Amaranth Won't Scare The Markets

Any fallout from the recent losses suffered by a pair of hedge fundsthat came out on the wrong side of a bet on natural gas prices probablywon't include a ripple through the financial markets or a governmentrush toward more regulation.

More likely, the onslaught of moneythat's been poured into hedge funds over the past four years--roughlydoubling their assets to over $1 trillion, according to the Hedge FundsIndustry Association--may slow down a bit as investors take a breathand pay closer attention to their funds' strategies and their managers'styles.

"You've got to know your fund manager," says investmentadviser John Mauldin, who publishes a newsletter that tracks the hedgefund industry. "So many investors just look at past performance, whichis not a reason to buy a fund."

His comments come in the wake ofreports that Greenwich, Conn.-based Amaranth Advisors, a fund with anestimated $7.5 billion in assets, has lost 35% of its value this yearthanks mostly to a recent drop in natural gas prices. Amaranth'stroubles come on the heels of those of MotherRock, LP, an energytrading fund that has suffered big losses since June and plans to shutdown. Funds that trade energy have been through volatile times lately,with natural gas prices off 20% since the beginning of September andcrude oil down to $64 a barrel from $78 last month.

Industryexperts say hedge funds have been taking greater risks of late, tryingto chase the 15% to 20% returns of a few years ago, which have mostlydried up recently. The average hedge fund returned 8% last year,according to industry tracker Hennessee Group, in line with the averagemutual fund.

But in the investment world, the hedge funddepartment is where the big boys play. And the territory is generallyfilled with experienced people who appreciate the risks involved andwho know how to take their losses. A one-sided bet on natural gas orany other energy product is going to produce big gains orlosses--exactly what a hedge fund investor expects.

"Investorsare supposed to understand the risks, assuming they're properlyqualified," says attorney William Natbony, a senior partner in thefinancial services group of Katten, Muchin Rosenman in New York.

Anda failing fund isn't very unusual. About 5% of the estimated 7,500 to9,500 hedge funds fold every year, the Hennessee Group says, largelybecause impatient investors with a lot of choices don't offer much of agrace period to managers who bring home lackluster returns. Even a bigloss by a fund like Amaranth is unlikely to have much of a trickle downeffect, according to Natbony.

A 35% loss "still means that 65% of the assets are in place, so the fund is properly collateralized," he says.

Thefallout of the two funds may serve to bring back voices calling formore SEC regulation of the industry. Just yesterday, Rep. Mike Castle(R-Del.), spoke out in support of more transparency while calling for astudy to examine hedge funds' impact on the economy. But Mauldin saysthat regulation would produce little value, since any new rulesprobably wouldn't take direct aim at a fund's particular assets.

"Aregulator can tell them to play by the rules, but won't tell them whatthey can or cannot invest in," he says. Fraud cases in hedge funds, hesays, are pretty minimal compared with public companies, rendering morerules largely useless.

Kotak - Everest Kanto

Kotak recommends a BUY on Everest Kanto

Download here

India's Architectural Wonders

See here

India's forthcoming wave of slick contemporary architecture, even beyond offices, symbolizes the Asian nation's rocketing economy, which first began to open up 15 years ago. Via a series of superlative skyscrapers, shopping centers, and residences that are the tallest, the largest, the "greenest," or the first of their kind, the country is quickly presenting itself as a 21st century global power.
In 2005, for example, Infosys Technologies opened its $65.4 million Global Education Center in Mysore. Located on a 270-acre, $119 million campus, the facility is the largest IT training center in the world, accommodating 4,500 trainees at any given time and hosting up to 15,000 per year. The center is being expanded to handle double the number of employees. While its glassy, futuristic design might evoke corporate buildings in Silicon Valley, the campus also features an Indian touch: a cricket pitch.

A MODERN TOUCH.  Software, engineering, and management-consulting giant Wipro commissioned Indian architect Vidur Bhardwaj to design an office in Gurgaon based on the traditional structure, the haveli (a house built around an open-air courtyard). Meanwhile, Tata Consultancy Services, a division of mega-conglomerate Tata Group, will soon see a sprawling, $200 million campus in Chennai designed by noted Uruguayan architect Carlos Ott (a nod to Tata's expansion into Latin America).

Buildings will feature a step-like structure recalling those found in centuries-old South Indian temples—only these are rendered in ultra-contemporary glass. It's scheduled to be completed next year and will boast the tallest tower in Southern India.

