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Wednesday, May 09, 2007

STRATEGY INPUTS FOR THE DAY


Dull start, bulls hope to slowly return

Success isn't permanent, and failure isn't fatal.

After an excellent April, the month of May is turning out to be pretty dull as far as bulls are concerned. The benchmark BSE Sensex has barely budged in the first four trading days of the month. It is down 0.8% so far. The key indices have fallen in three out of the last four trading sessions. FII inflows, which touched $1.26bn last month, have slowed down considerably. Most key results, barring a few prominent ones, are already out. In any case, the impact of corporate earnings is already in the price. The RBI, has kept interest rates steady and is confident of reigning in inflation between 4-4.5% in the medium term and 5% for FY08.

The one big worry is the sharp appreciation in the rupee versus the dollar. IT stocks have taken a big hit in the past few weeks and unless the central bank stems the relentless rise in the Indian currency they may continue to bleed. Having said that, a story in a leading financial daily says that the rupee has not advanced against a basket of 36 currencies. The RBI uses a more narrow 6-currency basket to measure the real effective exchange rate (REER) for the rupee. Sooner or later, the central bank is expected to step in and check the runaway rise in the rupee. But that may happen when inflation cools further.

After three days of reversals, the bulls will be hoping to have a better day today. But global indicators are quite mixed again. US stocks closed flat to slightly higher, while Asian markets are also mostly flat. Oil in New York is trading just above the $62 per barrel mark. We expect another lackluster opening followed up by the usual intra-day choppiness and stock-centric movement. Among the prominent companies announcing their results today include Lupin, Blue Star, AztecSoft and Page Industries. Fortis Healthcare will make its stock market debut today.

Lupin may gain as the company has received an approval from the US Food and Drug Administrative (USFDA) for Cefdinir for Oral Suspension, 250 mg/5mL. The company's Cefdinir capsules and suspensions are the generic version of Abbott Labs' Omnicef, which had US sales of about $787mn in the 12-month period ended December 2006. ONGC and IOC might gain amid reports that they have struck upon a big oil & gas discovery in the Persian Gulf.

Also keep an eye on Granules India. IFC, the World Bank's investment arm, has agreed to pick up a 11.5% stake in the company via a preferential allotment. Patel Engineering may attract some more attention as it has decided to set up a real estate arm for unlocking value from a land bank of over 500 acres in Mumbai, Bangalore, Hyderabad and Chennai.

FIIs were net sellers to the tune of Rs2.05bn (provisional) in the cash segment yesterday while domestic institutions sold stocks worth Rs1.25bn. In the F&O segment, foreign funds were net sellers at Rs1.59bn. FIIs were net buyers of Rs967mn on Monday. Mutual Funds pumped in Rs571mn on the same day.

US stocks posted their first decline in a week on Tuesday due to weaker-than-forecast earnings from power utilities. The fall ended Wall Street's best initial performance in May since 1990 and reflected concerns that the Federal Reserve policy makers will continue to be cautious on inflation. The Fed is widely expected to leave its benchmark lending rate unchanged at 5.25% at a meeting later today.

The S&P 500 Index ended nearly flat at 1507.72, snapping a five-day advance. The Dow Jones Industrial Average slipped 3.90 points to 13,309.07. The Nasdaq Composite Index finished barely changed at 2571.75.

US light crude oil for June delivery gained 79 cents to settle at $62.26 a barrel on the New York Mercantile Exchange. The front-month contract was trading 5 cents down at $62.21 a barrel in extended trading in Asia.

COMEX gold for June delivery fell $3 to settle at $687.40 an ounce. Treasury prices were little changed, with the 10-year note yield at 4.63%. In currency trading, the dollar gained against the euro but fell versus the yen.

European stocks closed lower. European Central Bank on Thursday is likely to hint at a rate hike in June and the Bank of England is likely to make a quarter-point rate hike. The pan-European Dow Jones Stoxx 600 index lost 0.8% to 389.79. The UK's FTSE 100 shed 0.8% to 6,550.40 and the French CAC-40 declined 0.6% to 6,034.25. The German DAX Xetra 30 slipped 1.1% to 7,442.20.

