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Saturday, July 14, 2007

Fortis Healthcare

Fortis Healthcare

India Multiplexes

India Multiplexes

Telecom Numbers - Vodafone extends lead over BSNL

Vodafone Essar has widened its lead over PSU telco Bharat Sanchar Nigam Ltd (BSNL) in June, in terms of global system for mobile communications (GSM) subscriber numbers.

Vodafone Essar (earlier Hutch Essar) is 2.33 million subscribers ahead of BSNL in June, while the gap was just 1.3 million between the two in the previous month, according to figures released by the Cellular Operators’ Association of India (COAI).

BSNL used to be the No 2 GSM player in India, in terms of subscriber numbers, till two months ago. In May, Vodafone Essar toppled the hierarchy by occupying the No 2 slot, and now it appears to be strengthening its position. UK-based Vodafone, the world’s largest mobile operator, acquired a controlling stake in Hutch Essar earlier this year.

The gap in subscriber numbers between leader Bharti and Vodafone Essar is also increasing. While Bharti had 11.5 million more GSM subscribers than Vodafone Essar in May, the difference now is 11.95 million.

Bharti’s marketshare has increased to 31.4% in June from 31.2% in May. Other operators which have shown an increase in marketshare include Vodafone Essar with 22.61% (22.36% in May), Idea with 11.86% (11.69% in May), Aircel with 4.98% (4.91% in May) and Spice with 2.33% (2.30% in May).

Many GSM operators, such as BSNL, Reliance Telecom, Mahanagar Telephone Nigam Ltd (MTNL) and BPL Mumbai, have recorded a dip in marketshare.

BSNL’s share has dropped from 21.43% to 20.90%, Reliance Telecom’s from 3.3% to 3.2%, MTNL’s from 1.95% to 1.92%, and BPL’s from 0.83% to 0.80%.

The slip in BSNL’s GSM growth is being attributed to the delay in executing its mega tender. Although Ericsson emerged as the lowest bidder for the 45-million line tender of BSNL, communications minister A Raja wants a re-look at the whole exercise.

The minister has said that $107 per line cost quoted by Ericsson is far too steep.

There are 135.9 million GSM subscribers in the country, as on June 30, 2007, against 130.6 million in May. The total addition in GSM numbers was 5.4 million in June.

Interestingly, COAI director-general TV Ramachandran said recently that the monthly growth in subscriber numbers could touch 10 million by December.

According to him, the growth is being driven, primarily by aggressive network expansions by the operators coupled with decreasing tariffs and increasing affordability. The government’s target is to have 250 million phone users by the end of 2007, and 500 million by 2010.

India in a fast lane

India in a fast lane

Weekly Close: Market jingle 'Don't worry be happy'

It was a bulls week. Globally markets remained firm for the week except Wednesday when US market dipped on weak housing data. Sentiments were positive across the globe. Sensex gained 2% for the week while Nifty gained 2.7%. Infosys results disappointed as they they met expectations of not being upto mark. Rupee played spoilsport and was the reason for reduced guidance in rupee terms. The exporters Got some government sops but really that did not matter much for the stocks. Bajaj numbers also disappointed and pressure continues to be there in a high interest rate environment. The optimism of the management about the new bike is what kept that stock up. Infrastructure companies had a gala time and then real estate companies joined in as well.

Inflation came in marginally higher at 4.27% Vs 4.13% for week ended June 30th. It remains controlled but not comforting in terms of the direction yet again. However the numbers because of the base effect will remain benign till September end and that helped the banks with no negatives. Some banks lowered their lending rates reflecting the increased liquidity. RBI tried to keep the rupee from appreciating but really the flows remain strong and its only adding to the liquidity. July 31st is the RBI meeting and thats unlikely to losen strings if this surge continues.