"By proposing to build their offices referencing Indian architectural design in this age of globalization, Indian companies are sending several messages," observes Islamabad (Pakistan)-based Saeed Shafqat, who teaches courses on South Asia at Columbia University's School of International & Public Affairs, in an e-mail interview.

"They're saying India has a heritage that is coming of age. And that Indians are taking genuine pride in their history, culture, and architectural contributions even in the modern era," Shafqat continues. "Finally, they are saying that Indian multinationals are a force to be reckoned with. [The new architecture] suggests economic self-confidence and strong national identity."

PROCEEDING WITH CARE.  But some experts believe architects and corporations should proceed with caution when planning structures with obvious Indian references. Plans for brand-building via recognizably Indian design motifs could seem simplistic or theme-park-like in their approach.

"Culturally specific motif application is not new. To some extent, it is an easy way to refer to the notion of cultural context," observes Vishakha Desai, President of the Asia Society, the nonprofit organization founded 50 years ago by John D. Rockefeller III to foster deeper understanding between Asian nations and the U.S.

She points to structures such as SOM's Jin Mao tower in Shanghai, completed in 1999 and known for its pagoda-like details, as an earlier example of too-obvious, recognizably "Asian" architecture.

MOVING BEYOND MOTIFS.  "The real challenge for contemporary Indian architects is to understand the historical principles of Indian architecture and design, as well as the specific materials used traditionally and appropriately in the climate," says Desai, who holds a doctorate in Indian art history. "They need to think beyond the quick, knee-jerk reaction of simply adding an 'Indian' motif."

Some architects commissioned to design projects to be completed within the next 10 years are doing exactly what Desai suggests. New York architects Tod Williams and Billie Tsien, for example, have designed a new Bombay campus for Tata Consultancy Services (to be completed by 2010) that incorporates elements such as a jali, a traditional carved screen used for centuries as both sunshade and ventilated wall.

Williams and Tsien's jali is more angular and contemporary and less florid than screens of the past. But it serves as a nod to Indian architectural history as well as providing an eco-friendly way to keep offices cool using natural shade and ventilation.

Sustainability is now a real consideration within Indian architecture. The country, which is highly dependent on coal for energy, is widely known to be one of the world's most polluted.

A study published in June, 2006, by the Community Environmental Monitors (CEM), an independent environmental health agency, indicated that millions of Indians in both urban and rural environments were exposed to up to 32,000 times more than the globally accepted standards for 45 harmful chemicals and 13 carcinogens.

As if to combat such disturbing images of India's polluted landscape, Indian and international architects commissioned to design edifices in India are increasingly producing "green," or eco-friendly architecture.

Sharekhan Eagle Eye (equities) & Derivatives Info Kit for September 19, 2006

Featuring ...

Fedders Lloyd

Finolex

Dewan Housing

Escorts

Nocil

Download here

Sharekhan Investor's Eye dated September 18, 2006

Download full report here

MRO-TEK
Cluster: Apple Green
Recommendation: Book out 
Current market price: Rs67

Book out
MRO TEK is a cash rich company and does not have any significant requirement for capital expenditure in the coming years. Consequently, the dividend policy is likely to remain liberal that would result in a decent dividend yield at the current level. However, the inability of the company to grow in the robust demand environment would continue to act as a drag on the stock's valuation. We advise booking out of the stock.

Sundaram Clayton
Cluster: Apple Green
Recommendation: Buy 
Price target: Rs1,550
Current market price: Rs1,040

Annual report review

The key takeaways from the latest Sundaram Clayton Ltd's (SCL) annual report are mentioned below.

• Good performance in FY2006: SCL delivered a strong performance as its top line rose by 17.3% to Rs629.3 crore in FY2006 as both the die-casting and brakes divisions rendered good performances. The net profits for the year marked an increase of 39.8% to Rs74.5 crore in FY2006. 
• Improving operating metrics: The company continued to generate strong cash flows, while the return ratios also marked an improvement during the year as the return on capital employed (ROCE) improved to 27.8% as compared with 26.7% last year while the return on net worth (RONW) grew to 23.7% as against 21.9% last year.
• Both divisions perform well: The brakes division performed well in FY2006 and the outlook remains bullish with the implementation of the norms such as IS 1852-2001 and the implementation of the anti-lock braking systems (ABS). The revenues from sourcing to WABCO are also expected to rise in the coming years. The die-casting division also showed a remarkable volume growth and the exports prospects for the division are quite bright.
• Capex: For FY2007, SCL has lined up a capital expenditure (capex) of Rs49 crore for the brakes division and that of Rs75 crore for the die-casting division. 
• Reiterate Buy: At the current market price (adjusted for value of investments) the stock trades at 11.1x FY2008E earnings and 9.2x FY2008 earnings before interest, depreciation, tax and amortisation (EBIDTA). We maintain our Buy recommendation on the stock with a price target of Rs1,550

PN Vijay Financial - BSEL & Suzlon

Suzlon still a buy? and what about BSEL?

