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Monday, April 13, 2009
Market seen opening firm on positive global cues
Key benchmark indices are seen extending a recent solid surge,as market opens after a long weekend, on the back of positive global cues. Trading in US index futures showed the Dow could rise 46 points at opening bell today, 13 April 2009. However, some profit taking in day's second half session cannot be ruled out.
Fall in headline inflation and weak industrial production data for February 2009 raised expectations of a further easing of the monetary policy by the Reserve Bank of India (RBI). Resumption of buying by foreign funds also bolstered sentiment.
Signs of an improvement in the Indian economy triggered a solid rally on the domestic bourses in the past few days. The rally was also a part of a sharp surge in global equities triggered by hopes the worst of the global economic recession may be over. From a 3-year closing low of 8,160.40 on 9 March 2009, the Sensex jumped 2,643.46 points or 32.39%.
Inflation based on the wholesale price index (WPI) rose 0.26% in the year through 28 March 2009, lower than previous week's 0.31% rise, data released by the government today, 9 April 2009, showed. It was the lowest growth in WPI inflation in at least two decades.
Asian markets were trading firm today, 13 April 2009 after Japanese prime minister Taro Aso more than doubled stimulus spending and Chinese lending rose by a record. Key benchmark indices in China, Singapore, South Korea, Taiwan and Japan were up by between 0.23% and 2.57%. Several Asia-Pacific markets including Hong Kong, Thailand, New Zealand and Australia were are shut today, 13 April 2009 for Easter holiday.
US markets jumped on Thursday, 9 April 2009 after Wells Fargo said it expects to report a record quarterly profit, fueling a month-long rally prompted by hopes that deterioration in the financial sector was abating.
The Dow Jones Industrial Average rose 246.27 points, or 3.14%, to 8,083.38, the Standard & Poor's 500 Index gained 31.40 points, or 3.81%, to 856.56 and the Nasdaq Composite Index climbed 61.88 points, or 3.89%, to 1,652.54.
Back home, key benchmark indices registered small gains in a highly volatile trade on Thursday, 9 April 2009. The BSE 30-share Sensex rose 61.52 points or 0.57% to 10,803.86, its highest closing since 15 October 2008. The S&P CNX Nifty was almost unchanged at 3,342.05 compared to Wednesday (8 April 2009)'s close of 3342.95. The stock market was closed on Friday, 10 April 2009, on account of Good Friday.
According to provisional data on NSE, foreign institutional investors (FIIs) were net buyers worth Rs 170.92 crore while mutual funds sold shares worth Rs 308.39 crore on Thursday, 9 April 2009.
Market may target 200 DMA at 3,450
The massive resistance at around 3,450 is unlikely to be overcome unless there is a volume explosion.
The market continued to surge ahead. The Nifty hit intra-days highs of 3,400-plus before settling to close at 3,342 points for a gain of 4.08 per cent. The Sensex was up 4.4 per cent at 10,803 points. The Defty gained 4.75 per cent as the rupee recovered to above the 50 level.
While FIIs were heavy buyers through the week, domestic institutions also bought, thereby contributing to the rally. Volumes rose perceptibly in both the cash and derivative segments. The advances-to-declines ratio was positive. The broader BSE 500 was up 5.2 per cent.
Outlook: Most of the signals were positive and the market tested resistance at around 3,400. However, the rally is looking overbought and a reaction is overdue. There is massive resistance at around 3,450. That is unlikely to be overcome unless there's a volume explosion. On the downside, there's support at around 3,225 and strong secondary support at 3,100.
Rationale: The market has seen gains of over 31 per cent since March 6, rallying from the 2,539 mark. It was unable to beat resistance between 3,350 and 3,400, though it tested that level in the last two sessions. Momentum signals are overbought and the RSI is also pretty high. This could mean a reaction. If this is a typical bear market rally, the downturn would be severe. The market could easily lose back the 30 per cent it has gained in the next four weeks.
Counter-view: The 200 Day Moving Average is between 3,440 and 3,470, depending on method of computation. If the Nifty closes above that level, there would be room for optimism and hopes that the long-term bear market was coming to an end. In theory, the rally could last for up to six weeks. But proximity to elections and Fibonacci time calculations suggest that it is likely to peter out within the next 5-10 sessions. Either way, expect high intra-day volatility on high volumes.