Mutual funds saw 25 per cent growth in the first six months this year, with assets now worth over Rs 4 trillion as against Rs 3,21,trillion in December last year. Fund houses collectively added over Rs 79,000 crore to their kitty within first six months of 2007. Reliance MF was the largest fund house with AUMs of close to Rs 60,000 crore. ICICI Prudential ranked second with Rs 43,000 crore. This may seem impressive and shows that Indians are jumping to put their funds into the markets. Important to note that atleast 50% of the AUMS are debt funds. Secondly the jump of 25% in assets under management also includes the appreciation of roughly 10%. Having said this.. we continue to believe that the markets will find greater participation. Near term though the issue of PAN cards will slow the addition of new entrants into the system.

Shipyard business seems set to take off. Bharti Shipyard bagged a $43.4 million order recently. L&T is set to invest between Rs 1,500 cr and Rs 2,000 cr in a new greenfield shipbuilding venture. Presently it has a shipbuilding yard at Hazira in Gujarat. The company recently bagged a Rs 440 cr order from Rotterdam-based Zadeko Ship Management CV to build four ships for special purpose cargo movement. ABG and Bharati are also expanding their capacity to meet the growing demand. Interesting to note that only about 4 weeks days are due for subsidy to get over which began in the mid-1990s. Indian companies want this to be extended by the finance ministry. Under this Scheme shipbuilders get a hefty 30% extra on every ship they build of a certain size or for the export market or domestic market. This scheme has already been extended twice. The current five-year subsidy, introduced on Independence Day in 2002, is set to expire on 14 August. In 2002, when the subsidy was last extended, Indian yards had orders worth Rs1,500 crore. Today, Indian yards have about 220 ships on order, at an estimated worth of Rs 15,000 crore. Because of the attractive subsidy, shipbuilders, both existing and new ones, have lined up investments of about Rs10,000-15,000 crore to upgrade and modernize existing yards and set up new facilities to boost capacity. It is expected that the subsidy will get reduced to 20% in the next plan and 10% in the plan after that. Wonder whether this has been discounted in the valuations of ABG shipyard and Bharti. The stocks continue to perform.

Gillette cut prices of its twin blade razor under brand Vector Plus. The price of razor has been slashed from Rs.49 to Rs.29 and a set of two cartridges from Rs.35 to Rs.20. Gillette is the market leader in premium shaving products. The market for shaving products in the country was around Rs.600 crore. Of this, 80 per cent would be conventional blades and only 20 per cent would be twin blades and premium shaving systems like Gillette's Mach 3. Gillette was acquired by P&G whose basic strategy has been cut prices to gain market share. This would be a smart move to increase volumes. We believe that the Vector will do better that the Presto! Presto is a use and throw twin blade. With vector cartridge priced below that, certainly that would be an aspirational brand. Competition would be really under pressure now. The key would be to spruce up its distribution. Valuations appear expensive.. but given the increasing marketsize, valuations are unlikely to slip. We like this company but it has been an under performer. However its time is nearing we believe. What we are not comfortable though is that P&G is now the owner and their treatment of the minority shareholders does not have a good track record. The Indian P&G hosted the home wash business till as much time as was being grown. When it was time to bring in profits, it was transferred to a 100% subsidiary. Keep watch on Gillette.

Zodiac is another brand company. The company derives over a third of its revenues from Branded sales in domestic markets. Interesting to note that the organised sector retailing of menswear is seeing strong growth and Zodiac provides a play on that. Manufacturing capacity in Dubai and deigner offices in 3 out of the 5 in the world fashion capitals are his selling point. Clearly the products are good and there is an aspirational level. Valuations make this attractive as well. Rupee strength is what seems to be worrying investors.. but given the segment where Zodiac operates, we think it should be a non issue. Do read our research note on this one.

Technically Speaking: Sensex is in a new range and continues in Mmentum. The bias is upwards as mentioned last week. Last week we mentioned that Sensex support in case of pull back was 14730. This week that is raised to 13870. Negatives would continue if this level is broken on the downside. 15090 is another support and thats the Gap support created on the way up by the Sensex. The fact that the gains of close to 200 points made on Friday was with advance decline volume of 2 advancing stocks for every 3 declining.

