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Friday, June 30, 2006

Thursday, June 29, 2006

Sharekhan Eagle's Eye - June 30

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Kotak Daily Reports - Jun 29

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HDFC Bank - Hinduja TMT

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Sugar: Still a sweet story?

The stock markets continue to face tremendous pressure. The fall in stocks across sectors and categories over the last few sessions has been painful for retail investors. Sugar stocks have been one of the worst losers in the recent falls. However, despite the fall in stock prices, the sugar story is still 'sweet' from a long-term perspective. For long-term investors, this seems to be a good opportunity to enter the markets and buy stocks at more reasonable valuations. In this write-up, we take a look at some of the factors that have the potential to lead the sugar industry on a higher growth trajectory in the future.

Stock Price on 10, May Price on 27, May % change
Bajaj Hindusthan 529 363 -31.4%
Balrampur Chini 196 113 -42.3%
EID Parry 296 200 -32.4%
Sakthi Sugars 259 160 -38.2%

Supply deficient: The sugar industry is expected to grow strongly in next two years, mainly on the back of low stock-use ratio. The industry will again face production shortfalls in the year 2006, with inventory filling the gap for the third year in a row. The difference between the production and consumption has reduced the inventory levels, from 11.3 MT in 2002 expected to go down to 3.5 MT in 2007. Also, the stock consumption ratio, which was around 67% in 2002, has reduced to 17% in 2005. this, we believe, have a positive impact on sugar prices.

Consumption performance: Sugar consumption depends on population growth and per capita consumption, and has increased at a CAGR of 4% in the last 5 years. We expect the consumption to clock similar levels of growth in the future. Per capita consumption for sugar is around 18 kg in India, which is one of the lowest in the world. With growing population, the demand for sugar is expected to go up.

Ethanol story: Currently 5% blending is allowed by 10 states in India. Adoption of the same by other states will ensure better realisations for the by-products. If blending ratio is increased to 10%, this will further boost the revenues of sugar companies.

By-products: Apart from ethanol, power, molasses, rectified spirit also generate revenues for sugar companies. Indian manufactures stand to gain from the integrated model. For example, in FY06, Balrampur Chini earned 86% of its revenues from sugar, while the remaining came from the power and distillery divisions.

Visible capacity expansions: Most of the sugar companies are expanding their capacities. Bajaj Hindusthan is taking its crushing capacity from the current levels of 56,200 TCD to 1,00,000 TCD in the next 2 years. Balrampur Chini is not too far behind. It is also increasing it capacity from 47,500 TCD to 70,500 TCD during this period. These companies are also expanding their distillery capacities in anticipation of higher ethanol demand.

Conclusion The sugar industry in India is supply-deficient, with production shortfalls being met out of past years' inventory and imports (though miniscule). Also, the sugarcane cultivation currently occupies only 2.7% of the cultivable land in the country and that the per capital consumption of sugar is low, there exists a huge potential for the sector to grow strongly in the future. The companies are also gradually transforming themselves from being conventional sugar mills into multi-product businesses by realising the potential of value added revenue streams from ethanol manufacturing and power co-generation.

Tuesday, June 27, 2006

Kotak - GHCL

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Infrastructure Reports - Edelweiss

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IVRCL Vs HCC: Constructing India!

The construction industry in India has received a fillip during the past 3 years, with the government showing increased focus towards developing a strong and sound infrastructure setup in the country. The industry is the second largest economic activity after agriculture, and is estimated to grow at an average rate of 9.5% during FY02 to FY06, against 8.6% average growth for the services sector during this period. In this article, we compare the two major players in the construction sector – IVRCL Infra and HCC – and see where they stand on a relative basis.

About IVRCL Infra
IVRCL Infrastructures & Projects Ltd., (formerly IVR Constructions Limited) was incorporated in 1987 and commenced its operations in 1990, thereby establishing itself as a premier EPCC (Engineering Procurement, Construction and Commissioning) & LSTK (Lump Sum Turnkey) Service Provider with front-end engineering capabilities. The company initially undertook small projects for building hospitals and roads in the interior regions of the country. Of late, it has emerged as a major player in water transmission, treatment and wastewater management. IVRCL is also known for its desalination drive, which was vindicated by it winning the Chennai Desalination Water Plant Project from the government. Beside this, the company is also into the business of constructing buildings and industrial structures.

About HCC
HCC is one of the largest private sector construction companies in India and the foremost in infrastructure building. The company has been involved in the construction of diverse projects ranging from power dams, highways and bridges to marine structures, water supply, factories and waste treatment plant. Apart from the domestic presence, HCC has executed several projects overseas in countries like Iraq, Nepal and Tanzania. Towards this, the company has entered into a number of technical collaborations as well as joint ventures with overseas players, bringing the latest technical know-how into the execution of its projects.

The comparison…
A look at the charts below makes it clear that HCC is a more diversified player than IVRCL. This is because the latter, though operating in four distinct segment, derives more than 60% of its revenues from the water segment, where it has presence into water desalinisation and supply kind of projects. In fact, the company is current executing the Rs 1,000 m Chennai Desalination Water Plant Project, which is supposed to be the largest of its kind in India. At the end of March 2006, IVRCL's order backlog stood at Rs 62.5 bn, almost 4 times its FY06 sales. Out of this backlog, the water segment contributes to 50% and the balance is distributed between roads (27%), building & structures (16%) and power (7%). Further, the management expects the order backlog to grow by 35%-45% in FY07. The company has especially stressed on its increasing focus in the power segment, whose contribution to the company's topline has increased from 3% in FY05 to 21% in FY06. In this segment, IVRCL has benefited from the government's thrust on improving the rural power situation through its Rajiv Gandhi Grameen Vidyutikaran Yojana.

Now, if one were to look at HCC's business mix (right hand pie chart), revenues are almost equally diversified into transport, water supply and hydel power segments, among others. In the transport segment, the company is especially focusing into BOT based projects, where margins tend to be relatively higher than the contract business.

On comparing these two companies on financial parameters, while IVRCL has grown revenues and net profits compounded rates of 39% and 32% during the period FY02 to FY06, the growth for HCC has been 37% and 38% respectively. However, if one were to compare the profitability, IVRCL scores over HCC in terms of sustaining margins at the operating level. As seen from the adjacent chart, while EBIDTA margins for IVRCL have moved in a narrow range of 8% to 10% during FY03 to FY06, the same for HCC have declined from 16% to just over 9% during this period. Focus on relatively low margin road construction sector seems to have been the main reason for the declining margins of HCC. On the other hand, water treatment contracts earn better margins due to more complex execution and this has benefited IVRCL in the past. However, one must note that considering the influx of a large number of players into the construction space, companies have sacrificed margins to gain on volumes. The same is likely to continue in the future as well and, to that extent, profitability is likely to be impacted, for HCC and IVRCL alike.

Financial comparison (FY06)
(Rs m) IVRCL Infra HCC
Net Sales 14,957 20,241
EBITDA 1,343 1,843
EBITDA margins (%) 9.0% 9.1%
Other Income 57 38.1
Depreciation 110 542
EBIT 1,290 1,339
EBIT margins (%) 8.6% 6.6%
Interest 253 413
PBT 1,037 926
Tax 108 172.353
PAT 929 754
Net profit margin(%) 6.2% 3.7%
Diluted EPS (Rs) 8.7 3
P/E 26.1 36.7

Comparative valuations
At their respective current prices of Rs 227 and Rs 108, IVRCL and HCC are trading at price to earnings multiples of 26 times and 36 times their FY06 earnings respectively. These stocks have been beaten down tremendously in the latest stock market correction and valuations have dropped to reasonable levels. Going forward, while we remain positive on the growth prospects of the construction sector in general and these companies in particular, investors need to look beyond order book accretions and study at what profitability are these companies accruing new orders.

Monday, June 26, 2006

Kotak - Arcelor Mittal Positive

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Sharekhan Eagle Eye - June 27

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Sharekhan Investor's Eye - June 26

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Kotak Securities - June 26

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Sharekhan Commodities Buzz - June 26

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ET - Picks for the week

Reliance Energy
Research: JM Morgan Stanley
Recommendation: Overweight
CMP: Rs 469 (Face Value Rs 10)
12-Month Price Target: Rs 526

JM Morgan Stanley rated 'overweight' on Reliance Energy with a one-year price target of Rs 526. Reliance Energy (REL), part of the Anil Dhirubhai Ambani Group, is one of India's premier integrated electric utilities, owning over 700 MW of generation capacity and distributing power in Mumbai, Delhi and Orissa.