Bulls & Bears: The Nifty Junior and Midcaps 50 outperformed the Nifty/Sensex pair this week, mainly because the gainers within these indices rose far more than the losers fell. Metals, real estate and housing finance stocks were among the bullish drivers with most major banks also doing well.
IT stocks saw a small pullback as the rupee strengthened. However more than short-term currency fluctuations, Infosys' 2008-09 results and advisory are liable to prove crucial to future direction in IT industry scrips. Towards the end of the truncated week, stocks started running into resistance at higher levels, mirroring the position of the indices.
MICRO TECHNICALS
ICICI Bank
Current price: Rs 398
Target price: Rs 365
The stock is ripe for some profit-booking. It's hitting resistance above Rs 400. On the downside, there is support between Rs 360-Rs 370 and that is likely to be tested on intra-day basis at least. Keep a stop at Rs 405 and go short. Book profits below Rs 365. Be prepared for 10 per cent intra-day swings.
Punj Lloyd
Current price: Rs 114
Target price: Rs 125
The stock has made what seems like a valid breakout from a base at Rs 105. It has a potential target of Rs 125. Keep a stop at Rs 110 and go long. Start booking profits above Rs 122. If the stock dips below Rs 106, the next reliable support is at Rs 97. So a short would be possible.
Suzlon Energy
Current price: Rs 57.5
Target price: Rs 63
The stock has made a breakout past resistance at Rs 54 on a volume expansion. It has a potential target of Rs 63 and perhaps Rs 65. Keep a stop at Rs 55 and go long. There is massive resistance at Rs 67- Rs 68 so the stock is very unlikely to cross the level.
LIC Housing
Current price: Rs 282
Target price: Rs 300
The stock has broken out past resistance at Rs 250 on high volumes. It could achieve a target of about 300. Keep a stop at Rs 276 and go long. Be prepared for major bursts of volatility in what is usually a very stable stock. Book some profits above the Rs 290-mark.
Unitech
Current price: Rs 42
Target price: Rs 48
The stock has moved up on strong volume expansion. It has a potential upside till the Rs 48 level and if there is a burst of profit-booking, it could collapse back till the Rs 37-Rs 38 level. Keep a stop at Rs 40.5 and go long. Start booking profits above Rs 46.
via Business Standard
Indian Overseas Bank
We recommend a buy in Indian Overseas Bank from a short-term trading perspective. It is clearly visible from the charts of Indian Overseas Bank that after encountering significant resistance in the band of Rs 80-85 in early January 2009, it began to decline.
The stock conclusively penetrated a support at Rs 60 in late January and was on a medium-term downtrend till early March low of Rs 37. This low is also a 52-week low. It reversed from this level and has been on a medium-tem uptrend since then.
The stock broke above its medium-term down trend-line and 21-day moving average in late March and continued its up move. On April 9, the stock breached its 50-day moving average, gaining 3 per cent.
We notice that there is an increase in volume for the past two trading sessions. The daily relative strength index (RSI) has entered in to the bullish zone and the weekly RSI is on the brink of entering in to the neutral region from the bearish zone. Moreover, the daily moving average convergence and divergence indicator is likely to enter positive territory. We are bullish on the stock from a short-term perspective.
We anticipate it to move up until it hits our price target of Rs 58. Traders with short-term perspective can buy the stock while maintaining a stop-loss at Rs 49.
Hindalco
Investors with a long-term perspective can continue to hold the Hindalco (Rs 59) stock even if the company’s near-term earnings performance is lacklustre. Hindalco’s operations have delivered reasonable growth on a standalone basis, but muted profitability and high debt of the Novelis acquisition have brought down valuations in recent times. As a low cost and integrated producer of aluminium, Hindalco could capitalise on Novelis’ value-addition capability and diversified user base in the event of an economic recovery. The tilt towards user sectors such as beverages and infrastructure makes it less vulnerable to demand slowdown than many of its global peers.
At a PE multiple of 7 times its estimated 2008-09 earnings, the stock trades at a discount vis-a-vis its Indian and global competitors.