Fundamentally Speaking: There is little reason on internal fundamentals to justify the current rally. This time too its liquidity driven. More cash inflows into the Indian Markets continue to drive them up. Global risks seemed to have waned and thats the reason for the same. However on valuation parameters we would believe that the upsides carry a risk. Merril has given its reasons and anticipates a 10% drop in Emerging markets. We believe that its no point trying to predict the top though. Enjoy while it lasts. The results season however could negatively surprise and if this comes from an Infrastructure company, that could be really bad.

United Breweries, Simplex Projects, PNB

United Breweries, Simplex Projects, PNB

Grey Market Premiums

Read - Issue Price , Premium

Everon Sys. 125 to 140 425 to 430

Simplex Projects 170 to 185 150 to 155

Alpa Labs. 62 to 68 Discount

Allied Digital 190 135 to 140

Spice Communication 46 10 to 12

Surychakra Power 20 2 to 3

H.D. Infra 500 32 to 35

Celestial Labs 60 8 to 10

Omaxe Ltd. 265 to 310 50 to 60

Simplex Projects - IPO Subscription Details

Qualified Institutional Buyers (QIBs) - 90.4452 times
Non Institutional Investors - 153.7979 times
Retail Individual Investors (RIIs) - 49.2625 times

OVERALL - 85.53 times

Everonn IPO Subscription Details

Qualified Institutional Buyers (QIBs) - 92.9454 times
Non Institutional Investors - 277.8083 times
Retail Individual Investors (RIIs) - 123.8025 times

OVERALL - 131.47 times

You need some freakin luck to get allotment in this...!

Even if you apply for maximum, the chances of you getting allotment would be around 13%

Central Bank IPO band at Rs 85-102

Central Bank of India, the 96-year-old government-owned lender, has fixed a price band of Rs 85-Rs 102 per share for its initial public offering of 8 crore equity shares, which will open for subscription on July 24 and close on July 27.

The bank will raise Rs 680 crore to Rs 816 crore through the issue. After the issue, government holding would come down to 80.2 per cent.

Qualified institutional buyers (QIBs) will be allotted at least 60 per cent of the issue. Of this, 20 per cent will be reserved for overseas investors and 5 per cent for mutual funds.

The retail portion has been fixed at 30 per cent of the net issue. Non-institutional investors can bid up to 10 per cent of the net issue. The bank will complete the allotments by August 11. Proceeds from the issue will be used to meet the additional capital requirements under the Basel II norms and to grow the bank’s assets.

“We should be in place to adopt the Basel II norms by March 31, 2008, though we are required to adopt the norms by March 31, 2009. Our capital adequacy ratio will fall by 1.25 per cent on account of operational risk under Basel II,” said H A Daruwalla, CMD of the bank.

The bank’s capital adequacy stood at 10.4 per cent at the end of March 2007.

The bank’s net worth was Rs 3,303.9 crore on March 31, 2007.

“Our capital adequacy will go up by 1 per cent after the issue to 11.81 per cent. Tier I capital will go up from 6.32 to 7 per cent,’ said Daruwalla.

The shares will be listed on the Bombay and the National exchanges.

ICICI Securities Primary Dealership, Citigroup Global Markets India, Enam Financial Consultants, IDBI Capital Market Services and Kotak Mahindra Capital Company, are the lead managers to the issue.

Rising open interest in F&O a worry

The BSE Sensex and the S&P CNX Nifty opened with a big gap and remained at higher levels taking the cue from the rising markets across the globe. Auto, banking, cement and metal sector shares contributed the most to today’s rally.

The worry now is the mushrooming open interest positions, which have shot up to an all time high level of Rs 83,000 crore (Rs 60,000 crore in futures and Rs 23,000 crore in option). Thus, the open interest has increased by whopping 46 per cent or by Rs 26,000 crore since the beginning of the July expiry series.

The market has seen a one-sided movement from 3555 on March 3 to today’s level of 4504.55. A correction is expected and this will bring overextended stocks out of their overbought zone. The correction will act as an opportunity for traders to take positions again.