In the emerging markets, the Ibovespa in Brazil ended flat at 50,277 while the IPC index in Mexico was down 0.7% at 29,572 and the RTS index in Russia dived 0.7% to 1913.

Asian stocks rose this morning. The Morgan Stanley Capital International Asia-Pacific Index advanced 0.2% to 149.37 at 11:20 a.m. in Tokyo, after earlier dropping as much as 0.2%. The index yesterday slid 0.2% after rising to a record on May 7.

In Japan, the Nikkei 225 Stock Average was down 11 points to 17,645 while the Hang Seng in Hong Kong dropped 15 points to 20,690. The Kospi in Seoul was down 2 points at 1580 and the Straits Times in Singapore shed 5 points to 3434.

During the week ended May 2, US Equity Funds lost much of the new money they had received during April, According to EPFR Global. Flows into emerging markets equity funds ground to a halt as the struggle surrounding the Turkish presidency reminded investors of the risks sometimes associated with this asset class, the Boston-based fund flow tracker says. Global Equity Funds and Latin America Equity Funds did extend their winning streaks. But flows were noticeably more subdued and, at the country level, favored the more defensive markets.

HOW MARKET FARED


Will it be four in a row for bears?

Markets witnessed volatile trades as alternate bouts of buying and selling in scrip’s across the sectors pushed the key indices in positive and negative territory. SBI, Infosys, REL, Bharti Airtel and TCS were the major losers dragging the benchmark index Sensex down nearly 200 points from days high to hit a low of 13741.24. The Mid-Cap and the small cap stocks also witnessed profit booking. Finally, the 30-share benchmark Sensex dropped 113 points to close at 13765. NSE Nifty was down 34 points to close at 4077.

Ranbaxy slipped 0.7% to Rs388. The company announced that they would spend about $14.5mn to upgrade its plant in South Africa. The scrip touched an intra-day high of Rs396 and a low of Rs384 and recorded volumes of over 13,00,000 shares on NSE.

TCS shed by 0.5% to Rs1266. According to reports the company has announced that it is in talks to provide services to Macau casinos the Hong Kong- based, English-language newspaper. The scrip touched an intra-day high of Rs1280 and a low of Rs1257 and recorded volumes of over 20,00,000 shares on NSE.

Shrenuj surged by over 6% to Rs47 after the company purchased Simon Golub & Sons in US. The scrip touched an intra-day high of Rs49 and a low of Rs44 and recorded volumes of over 44,000 shares on NSE.

Moser Baer marginally gained by 0.2% to Rs363 after the company announced that IFC will fund US$22.5mn (Rs1bn) to Moser Baer Photo Voltaic Ltd (MBPV). The scrip touched an intra-day high of Rs371 and a low of Rs360 and recorded volumes of over 4,00,000 shares on NSE.

L&T edged higher 0.3% to Rs1699. The company secured Rs2.15bn order in UAE. The scrip touched an intra-day high of Rs1720 and a low of Rs1690 and recorded volumes of over 2,00,000 shares on NSE.

Tech Mahindra dropped by over 4% to Rs1558 after the company registered its Q4 result with net loss at Rs3.29bn after a one-time payment of Rs5.25bn to a customer reduced its earnings and revenues at Rs8.75 (up 107%). The scrip touched an intra-day high of Rs1627 and a low of Rs1544 and recorded volumes of over 15,00,000 shares on NSE.

Technology stocks were among the major losers. Index heavy weight Infosys slipped 2% to Rs2002, Satyam Computer was down by 1.2% to Rs454 and Wipro fell 1% to Rs547. Rolta, Mphasis BFL and i-Flex are the major losers among the Mid-Cap stocks.

Select Metal stocks lost their shine as profit booking dragged them lower. Tata Steel marginally lost by 0.2% to Rs551 and Hindalco also edged lower by 0.3% to Rs144. However, Nalco was up 1.8% to Rs256 and SAIL added 0.7% to Rs135.

Banking stocks also pared their early gains as selling pressure dragged them lower. SBI fell over 3.4% to Rs1081, HDFC Bank was down by 0.9% to Rs991 and ICICI Bank slipped 0.5% to Rs839. Bank of India, Union Bank and Corp Bank were the major losers among the Mid-Cp stocks.