REL also undertakes EPC business, via a separate division, which constitutes 17% of REL's operating profit. The promoters own 53.8% stake in REL, foreign holding stands at 18.6%. With financial assets comprising over 50% of REL's total assets, ROE is depressed and non-operating earnings comprise close to 75% of stand-alone pre-tax net profit.

There has been little progress on the implementation of its big ticket projects over the past 12 months and REL has been neither able to deploy a sizeable proportion of its cash chest in high-ROE projects, nor has the company paid out a chunk of the cash to shareholders.

Further, performance in its Delhi distribution business has been lacklustre and EPC division earnings arguably remain a wildcard. All these developments are reflected in the stock's performance – over the past 12 months, the stock is down 25% in absolute terms and has underperformed the BSE sensex by 67%.

The price target for the stock includes the value of REL's existing utility business (Mumbai and other IPPs), EPC business, Delhi distribution business (BRPL & BYPL), and net cash valued at 1.3x book. JM Morgan Stanley assume REL will invest 50% of its net cash and 75% of returns thereon in projects that generate an 18% ROE (invested cash), while the remainder (idle cash) generates an 8% return.

GlaxoSmithKline Pharma
Research: HSBC
Recommendation: Neutral
CMP: Rs 1,006 (Face Value Rs 10)
12-Month Price Target : Rs 980

HSBC Global Research upgraded the rating from 'underweight' to 'neutral' with a target price of Rs 980 in a year for GlaxoSmithKline Pharma. HSBC believes that the benefits from restructuring exercise for GSK India may largely be over and may only contribute marginally to earnings growth going ahead.

However, it notes several positives on the product development front. Only 29% of GSK's India's product portfolio is currently under price control as of '05 as against c40% in '01. 'Power brands' identified as key drivers early on have grown at rates much higher than industry.

In-licensing of products from global pharma companies (at least seven launches since '03) has enabled GSK India to expand its therapeutic coverage from anti-infectives to the more profitable chronic therapies. However, HSBC lowers their revenue forecasts by 4% for 2006E and by 5% for 2007E.

The decline in the forecasts mainly stems from the proposed disposal of the animal healthcare business which is effective from '06. The proposed disposal of the veterinary business and the potential divestures of the remaining non-pharma business is a positive as the profitability for these businesses is well below that for the pharmaceutical business.

Among MNC pharma companies in India, GSK India is ahead in terms of clearly outlining its strategy for the Indian pharma market as well as delivery. Given the significant correction in the share price recently, HSBC revises the rating from 'underweight' to 'neutral'.

Dwarikesh Sugar
Research: IDBI Capital
Recommendation: Buy
CMP: Rs 133 (Face Value Rs 10)
12-Month Price Target: Rs 230

Dwarikesh Sugar Industries (DSIL), a leading sugar player, has been rated 'buy' by IDBI Capital. DSIL is all set to capitalise on the demand supply gap in the international sugar markets through its aggressive expansion plan. It has ordered machinery for its third unit at Bareilly, UP, which will boost the total capacity to 21,500 TCD.

The proposed greenfield 7,500 TCD unit along with a co-gen plant of 36MW and additional 24MW cogeneration at Dwarikesh Puram, put together will cost the company around Rs.3,00 crore. The facility will be operational by the sugar season of '07-08. On account of the proposed expansion, the EPS is expected to grow to Rs 21.0 in FY07 and Rs.34.9 by FY08 from Rs.13.9 in FY06E.

Earnings are expected to expand further on account of the company's planned acquisition. The current market price discounts the FY07 EPS 8.9 times and FY08 EPS 5.4 times. The Indian sugar story has gone beyond the international boarders, as the international price has gone much above the domestic price owing to rising crude price and end of dumping by the EU.

Thus India is expected to emerge as a major international player in the sugar industry. With the combined effects of cost control measures, cane development, higher recovery and higher crushing the OPM (%) is improving year on year and is expected to stabilise at around 21% with the economies of scale arising out of expanded capacities, increased R&D and higher capacity utilisation.

Clutch Auto
Research: Emkay
Recommendation: Accumulate
CMP: Rs 120 (Face Value Rs 10)
12-Month Price Target: NA

Clutch Auto (CAL) is the largest maker of clutches and assemblies in the country with a market share of 60%. The company specialises in the heavy-duty segment which offers a decent scope both in the new as well as replacement market. CAL has tapped key players of the industry as its OE customers in the auto and tractor segments in India.

The exports of the company have been growing at a sturdy pace. CAL has entered into various agreements to market its products in the US and other international markets and has established a warehouse facility in the US to meet the growing demand. CAL exports to major American countries and expects to cater to more geographical locations.

Recently, CAL inked a JV with Pioneer - a leading US-based tractor component manufacturer to supply clutches and related components for the tractor market in the country. The American partner will supply products to original equipment manufacturers (OEM) as well as after market sales service through its 3,300 odd retail outlets across the North American market.

CAL supplies clutches to leading automakers in the country as well as abroad and its domestic clientele include prominent names like Tata Motors, Maruti, Escorts Tractors, M&M, etc. Clutches have a huge replacement market owing to the wear and tear of the hoses and plates.

CAL has penetrated across India and garnered a 30% market share in the replacement market. For FY06, the company has posted a 58% yoy rise in net sales to Rs 149.32 crore and margins remained steady at 15.9%. A lower tax and depreciation helped the net profit zoom 122% to Rs12.66 crore.

Exports contribution is on the rise and is likely to account for over 35-40% of the sales volume in the coming years. Factors like the recent ban on over loading is likely to aid growth in the CV industry and in return assist CAL's growth momentum.

The company is geared to improve performance both in the domestic and export markets over the coming years. Currently, the scrip is available at attractive valuations of 9.5x and 6.8x FY07 and FY08 estimated earnings respectively.

Sunday, June 25, 2006

Sharekhan Investor's Eye - June 23

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Businessline Recommendations

Tata Tea - Buy

Ashok Leyland - Buy

Allahabad Bank - Buy

Nicholas Piramal - Buy

Nagarjuna Construction  - Buy

Mphasis - Buy

Saturday, June 24, 2006

Hotels: Hot streak continues!

In keeping with the FII flows, the Sensex rose from 3,000 points in May 2003 to its peak on May 10, 2006, up 420 per cent! Come May 12, 2006, the bearish sentiment triggered by a combination of factors, ranging from high inflation, rising global interest rates leading to FII outflows, higher crude oil prices and slower economic growth showed no signs of abating, as Indian equities succumbed to cues of weakness across major global markets. For the first time in calendar 2006, the BSE Sensex fell below the so-called support level of 9,000 levels (albeit with no support!). Though the markets have recovered to touch the 10,000 mark, the nervousness among participants is still prevailing.

Like all other sectors, hotel stocks too faced the brunt of the negative sentiment. Almost all stocks from the sector fell from the highs of 2006. The correction in these stocks has, in general, been in line with that of the benchmark index, the BSE Sensex. This can be seen in the chart below, with all the stocks in question – Indian Hotels, Taj GVK, EIH and Oriental Hotels - having lost more or less in line with the Sensex.

However, despite this fall, we continue to be bullish on the hotel industry prospects from a long-term perspective. For long-term investors, this seems to be a good opportunity to enter the markets and buy stocks at more reasonable valuations, as the fundamentals are still intact.

Foreign tourists still come knocking at India's door: India, as a favoured destination for foreign tourists, continues to roll. The inflow of the tourists for the period January 2006 to April 2006 has grown by 14.4% as compared to the corresponding period last year. The foreign exchange earnings are also up 16.3% YoY. The last year was a golden era for the hospitality industry with 3.9 m tourists visiting the country. This year we expect around 4.4 m tourists to visit India.

Upmove continues: Ten cities in India continue to play the role of perfect host this year. After ending FY06 at a phenomenal 41% YoY growth, both in terms of revenue per available room (RevPar) and average room rates (ARRs) across 10 key Indian cities, the hospitality industry's performance in April 2006 shows that growth is here to stay. During April 2006, RevPar in the premium segment in premier cities rose by 34% YoY. The RevPar growth was driven primarily by ARRs, which increased from Rs 5,592 in April 2005 to Rs 7,563 in April 2006, a growth of 35% YoY (Source: Cris Infac). Occupancy rates across these cities are also on the rise. Riding on a wave of unprecedented room rate realisations, even summer occupancies continue to run high, lessening the effect of seasonality on the hotels.