Thanks Akash

Download here

Trent

Trent should declare an Eps of Rs 30 for Fy 07 and Rs 45 for Fy 08. Available at a trailing PE of 36 times and growing at 50% each year Trent is an excellent pick for a risk averse investor who wants to play the Great Indian consumer story. Also a company with a market cap of Rs 1000 crores raising money to create
a war chest of Rs 400 crores menas that they have something up their sleeve?

Thanks Akash

Download here

Gitanjali Gems

Gitanjali trades at a current year PE of less then 10 compared to Titan's (Tanishq). PE of 32.The RoE is how – ever very low but that could be because the IPO
proceeds are yet to be deployed. There is a scope for a PE re-rating and the stock could handsomely reward shareholders. The stock also trades at a
market cap to sales ratio of less then 0.5 for the current year. It could therefore be categorized as a growth cum value play which coulkd be a
significant multibagger in the making.

Thanks Akash

Download here

Movers & Shakers

* Bharat Earth Movers rose on entering into a deal with CCC for starting a joint venture company in Brazil.

* Southern Ispat hit the upper circuit breaker of 5% on its proposed plans to set up an integrated steel plant at Kannur in Kerala at a cost of Rs500 crore.

* Suzlon Energy moved up on bagging an export order from John Deere Wind Energy.

* Financial Technologies advanced after the MCX and the ZCE signed a MoU for working together that could mutually benefit both the exchanges.

* Wockhardt inched up on reports that it has signed a MoU with MIDC for setting up an SEZ at Aurangabad.

* Venus Remedies dropped despite announcing the launch of a new formulation, Fejet-od.

* Satyam Computer Services slipped despite signing a deal with the University of Melbourne for undertaking joint research projects.

* PBM Polytex inched lower despite announcing plans to set up a windmill power project.

Sharekhan Stock Idea - BASF

BASF India
Cluster: Ugly Duckling
Recommendation: Buy 
Price target: Rs300
Current market price: R220

Piggybacking on consumption boom

Key points 

• We expect BASF India (BASF) to benefit from the changing demographics and the resulting consumption boom in India.
• BASF's products are used in industries like white goods, textiles, home furnishing, paper, construction and automobiles all of which have been growing at a fast pace in contemporary times.
• To capitalise on the resulting opportunity, BASF is expanding the capacity of its two key products, expandable polystyrene and polymer dispersion, which are used in the white goods industry and paper industry respectively.
• We expect BASF's revenues to grow at a compounded annual growth rate (CAGR) of 31% and its earnings to grow at CAGR of 32.8% over FY2006-08E.
• It has seen consistent return ratios in the past five years. It has RoCE of 24.8% and RoNW of 17.1% for FY2006; the same are expected to improve to 33.8% and 23.8% respectively by FY2008E.
• BASF has a dividend yield of 3.3% and a high dividend pay-out of 40% which provide a margin of safety to the investment. 
• At the current market price of Rs220, the stock is quoting at 7.6x its FY2008E earnings per share (EPS) and 4.3x its FY2008E EV/EBIDTA.
• We believe that the stock is trading at attractive valuations given that:
  - the outlook for the company's business is very bright over next two years;
  - the return ratios, RoCE and RoNW, are likely to show sharp improvement; and
  - the dependence on agrinutrients business is likely to reduce substantially.
• We recommend a Buy on BASF with a price target of Rs300.

Trading Call

Buy Reliance Industries above Rs 1143 for target of Rs 1159, support at Rs 1136.

Trade at your own risk

The story from 12K to 12K...

and what is driving the rally this time

Four months after it fell off the mark and five months after it firsttouched it, the Sensex is back at 12,000. Time to rejoice that all'swell with the world? Not really, if you take a close look at theunderpinnings of the rally that has taken the index back tostratospheric levels. The present rally appears to be selective interms of the participating stocks, and the market has turneddiscriminating in the mid- and small-cap spaces. There has been avirtual shake-out among the mid-caps that were in the vanguard of thelast rally till May. Ditto for the small-cap stocks, where, again, theparticipation has been minimal in this rally

Read here

Textile: Is it different this time?