Aluminium: Main revenue generator
Aluminium and copper are Hindalco’s main business streams. On a standalone basis, aluminium contributes 37 per cent to Hindalco’s revenues, but its share in net profits is as high as 80 per cent. Extensive brownfield expansions and low-cost acquisitions implemented over the last five years have put Hindalco on the list of global low-cost aluminium manufacturers. The company concentrates on producing rolled aluminium, ingots, bars and foils. These finished goods are sought after by infrastructure companies, capital goods manufacturers and power transmission and distribution companies.
While the automobiles industry accounts for about one-fourth of Hindalco’s demand (on a consolidated basis), the improvement in domestic passenger vehicle sales offers some comfort. For the nine months ended December 2008, Hindalco’s net profits (on a standalone basis) from the aluminium segment rose by about 6 per cent and revenues by 10 per cent.
Hindalco acquired Novelis, maker of value-added products such as beverage cans and alloy wheels in May 2007 for $6 billion. Though this changed Hindalco’s business and geographic profile, the deal weakened its balance-sheet as Hindalco was forced to take on Novelis’ debt burden of $2.9 billion.
Novelis Acquisition
Born in early 2005 as a result of spin-off from its parent company Alcan, Novelis has a diversified clientele — Coke, Ford, General Motors, Audi, Lotte, Kodak and Tetra Pak. But in a bid to pump up its business, Novelis entered into fixed price supply contracts with some of its major customers.
Trouble began in 2005 when raw material prices spiralled sharply. Since Novelis was compelled to sell below cost due to contractual obligations it reported losses of $102 million from operations for the nine months ended December 2008. This swelled to $1.82 billion, after the company charged goodwill impairment and losses on derivative contracts.
Despite this, Novelis’ business does offer long-term benefits to Hindalco. Facility to produce value-added products may aid Hindalco’s margins over the long term. The fixed price contractual obligations of Novelis end by January 1, 2010. Moreover, Novelis has embarked on cost savings and had undertaken a production cut. In addition, it is accounting for goodwill impairment which may help Hindalco benefit from the deal
Copper: Yet to shine
Hindalco’s copper business (where demand is mainly from the domestic market) has been facing margin pressures from declining realisations. While the segment’s contribution to revenues is 67 per cent, its high cost structure has limited its share in profits to as low as 20 per cent.
Copper cathodes and rods find use in high end industries such as electrification, housing and construction and infrastructure projects. Apart from US and Europe, Hindalco exports copper to the BRIC nations, which offset decline in demand from US and Europe in 2007-08. But with even the BRICs witnessing a slowdown in 2008, Hindalco’s revenues from copper slipped by 5 per cent for the nine months ended December 2008.
LME prices
Copper prices in the London Metal Exchange corrected sharply, by 62 per cent, between July and December 2008. They have since recovered 44 per cent. Easing warehouse stocks and signs of higher Chinese demand have raised hopes about an early recovery in the copper price cycle.
On the other hand, aluminium prices remain subdued, though they have risen 19 per cent from the February 2009 lows. LME inventories show some improvement in aluminium demand but the recovery is more tentative than for copper.
Financial overview
A strong commodity cycle saw Hindalco deliver sales growth of 24 per cent and operating profit growth of 25 per cent between 2003 and 2007.
In 2007-08, the company saw a manifold growth in consolidated sales from Rs 193 crore to Rs 600 crore (attributable to the acquisition of Novelis), while operating profits rose 50 per cent. But high interest costs from the Novelis acquisition led to a dip in net profits. From a consolidated debt service coverage ratio of 15 times in until 2006-07, it fell to three in 2007-08.
The bridge loan taken for the buyout (due in November 2008) has been fully repaid by the company, through rights issue proceeds amounting to $920 million. For the remaining debt, the company has again borrowed $982 million (at a rate of LIBOR + 80 bps) after liquidating its investments.
The financial year 2007-08 saw a sharp surge in crude oil prices, which had cascading effect on transportation costs and cost of alternative energy sources such as coal. Going forward, Hindalco’s margins are likely to benefit from the substantial correction in crude oil and coal prices.
