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Monday, September 15, 2008
Grey Market - Chemcel Biotech, 20 Microns
20 MICRONS Ltd. 50 to 55 8 to 10
Chemcel Biotech Ltd. 16 4 to 5
Sector Watch
Auto
The auto sector has been one of the worst-affected due to the rise in metal prices, higher interest rates and dip in demand. The drop in commodity prices will help companies improve their margins and prompt price cuts ahead of the festival season.
While commercial vehicle and high-end car sales would continue to be muted due to high interest rates, demand for lower-end cars, two wheeler sales and tractors are likely to be driven by high rural demand. Two wheeler makers Hero Honda, Bajaj Auto, Maruti Suzuki and M&M could give good returns over the next six months.
Banking
Lower inflation numbers for the last three weeks had breathed new lease of life to the banking sector. RBI’s monetary policy, the initiatives of the government and good monsoons will ease inflation in the medium term.
Experts say that interest rates have peaked and may cool off by the year end. While the falling 10-year bond yield, from 9.5 per cent to present levels of 8.3 per cent, is a positive precursor, a small hike (25 basis points) by the RBI is though not ruled out (and perhaps, is already discounted by the market).
In the meantime, the banks have leeway to tighten their strings and focus on pertinent issues like cost cutting, asset quality and protecting margins. Banks such as SBI, ICICI, Union Bank and Axis Bank are likely to benefit.
Engineering and Capital Goods
The softening input prices should ease out some pressure on the margins as many of the companies have recently hiked product prices. However, a depreciating rupee is making imports more costly. The issues pertaining to interest rates, inflation and the slowdown in the industrial and infrastructure space are still in play. The rising interest rates and the input prices have compelled companies to go slow on the new investments.
Also, funding for new and the existing projects through equity (attracting investors) and debt have become more difficult. Though the strong order book will see them through the next two years and should have a positive impact on revenue growth, this is already reflected in the valuations.
What is needed is the pick up in the investments and industrial capex, which may happen only after companies get an assurance in the form of a pick up in demand. Analysts prefer stocks like Cummins India, Voltas and Crompton Greaves, as they are the most attractive in terms of valuations.
Metals - Ferrous/Non-ferrous
While there is some relief as prices of inputs (such as iron ore and coal) have come down, it is not enough as coal prices are still high. And Indian companies have to depend heavily on imported coal.
Additionally, the depreciation in the rupee has made the imports more costly. Also, whatever gain the companies will have on account of the fall in the iron ore prices has been passed on to the customers by way of cut in steel prices on account of weak global steel prices.
A few of these large players such as Sail and Tata Steel, which have their own iron ore mines and being integrated plays, should earn relatively better margins as compared to non-integrated players.
The Indian non-ferrous companies will be negatively hit on account of 20-30 per cent correction in the global commodity prices. Aluminum, copper and zinc manufacturers might get affected and will show lower margins and profits.
Most of these companies have a higher base as the commodities prices were better then. However, the falling rupee could be a positive for the Indian non-ferrous companies. Despite this and the benefit of new capacities, the net impact could still be negative as the global prices have corrected significantly.
Analysts expect margin pressure on companies like Hindustan Zinc, Hindalco and Nalco.
Pharmaceuticals
The fall in the rupee will help pharmaceuticals companies (Ranbaxy, Glenmark, Lupin), which derive a large chunk of their revenues from international markets.
Part of the higher import cost due to a rise in raw material costs from China and the costly dollar will be neutralised by exports. Companies with higher FCCBs (Ranbaxy, Sun Pharma, Wockhardt) on their books will have to account for it and there will be a translational loss.
Software
The weaker rupee will be a relief for tech firms that have been grappling with a slowdown in the US economy, which is one of their biggest markets. A one per cent depreciation of rupee against the dollar pushes up operating margins by 35-40 bps for IT firms, which however, this time around might get diluted due to growth concerns.
The earnings should nevertheless get a boost of 3-5 per cent in FY09 on account of a weaker rupee. The upsides due to the weakening rupee may be capped, if the RBI intervenes by relaxing ECB norms. Firms that have lower forex hedges (Infosys and Satyam) are expected to benefit the most.
Textiles
While the sharp depreciation of rupee against the greenback is a positive for the textile industry, it continues to feel the heat from higher raw material costs, slowdown in US (demand impact) and increased competition from countries like Vietnam and Bangladesh.
"Rise in cotton prices (30-35 per cent in last one year) would eat up much of the gains made by the industry from the reverse currency movements," points out Nirav Shah of Pinc Research.
Companies like Gokaldas and Welspun India would benefit the most, as more than 60 per cent of their business is in the form of exports; some gains could get offset due to weak demand.
Shah adds that with the softening of crude oil prices, polyester manufacturers like Indo Rama Synthetics and RSWM Ltd should be able to improve their margins.
Mutual funds sitting on cash pile
Mutual funds are sitting on a huge cash pile of over Rs 12,000 crore, awaiting right market situation to deploy the funds and in turn protecting investors from any sharp losses due to market downturn.
An analysis of the equity and cash allocations of equity diversified funds shows cash piles have increased steadily from 10 percent in April to over 14 percent at the end of August.
"Exposure in equities as an asset class to the total market value of the funds has decreased from 86 percent in July to 85.5 percent in August, while cash holdings have increased by 48 basis points to 14.53 percent in August," brokerage firm HDFC Securities' report analysing equity moves of fund houses stated.
The allocations to cash in the past four months have increased from 10.70 percent in April to 11.97 percent in May and from 13.80 percent in June to 14.05 percent in July, the report showed.