Cement stocks gained momentum during the day. Heavy weight ACC advanced 2.7% to Rs886, Grasim was up by 0.5% to Rs2485 and Gujarat Ambuja added 0.5% to Rs120.

Insider Trades:
Prithvi Information Solutions Limited: Mr. V Satish Kumar, Managing Director has purchased from 40000 equity shares of Prithvi Information Solutions Limited on 7th May, 2007.

Sector Roundup:
BSE IT index was the major loser and lost 1.32%. BSE Auto index (down 1.17%), BSE Consumer Durable index (down 1.08%), BSE Pharma index (down 1.05%) and Oil & Gas index (down 0.98) were among the other major losers.

Volume Toppers:
TTML, SAIL, Indiabulls, Dish TV, R Comm, Idea, ICRA, Redington, Reliance Capital, IVRCL Infrastructure, MTNL, India Cement, ACC, Tata Steel, Cinemax and IDFC.

Lower Circuit:
Tele Data, Tripex Overseas, Garnet Construction, Maxwell Industries, Anant Raj Industries, Nirlon and Ramco System.

Result Today:
Blue Star and Lupin.

Delivery Delight:
ABB, Apollo Tyres, Associated Cement Co, Crompton Greaves, National Aluminium Company, Nicholas Piramal, Reliance Capital, Siemens, SAIL and Tata Chemicals.

Abnormal Delivery:
TVS Motor, State Bank of India, Hero Honda, Rolta India, Federal Bank, SRF, CEAT, Satyam, Colgate, Kotak Mahindra Bank and Tata Elxsi.

Stock Futures with Largest Increases in OI:
Infosys, Bata India, J&K Bank, SBI, Corp Bank, Century Textile, Bombay Dyeing, SCI and Bajaj Hindusthan.

Stock Futures with Largest Decreases in OI:
GDL, Crompton Greaves, Indian Bank, Nagarjuna Fertilizers, Colgate, Karnataka Bank, Mphasis BFL and Nicholas Piramal.

Results Corner:
Kotak Bank Q4 profit at Rs1.7bn (30%), total income at Rs14.26bn
Syndicate Bank Q4 profit at Rs1.04bn (up 1%), revenues at Rs19.3bn (up 53.7).

Brokers Recommendation:
Ashok Leyland – Outperformer from Man Financial with target of Rs46.

Long Term investment:
Colgate

Major News Headlines:

Holcim buys additional 3.2% stake in ACC for Rs5.4bn

Syndicate Bank to pay final dividend of Rs1.3 per share

GHCL unit gets US$100mn order from Starwood Hotels

TCS signs contract with Microsoft for RFID Solution

Kavveri Telecom inks pact with Ericsson India

Shrenuj & Co buys Simon Golub & Sons in US

L&T secures Rs2.15bn Order in UAE.

RESEARCH

Colgate-Palmolive (India) Ltd.
FY07 Result Update
Rating: BUY
CMP: Rs381.60

Key Highlights

Net sales grew 15% yoy to Rs13bn in FY07, driven by strong volume growth of 9% in toothpaste and 22% in toothbrush segment.

Margins expand 70bps to 16.1% aided by lower adspend and raw material cost. Higher outsourcing restricted further margin expansion.

Net profit rose 59% yoy to Rs2.2bn. Adjusted profit post VRS cost of Rs580mn increased 16% yoy to Rs1.6bn.

The company proposes reduction in share capital by Rs1.2bn to Rs135.9mn, Rs9 per share to be paid as a tax-free ‘deemed dividend’.

Colgate’s core oral care business has been growing at a healthy 10% pa in volume terms. The price hikes undertaken during the year, successful new launches and re-launches, coupled with the fiscal benefits from the Baddi plant have ensured a double-digit topline growth and improvement in profitability. The company has gained market share at the cost of regional players. The strong volume growth in toothbrush category indicates increasing shift towards toothpaste segment. Colgate being the market leader is expected to be the biggest beneficiary.

Colgate plans to increase the capacity at its Baddi plant to 40,000tons by Q1 2008 and to invest the fiscal gains from Baddi unit for brand building and further capex. At the current market price of Rs397, the stock is trading at 22.5x FY08E EPS of Rs17.6 per share. We recommend a ‘Buy’ rating on the stock.