Anagram - Stock Watch

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Motilal Oswal - M&M

Motilal Oswal report on M&M - here

Dimensional Securities - Tulip IT

Dimensional recommends BUY on Tulip IT with a target of 516 (12 months)

Sensex advances 227 points

The market surged for the third consecutive week on account of falling crude oil price, strengthening of rupee, strong FII-buying and on expectations of robust results from corporate India. The market moved up as the US Federal Reserve kept interest rates unchanged at a meeting on Wednesday (21 September).

The market also rose on expectations that the RBI may keep short-term interest rates unchanged at its credit policy meeting next month.

The BSE Sensex gained 227.41 points, to finish on 12,236.78. The S&P CNX Nifty rose 65 points, to close at 3,544.

The BSE Sensex rallied on Monday, gaining 62 points on the back of strong FII inflows, and steady-to-firm Asian markets.

On Tuesday, the Sensex fell 101 points on profit-booking and on concerns over possible sales by hedge funds after US hedge fund Amaranth Advisors said on Monday (18 September) it may suffer billions of dollars in natural gas losses following a steep fall in price recently. Amaranth’s woes fuelled concerns that many other hedge funds could also have been hurt by the steep fall in crude oil and natural gas price, and has bred concerns that such funds may book profits in Indian equities, to make up for losses suffered in their energy related investments globally.

On Wednesday, the BSE Sensex jumped 139 points as crude oil prices fell below $61 a barrel.

On Thursday, the benchmark index rose 165 points, as investors stocked up equities ahead of the second quarter results and after the US Federal Reserve kept interest rates unchanged. Buoyant direct tax collections in the current fiscal also lifted the market as it indicated a rise in corporate profits. The centre’s gross direct tax collections registered a 33.5% growth in April-September 2006, to Rs 87,831 crore.

On Friday, the Sensex lost 37.49 points, taking cue from weak global markets.

FIIs invested to the tune of Rs 1,296.5 crore in equities in four trading sessions, from Monday to Thursday, while mutual funds offloaded Rs 15.76 crore worth of equities.

Engineering and construction major L&T was up 0.64% in the week, to close at Rs 2,656.75. Investors mopped up the scrip ahead of the record-date for a bonus issue. The company will allot bonus shares on 29 September 2006.

Cipla rose 2.1% in a week to close at Rs 260.15. Recently, it received tentative FDA approval for Lamivudine and Zidovudine, both anti-AIDS drugs.

Ranbaxy fell marginally by 0.06% in a week, to close at Rs 413.80. The pharma major has received approval from the US Food and Drug Administration to manufacture and market Furosemide Tablets 20 mg, 40 mg, and 80 mg.

FMCG giant Hindustan Lever rose 5.6% in a week, to close at Rs 257.25. The company has hiked prices by an average 3%, across portfolio over the last two months.

ONGC rose nearly 2% in a week, to close at Rs 1,184.45. The company’s foreign subsidiary and Sinopec, in joint venture, acquired Colombian oil assets of US-based Omimex Resources. Omimex has oil & gas operations exclusively in Colombia, which include onshore production and exploration areas with proven reserves of more than 300 million barrels of oil, and a current production of approximately 20,000 oil barrels per day.

Reliance Industries rose 1.2% in a week, to close at Rs 1,155.20. The company paid Rs 425 crore as advanced tax, in the second installment this year, compared to Rs 225 crore last year.

IT stocks were in demand this week. Satyam rose 1% in a week, to close at Rs 838, Wipro rose nearly 2% in a week, to close at Rs 519.55 and Infosys gained 1.1% in a week, to finish at Rs 1,830.10.

PSU power equipment manufacturer Bhel gained nearly 2%, to close at Rs 2,312.30. There were reports that it may acquire an IT company in the west, to enhance capacity and technological expertise. The company is reportedly said to have bagged Rs 1,224 crore contract from Uttar Pradesh Rajya Vidyut Utpadan Nigam (UPRVUNL).

BRICS - Steel Sector

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BRICS - Tulip IT Services

We are revising our estimates and target for Tulip IT Services in order toincorporate the higher-than-expected demand for its wireless IP/VPNcorporate data services (CDS) as well as a shift in our valuation method.We have upgraded our FY07 and FY08 EPS estimates to Rs 28.4 and Rs40.2 from Rs 22.3 and Rs 29.5 respectively. We reaffirm our BUYrecommendation with a revised March ’07 target of Rs 383, which is 12%lower than our previous target of Rs 437. This revision is mainly becausewe have switched from a P/E-based valuation model to the DCF methodwhich we feel is more appropriate given the recurring nature of revenuesfrom Tulip’s high-margin CDS business. In our opinion, the company’scurrent valuations do not factor in the high growth and profitability of itsCDS business and the expected growth in coming quarters.