Indian textile companies, across product categories (apparels, denim, home textiles) are today seeking to build scale, extend their footprint and access global markets. While their attempts are not without several hiccups, there is certainly a sort of rejuvenation in the sector, which was once written off as an old economy debt-ridden sector. This was primarily so when most companies in the sector sought refuge in the BIFR in the late 90s. With the textile majors today once again talking of expanded capacities and inorganic growth, we analyse whether the scenario is different this time.

The pros...
Yet to reap the fruits of capex: Most companies in the sector timed their expansion plans FY04 onwards, so as to avail themselves of the funding under TUF (Technology Upgradation Fund, offering loans at 6% subsidy) - due to expire in March 2007. This led to the capex-spending phase in the textile sector peaking in the last two fiscals. Against this backdrop, we believe most of the capex in the sector has already been incurred or is in the last leg of completion. We believe that the benefits of these expansions should start filtering in from FY08 onwards, once the new capacities stabilise and the utilisation levels get normalised.

Overseas alliances to help move up the chain: Several Indian textile companies have formed alliances with their global counterparts, particularly those with strong front-end capabilities, in a bid to access global markets, tap technological know-how, design skills and branding and retailing ability. The alliances have been struck in most cases by way of JVs or stake acquisition. The strategic rationale for the alliances could be as outlined below.

• Branding and retailing capabilities: While Indian textile companies have the advantage of a cost competitive manufacturing base, they lack global branding and retailing capabilities. Tying up with overseas companies will help them move up the value chain and focus on the more lucrative branding and retailing business (Welspun India's stake acquisition in Christy).
  
  

• Market access: Overseas alliances give Indian companies direct access to the US and European markets where their overseas partners have a distribution channel in place (Raymond's JVs with overseas partners).
  
  

• Technology transfer: Transfer of technology and know-how for manufacturing the premium end products will become a possibility. Raymond through its JV with Gruppo Zambaiti has entered into a new line of business - high-value cotton shirting fabric. While Raymond will provide the low-cost manufacturing base in India, while its overseas JV partner will supply the technological know-how.
  
  

• Designing capability: Overseas alliances will help Indian companies acquire international design capabilities and product development skills. This is true for all the three JVs entered into by Raymond in the recent past.
  
  

Retail footprint: Most large textile companies in India, realising the growth potential in domestic retailing, have drawn up aggressive strategies to expand their footprint in the domestic market (see table below). These include companies like Welspun and Himatsingka, which were traditionally export-oriented, as also Raymond, which has been the pioneer in domestic textile retailing. While Raymond has been reasonably successful with most of its domestic brands, its brand Color Plus is pegged as the most profitable apparel brand. Home textile (furnishing) companies like Himatsingka and Welspun have also taken steps in this direction with their outlets Atmosphere and Spaces respectively.

And the cons...
Home textiles-Over-supply concerns: Although home textile companies have recently been aggressive on the capacity expansion front, realisations have remained stable. But as new capacities come on-stream and utilisation levels pick up, this is unlikely to continue. This is because although India continues to feature amongst the lowest cost producers for the US and EU markets, competitors like Pakistan and Turkey are cannibalising its market share. Moreover, with the possibility of slowdown in the western economies looming large, a slowdown in demand cannot be ruled out.

Apparel-Rigid labor laws: India's inflexible labor laws have been a hindrance to investments in this segment. Unlike in home textiles, garment capacities are highly fragmented and leading Indian textile companies have been slow to ramp up their apparel capacities, despite strong order flows from overseas buyers who are trying to diversify out of China.

Denim-Excess capacity: Total denim capacity in India has nearly doubled over the past 12 to 15 months, resulting in a prolonged slump in the domestic market. Most new entrants (largely catering to the unorganised market) are incapable of producing export-quality denim and have resorted to dumping their produce in the domestic market resulting in nearly 15% drop in prices within a few months.

Firming cotton prices: As per the data for cotton production shown by the textile ministry of respective countries, cotton production is expected to rise by 2% globally. However, the new capacities in the textile industry seem to have to be falling short of sufficient raw material. While India continues to remain in surplus, the demand for cotton from across the globe is expected to keep cotton prices firm for the rest of the fiscal, thus impacting the operating margins of textile companies.

The scenario is...

...no different this time! Excess capacity, pressure on realisations and raw material costs are as much of a concern today as it was half a decade back. In fact, dependence on exports for vending a large part of turnover has cost the companies foreign exchange losses (in their hedging account) with the rupee depreciation. Nonetheless, what needs to be acknowledged is that several companies in the sector have been pro-active in taking advantage of the regulatory and market opportunities (TUF, retail outlets, overseas JVs), which we believe will stand them in good stead in times to come.