The total net asset value (market value) of these funds has also decreased sharply to Rs 86,953.29 crore in August from Rs 98,912.01 crore in April, this year.
"Domestic mutual funds that have been trying to provide some support to the Indian markets by bottom fishing kept away from the volatile equity markets during the month of August," the report said.
"The cash piles are well placed to maintain buying interest and propel the sagging market forward," an official from a leading fund house said.
Investors showed a greater propensity for debt oriented funds including Fixed Maturity Plans, the report added.
Sunday, September 14, 2008
Market likely to open negative on Monday
The market opened with the gap on Monday due to waiver of NSG`s acceptance of the US proposal to drop the ban on nuclear trade, which will put the Indo-US nuclear deal on the fast track and enable the India to access the global nuclear market to meet the booming economy`s soaring energy needs, estimated to be worth billions of dollars. This led to the increase in stocks of capital goods sector engaged in manufacturing nuclear reactors and equipments and power sector though the sector is witnessing huge shortage of coal recently.
In the OPEC meeting, there is decision to cut production by 520,000 barrels per day keeping the output quota of 28.8 million barrels per day excluding The crude fall to $99.99 from a overall high of USD147.27. The Inflation came down to 12.1%, down consecutive for three weeks. The banking sector is hopeful of interest rates peaking out. The high interest rate has already affected interest sensitive sectors like auto and realty which now looking to RBI for a rate cut. The auto sector has witnessed slowdown seen with the August numbers.
The dollar strengthened more than 45.7 against rupee in this week due to offshore related dollar buying in line with the weaker regional stocks. But going forward Indian IT/ITES sector would not gain much from it as most of the big companies have their contract hedged out at Rs 43-44 level.
Regarding Sugar sector the Supreme court has fixed Rs 110/quintal price for cane for the 2007-08 crushing season (October-September) against a state advised price (SAP) of Rs 125 a quintal and Rs 81.8/quintal SMP (Statutory Minimum Price), positive for the sector. In Fertilizer segment the Government has laid ambitious plans of upto 20% blending of Bio-Feuls (Ethanol, Jatropa Diesel etc.) by 2017. In the Telecom sector, DoT and Telecom Ministry has decided to raise the license fee for 3G spectrum and changed the 3G-auction policy.
July Index of Industrial Production, IIP numbers came in at 7.1% as compared to 5.4% in June. The sectors performed are capital goods, mining, electricity production and consumer durables. IT and manufacturing growth declined. Customs and excise collections rose an annual 10.5 per cent in the first five months of this fiscal (till August) to Rs 93,856 crore. This year, the government has cut Customs duty to fight inflation and also reduced the central excise rate. The latter is expected to impact excise collections further this year. The market tumbled during this week due to week global cues which may persist in the week ahead.
Outlook For The Week
Nifty opened the week on a positive note and made a high of 4558. However, huge selling pressure was seen from resistance near 4545 and Nifty closed the week in red with 3.48% loss with higher volumes. Nifty has crucial support at 4,190. For weekly purpose trend deciding level is 4,190. If Nifty shows strength above 4,190 then we may see a rally to 4245/4295/4345. Upside crossover may take it to 4,385/4,445/4,490/4,545. If Nifty doesn`t sustain above 4,190, then we may see decline to 4125/4060/3990. Breakdown may take it to 3,925/3,875/3,845/3,760.
On Monday, Nifty may open on a negative note. For the daily purpose, trend deciding level is 4,225. If Nifty manages to trade above 4,225 then we may see a rally to 4,245/4,275/4,295. Breakout may take it to 4,325/4,245 and higher. On the other hand, if Nifty doesn`t sustain above 4,225, then we may see a decline to 4,190/4,160. Breakdown may take it to 4,125/4,095/4,060.
Inflation on downward trend ?
Inflation could well be on its way down as the Government on Sunday said seasonally adjusted monthly inflation for August fell drastically to 5.5 percent, the lowest since December 2007.
Even though annual inflation rate, as conventionally measured, fell for the third week in a row, it was quite high at 12.10 percent for the week ended August 30.
However, if seasonal factors are done away with, annual rate of inflation for August fell significantly to 5.5 per cent against the high of 12.7 percent in July and 29.5 per cent in June, 2008, according to a statement issued by the Finance Ministry today.
"Annualised seasonally adjusted inflation in August 2008 has been the lowest since December 2007," the statement said. Seasonal factors play an important role in build-up of inflation. De-seasonalised index, therefore, is commonly used in assessing price build up, the statement added.
Sources in the finance ministry said this indicates a possible beginning of the fall in inflation.
This could be significant since many analysts expect inflation to rise again to 13.5 percent in November before easing to 9 percent in March.
Even if annual rate of inflation, as is conventionally measured, is taken into account, inflation for primary food items, which is a main concern for the common man, has declined for the week ended August 30.
According to the statement, inflation remained low for some of the important consumer items.
"The inflation for primary food articles at 4.6 percent on August 30, 2008 was lower compared to the inflation of 7.1 percent, a year earlier," the statement said.
In manufactured products also, inflation for cement (at 2.0 percent in the current year compared to 12.9 percent, a year earlier) and machinery items (at 5.5 percent in the current year compared to 8.7 percent, a year earlier) remained lower, according to the statement.
To a question as to why the finance ministry statement released on Thursday said inflation for 30-essential items increased to 7.52 percent during the week ended August 30 from 6.90 percent a week ago, the sources said the rise was mainly caused by sugar inflation, which had declined during the same period a year ago.
Sugar falls in the category of manufactured food item and not primary food item.
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