Visible expansion plans: Most of the hotel chains are expanding their room inventory. Indian Hotels along with its group companies is adding 2,000 rooms in the next couple of years. Hotel Leela has also drafted a blue print for expansion by increasing its room inventory by 50% at an estimated cost of Rs 14 bn. EIH's Mumbai property is also going to start operations by end of 2007. The foreign brands are not far behind. While Shangri-La is targeting 8 to 10 hotels by 2010, Dawnay Day, with an initial US$ 200 m investment, is planning to add 30 three- to four-star hotels in the next three to five years.

As we have indicated above, we are buoyant on the prospects of the Indian hospitality industry, both from the international and domestic tourism perspective. On the back of constrained supply, at least in the medium term, we expect occupancy levels and ARRs to remain robust across hotel properties. However, investors need to give adequate consideration to event risks (like economic slowdown and terrorist strikes) that might constrain this growth.

Equitymaster - Wochardt

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Thursday, June 22, 2006

Monday, June 19, 2006

Sharekhan Commodities - June 19

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Kotak Securities Reports

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ET - Stocks you can pick up this week

Cummins India
Research: JM Morgan Stanley
Recommendation: Buy
CMP: Rs 164.25(Face Value Rs 2)
12-Month Price Target: Rs 228

JM Morgan Stanley has put a buy on Cummins India with a 12-month price target of Rs 228. Cummins posted a strong set of numbers with revenues, EBITDA and net earnings increasing by 22%, 26% and 17% respectively. Domestic business, which comprised nearly 65% of total revenues, posted yoy growth of 32% with export sales rising by 8% yoy.

Historically, this has been the strongest quarter for Cummins. CIL posted its highest-ever EBITDA margins in the past three years' last quarter, at 15.1%. This quarter, CIL managed to maintain its margins at 15%, a yoy growth of 40 bps. Margins improved due to aggressive cost reduction initiatives employed by the company, operating leverage, productivity improvement and better product mix.

This was despite CIL booking approximately Rs 9 crore as a one-time charge for a change in its pension scheme from a defined benefit plan to defined contribution plan, provident fund impact on leave encashment and excess inventory cost.

Therefore, while other expenses, as a percentage of sales, declined 90 bps yoy to 11.4%, raw materials and staff expenses increased marginally by 10 bps and 30 bps respectively. EBITDA grew 26% yoy to Rs 58.3 crore. For full-year F2006, EBITDA grew 46% yoy with margins rising by 230 bps to 14.3%.

The company hopes to sustain margins at these levels through cost-reduction initiatives that would enable the firm to offset cost volatility in commodities. At the current market price, Cummins trades at 15.7 times the estimate for F2007 EPS and 14.0 times the estimate for F2008 EPS. In terms of EV/EBIDTA, the multiples for F2007E and F2008E are 13.2 times and 11.2 times, respectively, and in terms of P/BV, the multiples are 4.1 times and 3.7 times.

Research: CLSA
Recommendation : Buy
CMP: Rs 210.35 (Face Value Rs 2)
12-Month Price Target: Rs 280

CLSA has put a 'buy' on Cipla with a target price of Rs 280. With over 300 products across 65 therapies, product registrations in over 160 countries and a renewed thrust on growing exports, Cipla as strongly positioned to rapidly expand its share in the global generics market.

Cipla's exports rose at a 29% CAGR from $338m in FY06 to $720m in FY09 as its partnership-centric model enables low-risk high growth.

CLSA upgrading earnings by 19-22% driven by strong growth in formulation exports corroborated by aggressive investments in manufacturing facilities. The generic opportunity outside of the US, Europe and Japan is expected to reach $52bn by '09 (from $34bn in '04).

The opportunity is huge in 160-odd countries and growing. Cipla is one of the best proxies to the growth of generics in these countries. Cipla's model of developing partnerships with local companies enables it to leverage local market knowledge from its partners; and its own R&D, product development and manufacturing skills.

It's a win-win situation for both, and in particular, enables Cipla to grow its export markets with little investment in the front end, which substantially mitigates risk.

Having built relationships with more than 200 partners in 160 countries, Cipla now has 4,000 product registrations and 7,000 pending approval. These include tablets and capsules, respiratory products, oncology products and hormones. These products come from 31 manufacturing plants across six Indian locations.

This manufacturing strength, a rich product basket and partnerships have driven a 58% CAGR on formulation exports in the past three years. More importantly, US generics, which is the growth driver for most peer companies, contributes less than 6% of top line, making Cipla far less vulnerable to a pricing decline in that market.

With earnings set to double over FY06-09 (27% CAGR), valuations at 17.5 times FY08CL are reasonable. The target price of Rs 280 (22x FY08CL) implies a 26% upside.

AIA Engineering
Research: Enam Securities
Recommendation: Outperformer
CMP: Rs 528.30 (Face Value Rs 10)
12-Month Price Target: Rs 700

Enam has rated AIA Engineering's as an outperformer as its FY06 results are stronger-than-expectations. On a consolidated basis, AIAE reported revenues of Rs 400 crore (38%) and net profit of Rs 52.3 crore (up 91%). EBIDTA margin jumped 570 bps to 21.8% due to a 20% increase in realisation and favourable product mix.

AIAE's order backlog, at the end of FY06, stands at a healthy Rs 295 crore, and has grown by 84% from the level of Rs 160 crore at the end of H1FY06. Over 30% of the company's order backlog comprises project business where margins are higher. On a like-to-like basis, consolidated production volumes were up at 59,329MT in FY06. Of this, about 28,000MT were exported, while the balance was domestic sales.

AIAE's year-end capacity stood at 65,000MT. AIAE is augmenting its capacity from 65,000MT to 1,69,000MT by setting up a 100% export oriented unit (EOU) at Changodar. The capacity expansion would be in phases with the first phase of 52,000MT commencing production in December '06 and second phase of 52,000MT coming into production by December '07.

AIAE has an estimated 20% share in cement grinding market and seeks to increase its share to 35% once the new capacity is on stream. In addition to this, the company expects to enter the mining segment where the market potential is 10x larger than cement.

During FY06, AIAE has also made inroads into China — the largest market for grinding media in the world. Enam is raising the estimates for FY08 to factor in the increased capacity addition, and likely improvement in margins due to economies of scale and tax savings, once the EOU at Changodar becomes operational.

At the current market price, the stock trades at 12 times FY07E EPS of Rs 40.3 and seven times FY08E EPS of Rs 69.2

Tata Teleservices (M)
Research: IL&FS Investsmart
Recommendation: Buy
CMP: Rs 18.00 (Face Value Rs 10)
12-Month Price Target: Rs 55

IL&FS Investsmart has put a 'buy' on Tata Teleservices (M) with a price target of Rs 55. In past two months Tata Tele released its excellent Q4FY06 results when it turned cash positive and a lower stock price brought about by the recent fall in the stock market.

This anomaly gives investors an opportunity to buy into a turnaround story at prices driven down purely by extraneous events. In this report IL&FS has reiterated its arguments with renewed confidence, with additional focus on the above recent events, even though net profits may be over a year away and a currently negative net worth.

TTML turned cash positive as expected by us. At 64.8% qoq, EBITDA growth was stronger-than-expectations of 40%, driven by revenue growth and strict cost controls.

EBITDA margins expanded to 17.7% from 11.4% in Q3FY06, higher than the expectation of 14.4%. The net loss was lower at Rs 104.5 crore compared to Rs 129.8 crore in Q3FY06. IL&FS Investsmart expects this to continue.

Based on DCF analysis with projections until FY22, TTML is currently worth Rs 55 per share – even after assuming an expanded equity base of 2,279m shares after about Rs 1,100 crore of fresh capital infusion that they have assumed during FY07.

The merger of TTML with Tata Teleservices (TTSL) is inevitable as both work closely on the operational front and TTSL owns 47% of TTML. This will create a much larger all-India entity with huge economies of scale. TTML could be an entry to TTSL much as MTNL is touted for BSNL.

Saturday, June 17, 2006

Business Today - Test Case IPO

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Business Today - Will HOT property cool off ?

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At Bursting Point

Despite last fortnight's correction in prices of commodities, specifically metals, a blow-out in prices could be on the cards after years of heady appreciation

"The world is now in the midst of another bubble - this one is commodities. It, too, will burst."
Stephen S. Roach, Chief Economist, Morgan Stanley

"Anyone who says commodities have been in a bubble has not done his homework and does not know about what he is talking"
Jim Rogers, Global commodities Guru

Last fortnight as commodities of all hues slipped into a downward spiral globally after years of a breathless uptrend, the billion dollar question on traders' lips worldwide was: Are we in for speculative blow-out? The tell-tale signs were all over the place (including in global equities): Base metals like copper, zinc, steel and aluminum were XX per cent off peak prices in a weak. To be sure, no commodity was spared, be it precious metals (gold, silver, platinum, palladium) or sugar, or cotton, or wool. Whilst most traders were caught on the wrong foot, there were those who saw it coming. "Base metal prices were moving up parabolically in April and early-May, with copper doubling in a little over a month. At the same time China was sending signals of its intent to reduce the energy and commodity content of its GDP over the next several years. There was a major macro disconnect that triggered my concerns about commodities as an asset class," Morgan Stanley's Roach told BT. Roach had turned bearish on commodities before last fortnight's plunge in prices began.