Other concerns
The major constraint for the aluminium division is the threat of import substitution. With the government recently hiking import duties on the metal, this problem has been addressed adequately. The copper division continues to face raw material supply constraints, resulting in production capacities remaining unutilised.
Moreover, Hindalco faces margin pressures because of depressed treatment and refining charges, which determine conversion margins on copper and this is expected to persist in the near future also.
AIA Engineering
Investors can consider buying the stock of AIA Engineering, the world’s second largest manufacturer of high-chrome mill internals. Our recommendation stems from the steady demand for AIA’s products from cement companies, both domestic and global, as also the revival of enquiries from the mining sector. Production cuts taken by some of its potential clients in the mining sector had earlier limited AIA’s revenue opportunities.
AIA, with a dominant presence in the domestic and overseas markets, appears well-placed to leverage from the revival in demand from the mining sector. At the current market price of Rs 163, the stock trades at about 9 times its likely FY-10 per share earnings.
While valuations are at a premium to capital goods stocks, that AIA is the only listed player in this space justifies its premium. However, given the recent surge in the markets, investors may be better off phasing out their exposure to this stock over a period of time.
Demand boosters
AIA specialises in design, manufacture, installation and servicing of high-chrome mill internals (which find application in cement, mining and thermal power industries). The demand for AIA’s products stems primarily from the switch in the user industries’ preference to high-chrome mill internals against the conventional forged ones.
This leaves plenty of room for growth as the current share of high-chrome mill internals stands at only about 15 per cent of the total demand. High-chrome mill internals, which are used to grind clinker in cement mills; coal in thermal power plants and mineral ore in mines are likely to attract higher demand in the coming years as they offer higher productivity, greater control over grinding process, lower power consumption and lower wear rates.
Demand for AIA’s products may also derive strength from the fact that there has not been any major scaling down in capex plans by the cement majors.
While sustained capex may help keep the demand from the cement sector strong (the sector is the primary revenue contributor for AIA), a good part of the company’s overall business (nearly 70 per cent) comes from replacement demand. That, to an extent, insulates AIA’s revenues from any sharp slowdown in its user industry’s capital spending cycle.
Besides, AIA is also looking to increase the share of its revenues from the mining sector. This appears to hold promise, as the market potential in this sector is immense, while competition is limited. Besides, it also plans to tap global market in this space. Trends in order inflows from the mining sector, therefore, may bear a close watch in the coming quarters.
Going slow on expansion
While the company had earlier gone in for a large capacity expansion programme, it has in conformity with the current market scenario toned its capex plans considerably. The second phase of its capacity expansion plan (100,000 tonnes) is now under review. AIA now plans to incur limited capex that will entail only the de-bottlenecking its current capacity. This appears prudent, as it will help the company conserve its cash.
Earnings scorecard
For the quarter ended December 08, AIA managed to report a 45 per cent growth in consolidated revenues, helped primarily by the new capacities it had added last May as also an improvement in its realisations. In terms of sales break up, exports made up for 57 per cent of its revenues and domestic sales the rest.
The cement sector continued to be the lead contributor, making up a good 65 per cent of its total sales. Utilities and mining segment made up for 25 per cent and 10 per cent respectively. But revenues in the coming year may be more or less flat as the management expects realisations to drop, led by the correction in raw material prices, even as it expects an increase in sales volumes.
Operating margins for the quarter, however, dropped by about 2.2 percentage points to 25.5 per cent, driven by a high base effect (as the company had initiated price hikes last year) and then prevalent high raw material prices. Net profit growth was pegged at about 17 per cent.
Sunday, April 12, 2009
Marico
Marico’s stock has been an underperformer in the FMCG pack despite the market preference for defensive stocks over the past year.
The better growth rates managed by larger FMCG rivals over the past three quarters and muted performance from Marico, due to higher raw material prices, have weighed on the stock. But with price hikes in the FMCG space tapering off and input prices for the company correcting from their peaks, Marico may deliver better growth in the year ahead.
An expanding international business, a promising new product pipeline and brands positioned strongly on the beauty and wellness plank, suggest that the business is well placed to weather any moderation in consumer spending. Investors can buy the stock, currently trading at a PE of about 16 times its estimated 2009-10 earnings; at a discount to larger rivals such as Hindustan Unilever, Nestle and Dabur India.