The Nifty 4400 - Thursday's resistance — is now becoming the support level. Operators now have shifted their resistance level to 4,500 as open interest in 4,500 Call options increased by 98 per cent to 13.87 lakh shares.

While doing so, they have started covering their positions in 4200-4400 Call options, as the open interest in these levels declined today.

The support has been built at 4,400 levels as the open interest at 4,400 put options increased by 7.64 lakh shares to 28.72 lakh shares today. With Nifty crossing the 4,500 levels today, new support is building at that levels. The 8.21 lakh shares added at 4,500 put options, took the OI to 11.70 lakh shares.

Strong support continued to be around 4,300 levels with the put open interest of 46.83 lakh shares built at that levels.

Markets displayed enormous strength as buying was evident throughout the session backed by gains in global indices.

The turnover increased by over Rs 5,000 crore to Rs 48,900 crore on the NSE. The put/call ratio rose to 1.63 from 1.54 as 24 lakh shares were added in put options, while 6 lakh shares were added in call options.

Weekly Technicals, Derivatives

Weekly Technicals, Derivatives

Technicals, Futures

Technicals, Futures

Bajaj Auto, UTI Bank

Bajaj Auto, UTI Bank



Infosys Quarterly Results Update

Infosys Quarterly Results Update

Investment Boom - India Strategy

Investment Boom - India Strategy



NSE Futures Volume - not no:1 anymore!

The National Stock Exchange has lost its place as the world's top bourse for stock futures trading in terms of volume to South Africa's JSE Ltd, according to the latest report by World Federation of Exchanges (WFE).

Johannesberg-based JSE Ltd recorded 44 million transactions in stock futures during January-March 2007 compared to 30 million by city-based NSE. In comparison, JSE had recorded only 13 million contracts in January-March 2006 and gained 229%. NSE, on the other hand, witnessed 25 million contracts and posted a gain of only 18% during the corresponding period.

“This growth is the result of an aggressive advertising campaign aimed at both the retail and the wholesale market, and of positive changes in the regulatory regime of these products in South Africa,” the WFE report on derivatives trading said. Europe’s Euronext.liffe was the thirdbiggest with 12 million contracts, up 319% compared to the year-ago period.

In 2006, the Indian bourse was the most active exchange in the world for stock futures trading and more than 100 million contracts were exchanged compared to JSE’s 70 million. “However, the size of stock futures contracts is smaller on JSE than on other leading exchanges,” WFE said, adding the stock futures notional value of trades on this market was outpaced by NSE, Euronext.liffe, Eurex and Borsa Italiana.

The notional value of stock futures on the NSE was about $800 billion in 2006, while that of JSE was less than $50 billion. Euronext was the second-biggest with a notional value of more than $300 billion. NSE stock futures volume grew 50% in 2006 compared to 2005, but faster growth was recorded in some other bourses. Stock futures trading rose 185% on JSE in 2006 versus a year ago, 143% in Euronext, 681% on Hong Kong Stock Exchange.

WFE said the volume of trading in stock futures almost doubled in 2006 and this growth seemed to be continuing during the first quarter of 2007. JSE, Euronext.Liffe and Eurex showed important volume growth rates. Other exchanges where stock futures are traded in the Asia Pacific region include the Australian Stock Exchange, Honk Kong Exchanges.

Investor's Eye - July 13 2007

NIIT Technologies
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs720
Current market price: Rs510

Annual report review

Key points

  • NIIT Technologies had an outstanding FY2007. It reported an exponential growth of 94.9% in its consolidated earnings, driven by a healthy growth of 45.8% in its revenues and an improvement of 140 basis points in its operating profit margin (OPM).
  • The impressive performance is a reflection of the benefits of the efforts taken to restructure the business model to focus on key industry verticals. Moreover, the inorganic initiatives in terms of the acquisition of Room Solutions further aided the company's overall growth during the year.
  • The outlook for FY2008 appears to be encouraging, given the healthy fresh order intake of $209 million in the last fiscal and the commencement of its joint venture with Adecco SA in FY2008.
  • At the current price the stock trades at 12x FY2008 and 9.9x its FY2009 estimated earnings. We maintain our Buy call on the stock with a price target of Rs720.