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Sharekhan Investor's Eye - Sept 22

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Omax Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs178
Current market price: Rs97

Annual report review

The key highlights from the latest Omax Auto's annual report are mentioned below.

• FY2006 performance: Omax Auto registered a good top line and exports growth, but the profitability declined due to a rise in the employee and power costs and higher interest cost.
• Efforts to increase efficiencies: The company plans to undertake a number of measures in order to increase its operational efficiencies. The use of low-cost fuel, captive material consumption and increased automation and productivity are expected to achieve the same and aid in improving its margins going forward.
• Export expected to surge: The management has an export target of Rs50 crore for FY2007 as against exports of Rs26.6 crore in FY2006. The current export order book of the company is to the tune of Rs150 crore, which is to be executed within the next three years.
• Capex plans: Omax has aggressive plans to expand capacities across all its units including the units at Dharuhera, Binola and Bangalore. For the current fiscal, the estimated capital expenditure is Rs61 crore.
• Reiterate Buy: At the current levels, the stock discounts its FY2008E earnings by 4.7x and enterprise value (EV) by 3.5x. The stock appears to be attractive at these levels and we maintain our Buy recommendation on the stock with a price target of Rs178.
  

Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,250
Current market price: Rs1,155

It is solid, not gas
Recently there have been several news reports on Reliance Industries stating that the gas reserves in place in its KG-D6 block could be as high as 50 trillion cubic feet (tcf), almost three times the existing reserves as reported to the directorate of hydrocarbons.

We have revised our price target on the stock to take into account the earnings of the company for FY2008 and the value of Reliance Retail. We believe that with newer and exciting businesses lined for investment, RIL is set to enter another era of strong growth for itself over the next five years. We maintain our Buy recommendation on the stock with a price target of Rs1,250.

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VIEWPOINT

Educomp Solutions

Growing exponentially
Educomp is well positioned to tap the huge potential in the education segment, both in the private and public schools, due to the investments made in developing the digital content. We expect the consolidated revenues and earnings to grow at a CAGR of 82% and 80% respectively over the two-year period FY2006-08. However, the positives appear to be fully priced in with the stock trading at 27.5x its FY2008 estimated earnings of Rs25 per share (on a diluted equity base).

Putting ethanol in the fast lane

Despite falling oil prices and a corresponding drop in the stock price of various ethanol companies, famed venture capitalist, Sun Microsystems co-founder and ethanol investor Vinod Khosla outlined four steps he said would help the country use more of the plant-derived fuel.Speaking at a Cleantech Venture Forum conference in New York City, Khosla told a roomful of fellow venture capitalists that a couple of government mandates and a shift in the subsidy policy would go a long way in helping bring more ethanol to market.

Specifically, he called for a government mandate that 70 percent of all cars sold in the U.S. be flex-fuel - which is having the ability to run on gas, ethanol or other alcohol-based fuels - by 2014, and that 10 percent of all major-branded gas stations in the U.S. sell E85, a fuel that contains 85 percent ethanol.

The move is an attempt to allay concerns by the oil industry that there aren't enough ethanol cars to make installing E85 pumps worthwhile, and simultaneous concerns by the auto industry that people won't buy ethanol cars because there's no place to fill them up.

He also said the current government ethanol subsidy of 50 cents a gallon should be based on a sliding scale corresponding to the price of oil: 25 cents a gallon if oil is at $75 a barrel ranging up to 75 cents a gallon if oil falls to $25 a barrel.

"It indicates to Saudi Arabia, or (Venezuelan President Hugo) Chavez or whoever your favorite manipulator is that they can't manipulate the markets" and drive out alternative fuels, he said.

When asked who would pay for these mandates, Khosla indicated it would be up to to industry or the government. He said installing the gas pumps would cost something less than a billion dollars and making cars flex-fuel amounts to $35-$100 a vehicle.

"We're spending so much on energy security, spending that kind of money is a worthwhile investment," he said.

He also called for lifting tariffs on imports of ethanol from Brazil, a move strongly opposed by U.S. farmers, in exchange for increasing corn-derived ethanol in gasoline from 10 to 15 percent, a move he said was supported by some in the agriculture industry.

Most ethanol in America is currently derived from corn. Using corn-based ethanol as a fuel has been criticized for its potential to drive up food prices and its ability to provide only a fraction of the the country's total gasoline demand.

Khosla also has investments in cellulosic ethanol, a nascent but promising technology that involves making ethanol out of nearly any plant, wood or other biomass source, not just food crops.

"The president loves biomass, the farmers love biomass, even evangelicals love biomass" because it decreases the county's reliance on the Middle East, he said. "As investors we should make this happen because its good for the country."