Construction: The infrastructure push!

The Indian economy, with an expected growth rate of around 7.5% to 8% in FY07, is amongst the fastest growing in the world. In order to sustain this kind of growth rate, the country needs, among other things, robust and world-class infrastructure. It needs no repeating that the infrastructure in the country can, at best, be described as sub-standard, and at worst, pathetic. The country's financial capital, Mumbai, has, in some places, the kind of roads that you would not even find in a third-class village!  Thus, it goes without saying that if the country is to consistently grow at a good pace and attract investments, both domestic as well as foreign, then it will have to get its act together and consciously strive to improve its infrastructure - be it roads, power, ports, airports, irrigation, sanitation or telecommunications. In this regard, we briefly examine here, the kind of growth potential and investments that are there in the  infrastructure segment of the construction sector

Roads - Laying the route to prosperity!
The roads sector is one that is expected to see the maximum action in the infrastructure segment. Overall, infrastructure investments are expected to rise from Rs 1,700 bn in FY05 to Rs 2,200 bn by FY08. Of this, the roads sector is expected to contribute as much as 34%, or Rs 757 bn. A major part of this activity will be centred on the National Highway Development Programme (NHDP). This is the government's flagship project in its grand plan to give a facelift to the entire country's road network over the next decade. The project entails the building, upgrade and maintenance of 51,411 kms of roads at a cost of nearly Rs 1,900 bn.

Public-Private partnerships - Partnering for growth
With the pressing need to develop the country's infrastructure, the government has clearly realised that it cannot do it all on its own. It will have to involve the private sector, and the fact that a significant number of projects are being planned predominantly on a build-operate-transfer (BOT)^ basis is a strong indication of the government's intention to invite greater private sector participation in infrastructure creation.

Irrigation and water supply and sanitation (WSS)
Irrigation projects and urban infrastructure are expected to be other major areas contributing to the growth of the infrastructure segment. These 2 segments comprise 39% of the total outlay expected till FY08 at Rs 869 bn. Dam projects, water reservoirs, water treatment plants, desalination plants and sewage treatment plants are some of the project types that are expected to be awarded by state governments over the next few years. The state of Andhra Pradesh alone has envisaged investments of Rs 400 bn in irrigation projects over the next 5 years.

Power - Empowering India!
In India, the power infrastructure is in fairly poor shape. Power theft is rampant, and the quality of power supplied often leaves a lot to be desired. Thus, the need to accelerate power reforms cannot be understated. The government's capacity addition plans in the Tenth Five-Year Plan (2002-07) amount to 41,110 MW, while for the Eleventh Five-Year Plan (2007-12), the addition envisaged is to the tune of 60,896 MW. However, it should be noted that, given the past track record, it is unlikely that a great percentage of this addition will actually come on-stream during the plan periods. Nonetheless, construction investments are expected to amount to Rs 450 bn by FY10, giving significant scope for players operating in this sector.

The ones who matter!

	Sales	EBITDA margins	Net profit	RoE	Market price*	P/E ratio**
(FY06)	(Rs m)	(%)	(Rs m)	(%)	(Rs)	(x)
Gammon#	14,851	13.0%	1,043	20.6%	374	34.9
Hindustan Construction	19,870	9.2%	1,248	20.1%	109	21.9
IVRCL	14,957	9.0%	930	24.8%	253	27.8
L&T@	147,631	7.2%	9,424	23.7%	2,522	35.3
Nagarjuna Construction	18,404	8.9%	1,039	16.4%	312	26.7

As can be seen, all these players trade at reasonably high P/E multiples on a trailing 12-month basis, reflecting the high expectations that the market has from them. To their credit, so far, they have performed admirably, justifying the premium valuations that they enjoy on the bourses. However, we would say that while studying a construction stock as an investment, do not go by the order book size alone.

Factors like the duration of the order book, raw material costs, escalation clauses and the ability to protect margins are factors that, in our view, are more important than simply the order book-to-sales. Execution risks and, of course, finding adequate and qualified people to execute the projects, in our opinion, are the biggest risk factors.

^ In the BOT model, the vendor builds a highway or bridge, operates it for a period of time and later hands it over to the government. Here, it is important to note that this model rests on specialists who bring in the best knowledge and skill-sets for setting up such projects. The model works on outsourcing the early stages of project execution to specialist private players and once the project starts running smoothly, it is taken over and run by someone else like the government in this case.

Edelweiss - Praj Industries

Praj Industries going to make new moves ?

Edelweiss says ... here