Marico delivered a strong 27 per cent sales growth in the first nine months of 2008-09, driven by healthy growth in the Parachute and hair oils business, an expanding contribution from new products (now 15 per cent of sales) and strong growth in the international business.
Though Marico’s coconut oil brands saw spiralling raw material prices (copra), significant price increases taken over the year (thanks to a dominant market share) and a volume growth of 7-9 per cent, helped the business register reasonable growth. The edible oil brands faced substitution by cheaper rivals, but this was more than made up by a strong show from Marico’s overseas operations in Bangladesh, West Asia, Egypt and South Africa.
The strong sales, however, failed to trickle down to profits (12.5 per cent growth) due to the upward spiral in the prices of safflower seed and copra.
Signs of relief on input costs are now evident, with copra prices correcting by about 13 per cent and safflower prices by about 20 per cent from their levels in December. While the former promises to expand hair oil margins, the latter allows room to revive volume growth in the Saffola brand through price offs.
Re-launch of brands in the South African business and a favourable currency equation suggests that overseas operations may continue to chip in with good growth. The company’s presence in nascent product categories such as male grooming, hair creams and styling gels, as also new product prototypes – Saffola Zest – a healthy snack and low glycemic rice – hold considerable scope for scaling up in size.
Weekly Technicals - Apr 12 2009
The Sensex ended higher yet again with a gain of nearly 4.5 per cent at 10,804 in a highly volatile week. In the process, the index has now soared nearly 30 per cent (2,478 points) in the last five trading weeks.
Among the index stocks, Jaiprakash Associates was the top gainer with a gain of almost 18 per cent. Tata Steel, Larsen & Toubro, Reliance Infrastructure, Tata Motors, ICICI Bank, DLF, Reliance Communications and HDFC gained in the range of 8-16 per cent.
As mentioned last week, the target for the current rally remains 12,600 which could be achieved in the next couple of months. In the coming week, the index is likely to face some resistance around the 11,000-mark, and further up at 11,200. The 11,000-mark is R3 (Resistance 3 or 0.62 per cent retracement of the February range) on the monthly charts, and 11,200 is R3 on the quarterly charts.
Since, the rally has been so sharp and the 14-day RSI (Relative Strength Index) continues to remain in the overbought zone, profit taking or a sharp retracement in coming days cannot be ruled out.
The chances of a pull back or some profit taking before the index hits 12,600 are high. Going forward, factors such as general election, corporate results and global markets will weigh heavy on the market sentiment. Hence, the volatility is likely to remain high.
The base for the current rally is 9,650-9,710. Only consecutive close below these levels would change the trend back to the negative zone.
The NSE Nifty moved in a range of 252 points, from a low of 3,149, the index moved to a high of 3,401, and finally ended with a gain of 4 per cent at 3,342.
This week, the index is likely to test its 200-DMA (simple daily moving average) at 3,437. The index may face some resistance around these levels before continuing its upward journey. Above this, the Nifty is likely to rally to 3,470-3,500.
However, in case of a downside, the index is likely to find support around 3,245-3,185. Once 3,185 is breached, the index may see a steep fall towards the 3,000-mark
Saturday, April 11, 2009
Sensex gains another 455pts
The Sensex began the week with a positive gap of 173 points at 10,522. Profit-taking during the week saw the index slip to a low of 10,172. However, sustained buying by bulls helped the index recover and rally to a high of 10,932 - up 760 points from the week's low.
The Sensex finally ended the holiday-shortened week with a gain of 455 points at 10,804. In the process, the index has ended higher for the fifth week in a row, and is now up nearly 30% (2,478 points).
In the week under review, Jaiprakash Associates zoomed nearly 18% to Rs 114. Tata Steel, Larsen & Toubro, Reliance Infrastructure, Tata Motors and ICICI Bank surged 10-16% each. DLF, Reliance Communications, HDFC, Sterlite, NTPC, Sun Pharma and Bharti Airtel also ended with smart gains.
BHEL and ACC, however, slipped over 2% each
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