Oil produced by such companies as BP (down $0.61 to $65.35), ConocoPhillips (down $0.39 to $57.82) and Exxon Mobil (down $0.14 to $64.64) has become the subject of debate as its cost rises, climate change becomes more visible and tensions in the Middle East and South America underscore the U.S. dependence on crude.

Sharekhan Investor's Eye - Sept 22

Omax Auto
Cluster: Apple Green
Recommendation: Buy
Price target: Rs178
Current market price: Rs97

Annual report review

The key highlights from the latest Omax Auto's annual report are mentioned below.

• FY2006 performance: Omax Auto registered a good top line and exports growth, but the profitability declined due to a rise in the employee and power costs and higher interest cost.
• Efforts to increase efficiencies: The company plans to undertake a number of measures in order to increase its operational efficiencies. The use of low-cost fuel, captive material consumption and increased automation and productivity are expected to achieve the same and aid in improving its margins going forward.
• Export expected to surge: The management has an export target of Rs50 crore for FY2007 as against exports of Rs26.6 crore in FY2006. The current export order book of the company is to the tune of Rs150 crore, which is to be executed within the next three years.
• Capex plans: Omax has aggressive plans to expand capacities across all its units including the units at Dharuhera, Binola and Bangalore. For the current fiscal, the estimated capital expenditure is Rs61 crore.
• Reiterate Buy: At the current levels, the stock discounts its FY2008E earnings by 4.7x and enterprise value (EV) by 3.5x. The stock appears to be attractive at these levels and we maintain our Buy recommendation on the stock with a price target of Rs178.
  

Reliance Industries
Cluster: Evergreen
Recommendation: Buy
Price target: Rs1,250
Current market price: Rs1,155

It is solid, not gas
Recently there have been several news reports on Reliance Industries stating that the gas reserves in place in its KG-D6 block could be as high as 50 trillion cubic feet (tcf), almost three times the existing reserves as reported to the directorate of hydrocarbons.

We have revised our price target on the stock to take into account the earnings of the company for FY2008 and the value of Reliance Retail. We believe that with newer and exciting businesses lined for investment, RIL is set to enter another era of strong growth for itself over the next five years. We maintain our Buy recommendation on the stock with a price target of Rs1,250.

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VIEWPOINT

Educomp Solutions

Growing exponentially
Educomp is well positioned to tap the huge potential in the education segment, both in the private and public schools, due to the investments made in developing the digital content. We expect the consolidated revenues and earnings to grow at a CAGR of 82% and 80% respectively over the two-year period FY2006-08. However, the positives appear to be fully priced in with the stock trading at 27.5x its FY2008 estimated earnings of Rs25 per share (on a diluted equity base).

Movers & Shakers

• Harrisons Malayalam surged following the company's decision to sell its rubber estate in Kerala for Rs53 crore.
• Everest Kanto Cylinder inched up on reports that the company would raise Rs92 crore by issuing shares to Brightwill.
• JB Chemicals & Pharmaceuticals slipped despite getting a licence to manufacture and distribute a generic version of tenofovir disoproxil fumarate.
• NTPC eased despite reports that the company has signed a memorandum of agreement with the government of Arunachal Pradesh for setting up two hydroelectric power projects.
• Orchid Chemicals & Pharmaceuticals fell despite getting the USFDA nod to market Cefadroxil in the US market.
• Four Soft ended in the red despite winning an order worth Rs70 lakh from Panasonic.
• GE Shipping ended weak despite reports that the company has taken the delivery of a new built offshore supply vessel from Bharati Shipyard.

Trading Calls

Buy Tulip IT at Rs 283-277. Stop Loss at Rs 273

Buy Bajaj Auto at Rs 2915-2880. Stop Loss at Rs 2860. Target of Rs 3009 and Rs 3179

Trading Calls

Buy Datamatics around Rs 55 with a stop loss of Rs 53

Buy Tata Consultancy Services with a stop loss of Rs 1020 for a target of Rs 1110

Buy Federal Bank with a stop loss of Rs 198 for a target of Rs 240

Buy ICSA with a stop loss of Rs 701 for a short-term target of 900

Buy Dalmia Cement with a stop loss of Rs 325 for a short-term target of Rs 418

Buy Gujarat Ambuja Cements (Rs 115.95) with a stop loss below Rs 113.75 for a target of Rs 121-124

Buy ONGC (Rs 1198) with a stop loss below Rs 1190 for a target of Rs 1215

Sharekhan Eagle Eye (equities) for September 22, 2006

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Sharekhan Investor's Eye dated September 21, 2006

Selan Exploration Technology
Cluster: Ugly Duckling
Recommendation: Buy 
Price target: Rs94
Current market price: Rs67

Development efforts yield results

We attended the annual general meeting of Selan Exploration Technology Ltd (SETL). The key takeaways from the same are given below.