Then there are investors like Jim Rogers, a dyed-in-the-wool guru in commodities, with books like Hot Commodities to his credit. Try mentioning the word "bubble" to Rogers, and he's likely to rubbish you with disdain. He did exactly that to BT last fortnight, armed with an array of statistics. "Sugar is 80 per cent below its all time high; cotton 60 per cent; maize 50 per cent; soyabeans 60 per cent; silver 75 per cent; coffee 70 per cent; palladium 60 per cent; gold 30 per cent. If you adjust the hold highs for inflation, these and many others are 85-95 per cent below the all-time highs. What kind of 'bubble' is it when most things are 85-95 per cent below all-time highs," scoffs Rogers.

Rogers obviously knows what he's talking about. But at the heart of the bear theory is the question whether commodities deserve the highs they've been driven to in the first place? Should gold be at $700 per XX, copper at $4 per XX and oil at $70 per barrel? As Roach argues, there's nothing extraordinary about the global economic climate today to warrant such an uptrend in commodities, an uptrend that's pushed prices to their highest levels in the pat 35 years. There have been five periods of prolonged spikes in economic activity since the seventies. The current rebound, which began in 2002, averages 4.2 per cent in annualized world GDP growth terms. That's lower than the 4.4 per cent average annualized gains in the previous four global recoveries between 1970 and the 90s. Why then should commodities prices be at a 30-year all-time high? The Journal of Commerce composite gauge of industrial materials prices, which has four components (textiles, metals, petroleum products and a miscellaneous group), but which excludes agri-products and precious metals, has increased by 53 per cent over the past four years, the sharpest ever run-up since 1970.

The bull camp would feel such comparisons are odious, as there's one major piece in today's global economic picture that one didn't have to contend with prior in the 1970-2000 period: China. In 2005, China swallowed close to 9 per cent of the world's crude, 20 per cent of global aluminum, at least 30 per cent of steel and 45 per cent of the world's cement. And as the thrust continues to be on infrastructure and urbanization, a section of traders believes China will ensure that the rally in commodities doesn't peter out.

The bad news, going forward though, is that China is attempting to move away from investment-led growth to consumer-led growth (as is happening in India). And this will reduce its appetite for commodities sharply, thereby hitting global demand in a big way. Result? Prices will crash suddenly, and traders will be caught napping. Back home in India, where commodities markets have been racking up turnovers of Rs XXXX crore in daily trading, traders and analysts are treading with caution. Says Jignesh Shah, Chairman, Multi-Commodity Exchange (MCX): "Indian markets have shown a huge correlation with the world's commodity markets. As an exchange we have to manage the risks when such bouts of correction happen, and that's why we increased margins in various base metals." Adds Suresh Nair, Vice President (Commodities), Kotak Securities: "The commodity market was in overbought region for some time. After a rise of 100-120 per cent, a 15 per cent correction is healthy." Echoes Navin Mathur, Head (Commodities), Fortis Securities: "A market that makes a record almost every day is not sustainable for long." Trading in commodities from hereon isn't for the faint-hearted.

FIIs Don't Like Football, Sometimes

That India can't qualify for the FIFA World Cup-and won't in your lifetime-may actually be good news for foreign funds inflows.

India's dismal standing (rank: 117) and inability to qualify for the FIFA World Cup 2006-and, almost certainly, many more World Cups to come-may actually not be a bad thing and may actually work in favour of foreign inflows into domestic equities.

If that sounds like a bad joke, consider this: global corporate finance giant UBS (with its tongue not entirely in its cheek) has put out a research report that attempts to predict the winner of the 2006 World Cup. UBS thinks it will be Italy but more relevant to us is its finding that emerging markets (with a football culture) tend to react strongly to major football tournaments. UBS also says there is some sort of a correlation between losses at the World Cup and adverse performance of markets.

What's in all this for India? Plenty! At least 12 of the 32 teams that have qualified for the World Cup are classified as emerging markets. These include exciting markets like South Korea and Mexico, and exotic ones like Argentina. Now the fact that 31 of the 32 teams have to lose at some stage means that 31 markets are going to be subdued following a loss at some stage. Now picture this scenario: Argentina goes on to win the finals, Brazil gets dumped in the quarters, Mexico flatters to deceive (as usual), and Korea doesn't do justice to its dark horse tag. Investors start deserting these markets (either because of their inability to deliver or, as in Argentina's case, because they provide a good exit opportunity). What are the options for investors looking to reallocate assets?

Countries like India, of course, are resplendent above the vagaries of World Cup performance. So if your heart is on Brazil and your money on Dalal Street, here's a suggestion: place a wager on the men in yellow jerseys lifting the Cup, and hedge that with a fresh position in your favourite Indian stock(s).

Tuesday, June 13, 2006

B&K - Sasken Communications

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Movers and Shakers

  • Gujarat NRE Coke failed to garner gains despite the company announcing an investment of NZ$20 million in Pike River Coal.
  • Man Industries tanked even as the company announced receiving orders worth Rs500 crore.
  • Reports of the subsidiary company Indus-League Clothing setting up a joint venture firm with Lee Cooper International failed to lift Pantaloon Industries.
  • SREI Infrastructure, which announced that the company has bagged orders worth Rs3,000 crore from NHAI, inched marginally lower.
  • Opto Circuits slipped despite announcing a 1:1 bonus issue and a 30% dividend. 

Sharekhan Commodities - June 13

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Kotak Securities Report -June 13

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How Japan sank the U.S. market

Now that the Japan's economy is growing again, the Japanese central bank has been pulling cash out of its money markets to keep inflation in check. Here's how that fed a global market pullback. By Jim Jubak

Trying to make sense of the global stock market sell-off that began on May 13? Remember that old Wall Street saying, "Don't fight the Bank of Japan." If you want to know what has rattled stock markets around the world and when you can expect it to end, study the Bank of Japan. What's that? You thought the saying went "Don't fight the Fed"? How yesterday. Right now the Bank of Japan, not the U.S. Federal Reserve, is the most important central bank in the world. It's the Bank of Japan that's calling the tune for the world's equity markets.

Slip sliding away
For the last week, you've heard all the talking heads focus on the U.S. Federal Reserve in their efforts to explain the sell-off that began on May 13. The market decline, which reached a temporary crescendo with May 17's 214-point tumble on the Dow Jones Industrial Average ($INDU), is a result of worries that U.S. inflation is in danger of spinning out of control and that the Federal Reserve will have to raise interest rates at its June meeting and beyond.
Core inflation -- that is inflation without volatile food and energy prices -- hit an annual 2.3% in the April Consumer Price Index numbers reported on May 17. That's perilously close to the 2.5% inflation rate that many think is the top of the range that the Federal Reserve will tolerate. After those numbers came out, the odds of a June 29 interest-rate hike, as indicated by prices in the Fed funds futures market, climbed to 50% from 35%.

That's not a huge shift -- to 50/50 from a 35% chance. And you'd think while the stock market wouldn't welcome another interest rate increase -- higher interest rates, which increase the attraction of alternative investments such as bonds, are never great for stocks -- it would have gotten used to them by now. A rate increase in June would be the 17th quarter-point hike since the Federal Reserve began raising short-term interest rates in June 2004. The stock market has proven itself perfectly capable of rallying while the Federal Reserve raises interest rates. Before this recent sell-off, the Dow was up 12% since the Fed began raising interest rates from 1% on June 30, 2004.
It certainly wasn't enough to send the U.S. bond market into a swoon. Bonds actually rallied on some days when stocks were sinking. On May 18, for example, when the Dow Jones industrials fell 77 points and the Nasdaq Composite ($COMPX) fell to its lowest level since November 2005, the 10-year Treasury note actually climbed in price by 0.75%. The yield on the 10-year note, which moves in the opposite direction to prices, at 5.07% on May 18 was very little changed from where it stood at 5.12% on May 10, the day the Fed announced its latest hike in interest rates.

