, Volvo and an increase in domestic share through new parts such as crankcases, cylinder head and blocks, and new customers like Tata Motors. New JVs with global vendors such as Continental, Zhejiang Jinfei and Magna Powertrain will also help.
The price target of Rs 60 is based on 12.5x 1-year forward P/E multiple, which is the same as earlier. This represents a ~40% discount to larger auto part companies like Bharat Forge, which is warranted, given its relatively smaller scale and erratic track record.
Hindustan Zinc
Research: Citigroup
Rating: Buy
CMP: Rs 685
Citigroup has maintained its ‘buy’ rating on Hindustan Zinc with a price target of Rs 1,007. Citigroup’s global forecasts for FY08-09 have been lowered for zinc (by 15-20%) and raised for lead (by 16-22%) based on recent price trends and future expectations.
Following these changes and cost adjustments, Citigroup has reduced its EPS estimates for HZL by 11% in FY08-09E, and increased EPS estimates by 7% in FY10E. Zinc prices have fallen 32% since January ’07 on concerns about increasing mine supply, Chinese supply worries and speculative selling.
Citigroup’s new forecast prices in these concerns. However, China does not appear to be a threat, inventories remain low, and uncertainty on a smooth ramp-up of new mine production remains. Any delays to mine supply will lead to a deficit in ’08E and an upward trigger to prices. Lead prices are expected to benefit from strong Chinese demand in the auto and electric bicycle segment.
Supply has been disrupted in western Australia and the US. The upgrade in lead prices partially offsets the impact of the downgrade to zinc forecasts. In addition, HZL will benefit from higher volumes as its zinc smelting capacity will increase by 63% to 669,000 tpa by Q1 FY09 and from the company’s continued focus on cutting initiatives. Citigroup continues to value HZL at 10x FY09E EPS.
Vijaya Bank
Research: Macquarie
Rating: Outperform
CMP: Rs 75
Vijaya Bank is now emerging as a mid-sized bank, a change from its earlier image of a smaller bank. Over the longer term, Macquarie remains positive on the growth prospects of the bank; and has raised the target price to Rs 92. It has also maintained its ‘outperform’ rating on the bank.
It has increased its loan book by 11% YoY, with strong growth in small and medium enterprises (SME) and the retail segment. The bank expects loan demand to remain strong — the low growth was due to a spike of Rs 5,000-6,000 crore in undisbursed sanctions. It expects these to be disbursed in H2 FY03-08, which should drive loan growth of 28% for FY03-08.
The bank was caught on the wrong side of the liquidity squeeze late in FY03-07, leading it to rely on wholesale deposits. It suffered margin erosion in the first two quarters of FY03/08. However, the bank is making a conscious effort to reduce its dependence on wholesale deposits (from 30% of total deposits) to 25% by the end of FY03/08E. Non-interest income growth in Q2 was a surprise, primarily led by equity sales and bad debt recoveries.
Given the continued buoyancy in the equity market, coupled with a favourable environment for recoveries (due to high real estate prices), the bank will be able to record strong numbers in H2 FY03/08E. The bank plans to increase the number of branches by 5%, taking the total number of branches to 1,050 by FY03/08E. Though this will put pressure on its operating expenditure, the lack of significant employee additions (as the bank plans to reallocate existing employees to these branches) should act as a cushion.
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