• Recent efforts to develop oil assets bear fruits: SETL has discovered significant amount of recoverable oil deposits from the four wells drilled at its Bakrol oil field. It has already commercialised two of the oil wells and hopes to enhance the oil production volume by 35-40% during the current fiscal.
• Future plans chalked out: Under the next phase of development of its oil assets, the company has already organised services (like drilling and cementing) to drill four more wells. Given the encouraging findings of the data collected from the development work, SETL plans to induct a strategic partner to generate resources needed for further development of oil assets and also acquire the required technical expertise.
  

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SECTOR UPDATE

Cement

Rain drain

Key points

• The incessant floods in the states of Maharashtra, Gujarat, Rajasthan, Andhra Pradesh and Madhya Pradesh slowed down the growth in cement the dispatches to 4.35% in August. 
• A higher base of August 2005 also subdued the growth figures. Last year the floods had affected the cement dispatch figures for July 2005. As a result, the dispatches that had lagged in July 2005 had picked up significantly in August 2005.
• Despite the severe rainfall and floods in the country this year, cement prices remained firm at around Rs205 per bag, up by a very handsome 30%. The southern and western regions registered a very high rise in cement prices on a year-on-year (y-o-y) basis. 
• Going forward, we expect the cement dispatches to regain their momentum on the back of a pick-up in the construction activity post-monsoon. Cement prices may rise by Rs5-8 per bag during November 2006.
• This will be extremely positive for cement companies, as their earnings would receive a tremendous boost owing to the double impact of rising volumes and the substantially higher cement realisation.
  

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FIEM Industries IPO

Promoted by J.K.Jain, FIEM Industries is one of the leading manufacturers of automotive lighting and signaling equipment and rear-view mirrors. Major business comes from the two-wheeler segment of the vehicle industry. The company is capable of catering to the needs of almost all segments of the automobile industry: two-wheelers, three-wheelers, light commercial vehicles (LCVs) and tractors.

FIEM has technical support agreement with Ichikoh Industries, Japan. Ichikoh is supplier of automotive lighting, rear-view mirrors to major Japanese vehicle manufacturers such as Nissan Motors, Tyota Motor Corporation, and Daihatsu Motor. It has also entered into a memorandum of understanding (MOU) with Zadi Divisione Fanaleria CEV Spa, Italy, for producing products as per Zadi's specification for the European as well as the Indian markets. However, this MOU is yet to be converted into any agreement.

Customers of FIEM, both in India and abroad, range from TVS Motor Company, Honda Motorcycles and Scooters India, Suzuki Motorcycle India, LML, Kinetic Engineering., Kinetic Motor Company., Majestic Auto, Scooters India, General Motors, Hyundai Motors India, Skoda Auto India, Swaraj Mazda, Ashok Leyland, HMT Tractors, and Tractors and Farms Equipment to Piaggio Italy, Aspock Systems GmbH, Austria, and Geka, Germany.

The objects of the issue are to put up new manufacturing facilities and expand existing facilities. FIEM is setting up a 100% EOU (Unit-V) at Hosur, Tamil Nadu, and a unit at Nalagarh, Himachal Pradesh, a state that accords various tax benefits. Commercial production at both the units is expected to commence by January 2007.

Strengths

• The Indian auto component industry is expected to experience robust growth over the coming years. Growing demand from domestic original equipment manufacturers (OEMs) coupled with massive export opportunity created due to outsourcing by global OEMs and Tier 1 companies will be good for FIEM's growth. Already an established player with good technical collaboration, the company is expanding aggressively to capitalise on new opportunities as also to win over business from competitors, which are not aggressive. However, if it fails to tie up enough new business for the new and expanded capacities, its financials will suffer.

Weaknesses

• FIEM is dependent on TVS Motors, which accounted for around 70% of the total income in FY 2006. This makes it vulnerable to the fortunes of TVS Motors and also reduces its bargaining power with TVS Motors.
• The details of the MoU/ joint venture agreement by FIEM with Korea Airconditioners Company and Aspock Holding GmbH, Austria, for entering into totally new auto ancillaries such as air-conditioners and wiring harness are not available. These can increase the risk profile of the company.
• The FY 2006 performance is extraordinary, with sales up 24% and net profit 136% due to the sharp rise in operating profit margin (OPM) from around 9% in the past four years to 12.6%. This is despite the sluggish sales and profit of its largest customer, TVS Motors.

Valuation

The post-IPO EPS based on FY 2006 earning works out to Rs 6.6. At the offer price band of Rs 125-145, the PE range is 18.9x to 21.9x. The TTM PE of the Auto Ancillary-Lamps industry is around 13.5.