Gold also behaved oddly. The metal is the classic inflation hedge, and yet gold sold off on these inflation worries -- if that's what they were. The metal, which had been selling at $700 an ounce on May 10, closed at $657.50 an ounce on May 19. That's a drop of 6% when gold should have been climbing -- if the financial markets were focused on the U.S. Federal Reserve and heightened fears of inflation.

And finally there was the strange behavior of the U.S. dollar. If worries centered on the U.S. Federal Reserve and concern that the Fed and its new Chairman Ben Bernanke had lost control of U.S. inflation, you'd expect the dollar to sink against other global trading currencies as investors sold dollars to find safer havens in euros and yen. But instead, the U.S. dollar has actually stayed steady against these currencies. The U.S. dollar sold for 110.6 yen on May 10 and for 110.7 yen on May 18.
Not the Fed but the bank
This is where the Bank of Japan comes in. You can't understand why some asset prices have tumbled and others have stayed rock solid if you don't know what the Bank of Japan has been doing over the last few months.
As good as its word, the Bank of Japan has been taking huge amounts of liquidity out of the global capital markets. In an effort to re-inflate the Japanese economy and end the years of deflation that had kept the country mired in a no-growth swamp, the Bank of Japan had pumped billions into the country's banking system. Now that the economy is finally growing again and now that prices aren't sinking any longer, the Bank of Japan has given two cheers to the return of inflation and has started to remove some of that cash from the financial markets.

In the last two months, the bank has taken almost 16 trillion yen, or about $140 billion, in cash deposits out of the country's banks. The country's money supply has fallen by almost 10%. The Bank of Japan isn't finished pumping out the liquidity that it had pumped in. That should take a few more months. And when it is finished, the Bank of Japan is expected to start raising short-term interest rates.

No more cheap
This sign of the return of economic and financial health to Japan is, however, bad news to the speculators who have used cheap Japanese cash to make big profits by buying everything from Icelandic bonds to Indian stocks. The momentum in many of the world's riskier markets was a result of ever increasing floods of cash -- borrowed at 1% in Japan and multiplied by leverage as speculators turned $1 of capital into $3 or more of borrowed money.

For example, India's Mumbai stock market, up 21% in 2006 and 70% over the last 12 months, has seen an inflow of $10 billion in overseas money. That wouldn't be enough to move a market like the $14 trillion (market cap) New York Stock Exchange, but it's a bigger deal on the $742 billion Mumbai market. Although $10 billion isn't enough to move a market by itself -- that took improving fundamentals in the Indian economy -- it is enough to increase upside momentum once the ball is rolling. (The Indian market's benchmark BSE index plunged 10% Monday before trading was halted for an hour. It ended the day down 4.2%.)

New inflows of cash are needed to keep the momentum going, hot money investors know, and it looks like the supply of money flowing into these markets might diminish. The moves to date by the Bank of Japan aren't enough to radically diminish global liquidity, but they are enough so that the investors who have fed some of the world's riskier markets understand that the trend has turned.

It's one thing to invest in five-year Indonesia government bonds paying 12.13% when cash is flowing into the Jakarta financial markets, keeping the rupiah strong against the dollar and pushing Indonesian stocks ever higher. It's something else entirely when it looks like investment flows might be drying up. Speculators aren't about to wait until they actually see signs that cash flows are dwindling. They take profits at the first sign that the trend may be changing. That's why the Jakarta market can drop 5.3% in a day, as it did on May 18.

What we've witnessed since May 13 is a global flight out of more leveraged and more speculative investments. Speculators attracted by the momentum of the gold, copper, and silver markets have sold -- and are still selling -- rushing to get out before other speculators could liquidate their positions. Emerging equity markets have sold off for the same reason: India's Bombay Sensex index dropped 6.8% on the same day as the Jakarta market fell. High-yielding bond markets have collapsed as prices dropped, sending yields soaring and currencies skidding. The central bank of Iceland has raised interest rates to 12.25% in an effort to prevent the further fall of the krona as hot money flees the country.

Risky investments look riskier
What the Bank of Japan has done is to set off a global re-setting of investors' risk tolerance. With Japanese interest rates so low and Japanese cash so abundant, speculators, traders, and investors have been more and more willing in the last few years to take on risk at increasingly low premiums.

It isn't amazing that anyone would buy Indonesian bonds. It's amazing that they would buy them when the yield was only 12%. And given what we know about the direction of U.S. interest rates, the likely course of U.S. inflation and the size of the U.S. trade deficit, it was amazing that so many investors flocked to buy 10-year U.S. Treasury notes that they drove the yield in July 2005 to less 4%. On July 10, the 10-year Treasury yielded 3.97%. By locking up your money for eight fewer years in a 2-year note, you could get 3.62%. That's 0.35 percentage points in yield for taking on eight more years of risk.

Risk tolerance doesn't get reset in a day. The Bank of Japan is only halfway through removing liquidity from its domestic and global markets. Interest-rate hikes are likely to follow that with the first increases coming in the second half of 2006. At the same time, the European Central Bank is raising interest rates.

All excess liquidity has by no means been removed from the global financial markets. But the speculators know that money is gradually getting more expensive. Rallies can count on less hot money to fuel their last stages. Getting out earlier in rallies starts to seem wiser. Some risks are just not worth taking.

The correction that began on May 13 is part of the process of resetting risk tolerance and recalibrating risk premiums. It's not likely to last terribly long. Frankly I think the turn in this correction isn't that far off, and it's probably time to look for a buy or two. And it's likely to be followed at some distance by another bout of speculative momentum, which will be followed by another correction. Markets move from one equilibrium point to another by a messy process of over-shooting on each extreme of the swing until they find a new center.

That's where I think we are now, and that's what you can expect to see for the rest of 2006 as the Bank of Japan continues to force a recalibration of the risk tolerance of global investors. The volatility that results can be scary, but it doesn't mark the end of the world. It's rather just the way that, in the short term, the financial markets adjust to new fundamental conditions, such as a change in global liquidity.

It looks like those new funds that track commodities prices and have helped push the prices of gold, copper, platinum, and silver to historic highs have also been a major contributor in the recent sell-off. At least, that's the conclusion I draw from noting that all the commodities are falling in lockstep -- a sign of index selling. There's about $90 billion invested in funds that track commodities indexes -- about a sixfold increase in the last four years, according to The Financial Times. A lot of this is hot money that follows the momentum, and those investors are likely to be selling their positions in commodity index funds now that the momentum has broken. That selling, of course, results in redemptions of index-fund shares, and that in turn forces the index fund to liquidate positions, forcing commodities prices yet lower and leading to another round of selling.

Another key reason for commodity index-fund selling is a technical change in the commodities options market. Because many commodity options 12 months out now cost more than three-month options -- the options version of the inverted yield curve, since normally future options cost less than current options -- it currently costs an index fund money to roll over its options every three months. When the options curve is "normal," index funds are able to make money on rolling over their options. This "roll yield" has been a key factor in the outperformance of commodity index funds, and its disappearance -- caused, ironically by the popularity of commodities -- makes these index funds less attractive investments. And that re-enforces the selling pressure.

Jim Jubak E-mail at . At the time of publication, Jim Jubak did not own or control shares of any of the equities mentioned in this column. He does not own short positions in any stock mentioned in this column.

Sharekhan Eagle's Eye

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Monday, June 12, 2006

Kotak Securities Reports

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Sharekhan Investor's Eye

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Motilal Oswal - ITC

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ET - Hot Picks for the week

Research: CLSA
Recommendation: Buy
CMP: Rs 159 (Face Value Rs 1)
12-Month Price Target: Rs 210

CLSA has recommended a 'buy' on Hindalco with a 12-month price target of Rs 210. During financial year '07-08, Hindalco should see growth in volumes for copper, as well as aluminium businesses. CLSA is also positive on the medium-term outlook for aluminium, although there could be some softening in base metal prices from current levels.

The management has expressed confidence about the ramp-up of copper output to 350kt in FY07 and scale-up towards full capacity in FY08. The 390-kt alumina refinery expansion at Muri should come on stream by end '06, implying 5% growth in alumina output and 3% higher aluminium output in FY07.

Product mix enrichment supported by higher supply of value-added rolled products from facilities acquired from Pennar Aluminium and control on coal cost will have a positive impact on margins. With rising risk aversion globally, base metals also look vulnerable to near term correction.

Last week, Hindalco cut domestic aluminium ingot prices by Rs8,000/tonne (6%), but with volatile LME prices and local prices above import parity, further adjustments could be forthcoming. Spot prices of alumina, a key input for marginal Chinese smelters, also appear to be weakening.

However, CLSA earnings model assumes average LME aluminium price of $2,300/tonne (13% below current price), LME copper price of $4,500/tonne (43% below current level) and lower copper Tc/Rc margins for FY08 (19c/lb, vs 24c/lb in FY07 ) implying sufficient cushion to the forecasts. After the sharp 36% fall from its peak in early May, Hindalco is trading in line, below historical valuations. In contrast, the broader market remains at a 25-30% premium.

Hindustan Construction
Research: Motilal Oswal
Recommendation: Buy
CMP: Rs 113 (Face Value Rs 1)
12-Month Price Target: Rs 193

Motilal Oswal has recommended a 'buy' on Hindustan Construction with a 12-month price target of Rs 193. HCC's order book in March '06 stood at Rs 9,670 crore v/s Rs 5,380 crore in March '05 (up 80% YoY). As of end March '06, HCC has submitted price bids for projects at over Rs 2,280 crore, while price bids worth Rs 12,250 crore are expected to be submitted in the near future.

The company also submitted pre-qualification bids for 11 projects of Rs 6,570 crore, and expects to submit pre-qualification bids for five new projects valued at Rs 5,500 crore in the near future. During FY06, the company forayed into gas pipelines and EPC hydropower projects.

Realty development is emerging as a key business vertical for HCC, and the company is seeking opportunities in township development. In Lavasa Corp, HCC's stake has increased to 60.5% (v/s 50%). HCC is likely to report net profit of Rs 200 crore for FY07 (up 138%) and Rs 260 crore for FY08.

Based on SOTP, Motilal Oswal's value of the core business of HCC is Rs135/share (14x P/E), Lavasa project is at Rs 33/share and investments at Rs 25/share (at book value) and arrives at a target price of Rs 193 per share. At current market price, the stock quotes at reported PER of 17 times FY07E and 13 times FY08E. Adjusting for value of real estate, subsidiaries and investments, it quotes at PER of 9.1x FY07 and 6.9 times FY08E.

Jindal Steel & Power
Research: Edelweiss
Recommendation: Buy
CMP: Rs 1,311 (Face Value Rs 5)

Edelweiss has put a `buy' on Jindal Steel & Power. Jindal Steel's Q4FY06 results were broadly in line with expectations. Impact of higher volumes across all product segments was neutralised to a large extent by lower average realisations.

Q4FY06 topline rose 7.1% YoY (and 7.7% QoQ) to Rs 670 crore despite higher output in sponge iron, steel products and power. EBITDA declined 4.2% YoY (but increased 17.1% QoQ) to Rs 270 crore and EBITDA margins compressed 470 bps (320 bps higher QoQ) due to additional expenditure on repair and maintenance and refractory relining.

Effect of high interest payments and higher depreciation was offset by high other income and low tax outgo, leading to net profit increasing 2.7% YoY (19.1% higher QoQ) to Rs 150 crore, in line with expectations. The company benefited from new capacities commissioned towards the end of last year, leading to 48%, 16% and 23% higher volumes in sponge iron, steel products and power, respectively in Q4FY06.

For FY06, volumes were higher by 34%, 19% and 16% for sponge iron, steel products and power respectively. However, lower average realisations capped topline growth. Hence, net revenues for the quarter were 7.1% higher (7.7% up QoQ) at Rs 670 crore and FY06 revenues rose 15% to Rs 2,590 crore.

EBITDA in Q4FY06 fell 4% YoY (but up 17% QoQ) to Rs 270 crore and EBITDA margins fell to 39.9% (vis à vis 44.6% in Q4FY05 and 36.7% in Q3FY06). FY06 was marked by a steep fall in steel prices on account of capacity build-up in China and inventory de-stocking.

From March '06, steel prices have started moving up, and the outlook for average realisations is encouraging. The stock price has corrected by 42% in the recent bout of market correction and looks attractive. The company will see increasing proportion of earnings from its power business in years to come.

Research: Sharekhan
Recommendation: Buy
CMP: Rs 436 (Face Value Rs 2)
12-Month Price Target: Rs 552
Shareholding pattern

Sharekhan has recommended a 'buy' decision on Wipro with a price target of Rs 552. Wipro is witnessing strong traction in its existing information technology (IT) service business. In addition to this, the incremental growth from the recent inorganic initiatives has considerably improved the visibility of growth in its global software service business.

The margins are also sustainable at the current level, given the positive pricing environment and the other operating levers (like a higher offshore contribution and utilisation rate) that are likely to cushion any adverse impact of wage inflation on the company's profitability. The company has effectively addressed the two key concerns of a slowdown in its business process outsourcing (BPO) operations and a lack of focus on large outsourcing deals over the past few quarters.

Sharekhan expects the revenue of the BPO business to grow at a rate of 26% (up from 18.6% in FY2006) to Rs 961 crore in the current fiscal. The OPM is likely to improve by 400 basis points to a sustainable range of 17-18%, resulting in a 68% growth in the operating profit over the previous fiscal.

Over the longer term, the company has chalked out a growth strategy that largely involves setting up near-shore centres (non-India offshore centres in Latin America or eastern Europe) and improving the contribution of high margin revenues by introducing more higher value-added services.

Despite the obvious cost pressures like wage inflation and the need to invest in strengthening the domain expertise and geographical reach through organic and inorganic initiatives, Wipro is likely to maintain its profitability at the current level.

One of the key drivers of its profitability would be the turnaround in the performance of the acquired companies as more work is shifted offshore (most acquired entities are based in developed countries and have an onsite-centric business model). We expect the offshore revenue's (in US$ terms) contribution to improve by
around 100 basis points over the next two years.

Chidu ... Devil's Advocate ?

Karan Thapar: Hello and welcome to Devil's Advocate. Now that the Supreme Court has asked the Government on what basis it proposes reservation for OBCs in higher education, I want to ask the Government precisely what explanation will it give. That is the key question that I should put today to one of the minister concern with the issue, Finance Minister P Chidambaram.

Finance Minister the protesting students who met you some 10 or 12 days ago said that you are an ardent advocate for the cause of reservations in higher education for OBCs. Is that a correct description of your position?

P Chidambaram: Those adjectives are their's. I support reservation.

Karan Thapar: So you think that reservation is the right thing?

P Chidambaram: Among all the instruments available to us for affirmative action, the one that is proved most effective is reservation.

Karan Thapar: Explain to me. Many people would say that there is no doubt that steps need to be taken to help the OBCs to get greater access to higher education. Why do you believe reservation is the right way of doing it?

P Chidambaram: Experience tells us that.

Karan Thapar: What experience?

P Chidambaram: The experience of Southern states.

Karan Thapar: What is the experience of Southern states?

P Chidambaram: Let me tell you. It all began in the state of Mysore almost 75 years ago. In Tamil Nadu we have had reservations now for over 60 years. Andhra and Kerala have reservations for over 50 years.

Karan Thapar: Have they succeeded?

P Chidambaram: Yes undoubtedly they have. Let me explain. Once you get a set of parents from the backward communities who are educated, the degrees the graduation the post graduation, then you find the second generation child is able to compete more effectively with children of families who have say 200 years of unbroken tradition of learning.

Karan Thapar: So you are saying that reservations in south India have improved the quality of education for everyone?

P Chidambaram: Undoubtedly.

Karan Thapar: Then let me put you the opposite of that. Because it's widely believed that what you are saying is an illusion. All the centres of excellence which create the reputation for south India that you are referring to, I am talking about the Shankar Netralaya, the National Law College, the IIT Madras, the Indian Institute of Science Manipal there were other medical colleges, none of them have reservations for OBCs and as the sociologist Dipankar Gupta has pointed out in every single one of these the vast majority of faculty are non-OBC. They come from outside Tamil Nadu and they were not part of the Tamil Nadu education system. So clearly if they are proved its because they escaped from reservations not because of it.

P Chidambaram: For every institution that you have given, I can give you institution where there is reservation. There is reservation in Anna University. There is reservation in the Bharathidasan Institute. There is reservation in the medical colleges of Tamil Nadu. There is reservation in number of educational institutions.

Karan Thapar: Shifting to what you have mentioned about medical colleges of Tamil Nadu, because again Dipankar Gupta shows one thing that reservations for OBCs done in the South was to proliferate the number of minority institutions. And the example I want to give you is in fact the medical colleges. Out of the 120 minority medical colleges in India, 74 or 61 per cent are in the four Southern states and Pondicherry. Clearly that is a sign that in fact people are seeking alternatives to reservations as a way of escaping from reservations.

P Chidambaram: You are drawing the wrong conclusion from the right fact.

Karan Thapar: I am not drawing conclusions. Dipankar Gupta, who is the top sociologist, has drawn the conclusion.

P Chidambaram: Mr Dipankar Gupta can have an opinion. You can have an opinion. But you must listen to the other opinion. So just be patient. In Tamil Nadu it all started with government medical colleges. When government medical colleges had reservations the demand was great and the government was not willing to start more medical colleges. So it is in Karnataka, so it in Andhra. Then the private sectors started medical colleges and initially it started with Christian institutions. When Christian institutions were started then the Muslim started their own institutions.

Karan Thapar: Now you have even Telgu language institutions.

P Chidambaram: Then the Hindus started institutions, nothing wrong with that, nothing wrong with private sectors starting institutions.

Karan Thapar: You misunderstood my question. I am not saying there is anything wrong with the private sectors starting institutions. I am saying the reason they are starting institutions is because the quality of education in government institutions, because of reservation, has collapsed.

P Chidambaram: That's not correct. The best medical education in Tamil Nadu is still given by the government medical colleges. There are just I think one may be two private medical colleges in Tamil Nadu. Today Chennai is an admittedly an excellent centre for medical colleges.

Karan Thapar: Mr Chidambaram you are sitting in front of me advocating that reservations have improved the quality of education in Tamil Nadu. The truth is that you yourself didn't go to an institution where there is reservation for OBCs. You went to Loyala College where there is no reservation for OBCs and then you went to Harvard. Your son went to Don Bosco School, Texas University and Cambridge University.

P Chidambaram: You got your facts wrong. I went to Presidency College, which has reservation.

Karan Thapar: For your MA at which point in time affiliation to colleges were not important.

P Chidambaram: Your facts are wrong. I went to Presidency College for my basic under graduate degree where there is reservation. I went to Law College for my law degree where there is reservation. I am not a beneficiary of reservation but I know that reservation brought in students to my class would otherwise have never got in.

Karan Thapar: Mr Chidambaram your son went to Don Bosco School where there is no reservation. Then he went to the University of Texas where there is no reservation and then he went to Cambridge University.

P Chidambaram: My son would have never got the benefit of reservation anyway.

Karan Thapar: Did you not send your son abroad deliberately because you knew that the standard of education in Tamil Nadu had collapsed.

P Chidambaram: No not at all. I am a beneficiary of the educational system in Tamil Nadu and I am proud about the educational system in Tamil Nadu. It can be better that is a different matter. Neither my son nor I are the beneficiary of reservations.

Karan Thapar: You are saying that in fact the real track record and experience that establishes that reservation is good for education in the Southern state, lets accept it.

P Chidambaram: No, not only in Southern states. Now we have evidence that in Maharashtra it has helped. We have evidence that it has helped also in some other states.

Karan Thapar: People would challenge it, lets leave that aside. Lets come to the more basic aspect of this matter. If you believe that reservation for OBCs is right, do you have any idea what percentage of the Indian population is actually OBC?

P Chidambaram: We have empirical evidence that in a state like Tamil Nadu 69 per cent is reserved today.

Karan Thapar: That's the reservation that is not necessary correlated with the percentage of the population.

P Chidambaram: It is because in the state first we have had the Satanand Commission we have had the Ambasankar Commission which have done as best as they can an enumeration of the back ward caste in Tamil Nadu.

Karan Thapar: But then if you are going by the 69 per cent figure in fact the situation is even more confused than I thought because I was going to say that the three disputed figures that we have nationally the Mandal at 52 per cent, the NSSO at 32.1 per cent and the National Family Health Survey 29.8 per cent. Now you are adding to that a 69 per cent figure. Clearly the range goes from 29.8 per cent to 69 per cent and you don't know about it.

P Chidambaram: You ask for empirical evidence and you don't have the patience to wait for the answer. Tamil Nadu we have had the Satanand Commission, the Ambasankar Commission and nobody has challenged that count so far in Tamil Nadu.

Karan Thapar: It may be true of Tamil Nadu, what about nationwide?.

P Chidambaram: In Andhra they have had counts, in Karnataka they have had counts in Kerala they have had counts. And the people of Tamil Nadu, Andhra and Kerala have not challenged those counts.

At the national level, you are right, the only count we have had is Mandal, which was seriously questioned. We have had the national sample survey. The point is when the Mandal was implemented in government jobs, Supreme Court upheld reservation of 27 per cent.

Karan Thapar: But what the Supreme Court didn't comment up on and that is the very issue they have raised now in the latest question and I put to you is what's the basis of it.

P Chidambaram: Well the Government will answer it.

Karan Thapar: Well what answer will the government give.

P Chidambaram: I am not preparing the answer. The concern department will prepare an answer.

Karan Thapar: But is it such a secret that needs preparation.

P Chidambaram: You will have to gather all the material available.

Karan Thapar: This is very interesting. You have already decided that you want 27 per cent reservation for OBCs but you don't know on what basis you want it. Now you have to go back and discover the basis.

P Chidambaram: I am sure the material is there. We are not discovering the basis.

Karan Thapar: You are concocting it.

P Chidambaram: No we are not either. The ministry has to put together all the material available to it to reach the conclusion of 27 per cent. It will be based on material and the material will be put together - wait for the material.

Karan Thapar: But that's your claim. What I am saying to you is that the material available actually is contradictory. The range, which it covers, goes from 29.8 per cent to 69 per cent, that you quoted or at best all you can do is to draw an average from it. Clearly you do not know what percentage of Indians OBC, which is why when the Supreme Court asked you for the basis you are deeply embarrassed.

P Chidambaram: No I am not embarrassed at all. You are completely wrong. Wait for the affidavit to be filed at the Supreme Court. Why are you unwilling to wait for that affidavit.

Karan Thapar: The affidavit will be filed. Why are you unwilling to share with the country the basis of a decision that you have already announced?

P Chidambaram: The offices and the ministry concern will share with it. I am not the minister in charge with the department.

Karan Thapar: But you are part of the group of ministers which is responsible that is why I am speaking to you.

P Chidambaram: Of course. I am satisfied that there is material…

Karan Thapar: Then share that satisfaction with us.

P Chidambaram: Listen to me. That will come in the Supreme Court in a form of an affidavit. Material will be placed. I am not embarrassed. All I am saying is wait for the affidavit.

Karan Thapar: Let me tell you why I want to continue this question. This is the reason I am asking you, the government has announced a decision. The decision we have been told is in fact irreversible. Yet you can't give us the basis of the decision.

P Chidambaram: Yes I can give you the basis. There is a question from the Supreme Court. We have got the Mandal report. We have got state reports, which are all being compiled now. We have got the NSS survey. After all India is only a collection of states.

Karan Thapar: And they are all contradicting each other.

P Chidambaram: They are not contradicting. You have not read a single report. Let me ask you a question. Have you read the Satanand report?

Karan Thapar: No but I have read the NSSO figures and the NSSO figures are nationwide.

P Chidambaram: Please answer my question. Have you read the Satanand report?

Karan Thapar: But they refer only to Tamil Nadu.

P Chidambaram: That is right.

Karan Thapar: I am talking about the nationwide. I am very keen to know what is the basis on which the decision has been taken.

P Chidambaram: If the Tamil Nadu Satanand report is based on evidence, if the Tamil Nadu Ambasankar report is based on evidence that represents 6 crore people who make up the 100 core. Similarly the Andhra reports, the Kerala reports, the Karnataka reports and any other report that will be available in every other state, all that material will be put together, the Mandal will be referred to, the NSS survey will be referred to and a proper affidavit will be filed. Obviously I can't give all that material in an interview lasting 10 minutes.

Karan Thapar: There is something else that also emerges from this. If you are saying that all that material will be put together, clearly it hasn't been put together as yet.

P Chidambaram: Wrong again. It will be put together in the form of an affidavit and will be given to the SC.

Karan Thapar: If it is going to be put together then it hasn't been put together as yet?

P Chidambaram: Listen you are quibbling on words. Let me explain my position. You are quibbling and therefore there is no point quibbling in an interview. The material will be put together; the material is available where Supreme Court asks a question. Suppose the Supreme Court asks what have you done about a particular tax matter. I know the answer but will have to put together the material in a form of an affidavit.

Karan Thapar: This is not a tax matter. This is an issue that affects the future of people in India.

P Chidambaram: Everything affects the people of India.

Karan Thapar: Its an issue that has been challenged. When the government is asked what's the basis on which you have announced 27 per cent reservation in higher education for the OBCs. It's an amazing thing to say the government will answer in due course. The government needs to give an answer today.

P Chidambaram: I am sorry the government does not have to answer you in an interview.

Karan Thapar: Its not me its the people of India.

P Chidambaram: Government will answer in the proper forum in Parliament in the Supreme Court not in an interview conducted by you.

Karan Thapar: But you can't tell the people of India today.

P Chidambaram: I have told you about the material. Shall I say it in Tamil for a change?

Karan Thapar: No don't say it in Tamil.

P Chidambaram: I have given you the material, the state government's report. Let me repeat it once again for you. Several reports done by the state governments counter backward casts. The Mandal report, the NSS report and any other surveys.

Karan Thapar: All of which are contradictory.

P Chidambaram: That's your judgement. We don't believe its contradictory.

Karan Thapar: Its not my judgement. It's a fact.

P Chidambaram: If it is a fact then why are you asking me the question.

Karan Thapar: Because I am trying to prove that you don't have the basis for the decision you made.

P Chidambaram: Go ahead and prove it if it satisfies you.

Karan Thapar: If the people of India listening to this interview come to the conclusion that it does not appear to them that the government have an explanation, what would you say.

P Chidambaram: The people of India are not people entirely of your thinking. The people of India consists of SCs, STs backward class most backward class. They will be quite happy to know the large amount of material is available in every state. Large amount of material is available to support the argument that a significant proportion of seats must be reserved for the OBCs.

Karan Thapar: It sounds to me what you are saying is give us time we will come up with an explanation. We can't give it today but in 8 weeks we will.

P Chidambaram: Sorry that's your conclusion. Let me conclude the way I summarised it. My conclusion is there is ample material, you are simply refusing to see the material, You expect an answer in an interview. The answer will not be given to you in an interview. The answer will be given in a proper affidavit supported by proper documentation in the Supreme Court and in Parliament.

Karan Thapar: And not before 8 weeks. All right that's your answer.

Karan Thapar: We have disputed whether the Government has an explanation to give to the Supreme Court or not. Another issue that the students have raised with you is their demand for a non-political expert committee to review the way reservations have functioned for the last 50 odd years. The Government, in its reply has said that it will examine this demand. Does that mean 'yes', does that mean 'no' or does it mean that you are simply playing for time?

P Chidambaram: As I understand the Government's reply, there is no ground to review whether there should be reservation or not - there is no ground at all.

Karan Thapar: What about reviewing the way they function?

P Chidambaram: If you want to review how the reservation is implemented, it is fairly simple.

Karan Thapar: Not how they are implemented, whether they are functioning effectively.

P Chidambaram: Oh, they are.

Karan Thapar: We all know how they are implemented, what I am questioning is the efficacy.

P Chidambaram: The effect is, as I said at the beginning of the interview, can be seen in the Southern states. Members belonging to the OBCs have risen in the society and in the economy. There is an aspiration among those classes, which cannot be suppressed for too long.

Karan Thapar: If you are so confident that reservations have worked in the Southern states, which many people are strongly and strenuously disputing, then agree to the review, cause the review will presumably prove your point. Why aren't you agreeing to the review?

P Chidambaram: You need to understand that Parliament is competent to make a law and each member of the Parliament represents the people. If the overwhelming view in the country - as you believe it is and which I think is completely wrong - is 'for' reservation and Parliament reflects that view.

Karan Thapar: Then all the more reason to grant a review. Why are you not prepared to not grant a review?

P Chidambaram: I can't speak for the Government because I don't know the Government's position on the question of review.

Karan Thapar: Can I interrupt and tell you what the Government's position is as handed in a formal document by Oscar Fernandes to the students. It said, 'this will be examined'. I am asking you what it means. Does it mean 'yes', does it mean 'no' or does it mean that the 'Government doesn't know'?

P Chidambaram: As I said, I don't know. I have not seen that document.

Karan Thapar: A senior Minister, on a Group of Ministers handling this issue doesn't know what the Government's position is?

P Chidambaram: Wait a minute, the Government's position is a position that will be taken in the Cabinet and a Group of Ministers is 'advisory'. If Mr Fernandes has said it will be examined, I am sure he means every word and it will be examined.

Karan Thapar: But that is not the Government's position. It is only Mr Fernandes' position because the Government's position you said will be taken in the Cabinet.

P Chidambaram: You must give up this habit if quibbling Karan.

Karan Thapar: I am not quibbling.

P Chidambaram: You are. I think you are and many of your viewers will think you are.

Karan Thapar: And many of my viewers may think that I may have actually identified an important and interesting loophole.

P Chidambaram: Nothing. You have not identifies any loophole. If Mr Fernandes said that the matter will be examined, I am sure it is being examined by the concerned Ministry, it will come to the Cabinet for a decision and I cannot now say what will be the decision.

Karan Thapar: All right, let me then ask you your personal opinion, cause I presume as one of the more intelligent members of the Cabinet...

P Chidambaram: In the Cabinet, I will give my opinion.

Karan Thapar: Share it with the country. We look up to you and the country is listening to you.

P Chidambaram: I don't agree with you. A very small section understands English and listens to your programme.

Karan Thapar: Let me ask the question differently - after 50 odd years of reservations and the controversy that they have created, atleast in some quarters, do you believe that a review of how they function would be a sensible thing to do?

P Chidambaram: If review means questioning the justification of reservation, I say 'no'.

Karan Thapar: A review means questioning whether they have worked effectively or not and if it is to be found that they haven't worked effectively, that would end up questioning this justification as well. So, there is no doubt that one could lead to the other, but not necessarily.

P Chidambaram: I would not give my view, which I have to give in the Cabinet, but I know from experience that reservations have helped many members of the OBCs to rise in the Southern states. I am totally convinced about it.

Karan Thapar: If after 50 years of functioning, the very Constitution could have been reviewed and a Constitution review committee set up, which in fact found, despite all the criticisms that had initially arisen, that the Constitution was by and large functioning very effectively. Why then, are you worried about a review of reservation? Reservation is a very small part of the Constitution.

P Chidambaram: I am not worried, that decision will be taken by the Cabinet.

Karan Thapar: When will this decision be taken?

P Chidambaram: Whenever the matter comes to Cabinet.

Karan Thapar: When is that likely to happen?

P Chidambaram: I have no idea.

Karan Thapar: So, in other words this matter may never come to Cabinet because that may be a very effective way of stalling it.

P Chidambaram: Again you are quibbling. When Mr Fernandes said that the matter will be examined, the logical course is that the matter will be examined and placed before Cabinet. From that, you don't jump to the conclusion that it will never come to Cabinet.

Karan Thapar: Let me then come to another issue. The Government has committed itself to extending 27 per cent reservations to OBCs in higher education on the basis of the recommendation of the Mandal report. Your late leader, Rajiv Gandhi, who you revere, in a speech in Parliament on September 6, 1990 effectively showed that Mandal was inaccurate, it was unscientific, it was misleading and in very many areas, it was actually wrong.

P Chidambaram: I know that speech.

Karan Thapar: His conclusion is important. In the end, it may be emphasised that the survey has no pretensions to being a piece of academic research. On what basis then today, as successors to Rajiv Gandhi, do you want to keep pursuing the report?

P Chidambaram: Please remember, after that speech, in 1991, a Congress Government implemented reservation in Government jobs and that has come to stay.

Karan Thapar: So, in other words, Mr Gandhi's position has been forgotten?

P Chidambaram: No, I respect his view.

Karan Thapar: So much so that you want to go ahead with the report that was effectively rubbishing.

P Chidambaram: Please remember, it has been implemented in 1991. This is not the first time it is being implemented.

Karan Thapar: He was deeply critical of the 52 per cent figure.

P Chidambaram: He was.

Karan Thapar: He actually said that this figure includes many castes that are forward castes and many castes that are Scheduled Castes, he disputed that figure.

P Chidambaram: I am aware of that speech, but the fact remains that in 1991, a Congress Government implemented reservation in Government jobs. And now, 15 years later, the demand is to implement reservations in educational institutions.

Karan Thapar: Today, your Government that functions effectively under the tutelage of his widow will be in fact implementing something that he in his greatest speech had deeply criticised.

P Chidambaram: That is a wrong way to look at it. The Government has to reflect the realities and the aspirations of today. Today, there is a Parliament, there are political parties, there are political parties representing the very backward castes as a coalition Government, MPs reflect, I believe, the aspirations of their constituents. If Parliament decides that a Bill must be passed to provide for reservation for Backward Castes in educational institutions, that is not showing disrespect to Rajiv Gandhi, the way you put it, that means we are reflecting the current realities.

Karan Thapar: All right, let's accept your word. A pleasure talking to you on Devil's Advocate.

P Chidambaram: Thank you very much