Cluster: Apple Green
Recommendation: Buy
Price target: Rs70
Current market price: Rs55.5

Price target revised to Rs70

Key points

  • In the domestic fast moving consumer goods (FMCG) business, the flagship brand Parachute, which constitutes 35% of the total turnover, is expected to do well in FY2008. Parachute commands a market share of 48% in the hair oil market. The brand showed a volume growth of 12% in FY2007 and is expected to grow by 8% in this year.
  • With growing health consciousness, the Saffola brand registered a volume growth of 18% in FY2007 despite the price hike taken during the year. The strong brand equity that Saffola enjoys helps it to maintain its leadership position. With the growing consciousness for a healthy lifestyle, we expect the brand to grow by 13-15% in FY2008.
  • The company is adding new products to its pipeline every year which would fuel further growth. The new prototypes and roll-outs are primarily high-margin products that would boost its margins and drive its growth in the coming years.
  • Kaya Skin Clinic, which has 48 outlets, reported a turnover of Rs75 crore in FY2007. This business broke even during FY2007 with a profit before tax (PBT) of Rs0.04 crore. With the addition of few clinics in FY2007 and better utilisation in the existing clinics, the company was able to turn PBT positive in FY2007. We believe that with better operational efficiency this venture would provide fillip to the bottom line of Marico.
  • We maintain our positive outlook on the company and expect its turnover to grow by 21% in the current financial year. The company has done acquisitions worth around Rs500 crore ( Nihar, Manjal, Fiancée and Hair Code) which have been funded through debt and internal accruals. What's more, the company has been able to successfully integrate all these businesses. With a debt/equity ratio of 1.3 and the cash flow coming from its existing businesses, the company's appetite for further acquisitions remains unsatisfied which would fuel further growth. We are introducing our FY2009 estimates. The stock is trading at attractive valuations of a price/earnings ratio of 16.8x FY2009E and enterprise value /earnings before interest, depreciation, tax and amortisation of 11x FY2009E. We maintain our Buy recommendation on the stock with a revised price target of Rs70.


Rally in equity AUMs continues

The AUM for equity funds rose by 3.8% to Rs162,553 crore in June 2007. The rise in the AUM was above the market movement of 0.9%

Investor's Eye dated July 13, 2007

India Strategy - July 2007

India Strategy - July 2007

India Capital Goods and Engineering

India Capital Goods and Engineering

Sugar looking up again?

Sugar in New York rose to the highest price since March on signs that processors in Brazil, the world's largest grower, are churning out more ethanol and less sweetener.

Mills in the center-south region, where 85 percent of Brazil's sugar cane is grown, cut sweetener output by 8.7 percent from last year to 7.34 million metric tons, the Center South Sugar and Ethanol Industry Association, known as Unica, said yesterday in a statement. Ethanol output rose 11 percent to 5.56 billion liters (1.5 billion gallons), the group said.

``There are those who perceive the Unica numbers as constructive and that's why the market is up,'' said Jeff Bauml, managing director of BNP Paribas Commodity Futures Inc. in New York.

Sugar for October delivery rose 0.17 cent, or 1.8 percent, to 9.87 cents a pound on the New York Board of Trade. The price earlier reached 10.22 cents, the highest for a most-active contract since March 28. Sugar has jumped 16 percent from a 23-month low of 8.52 cents on June 5.

Crude oil reached $74 a barrel in New York today, the highest since August 2006. Rising energy prices will boost the appeal of ethanol as an alternative fuel, said William Adams, chief energy and capital market strategist for LaSalle Futures Group in Chicago.

Sugar futures may rise to 10.5 cents next week, he said. The price may reach 11 cents to 12 cents during the next two months, said Thomas Hartmann, a broker at Altavest Worldwide Trading in Mission Viejo, California.

Sugar Surplus

Prices still are 40 percent lower than a year ago because of concern that Brazil will boost production. The country's sugar- cane output will rise to a record 528 million metric tons in the current harvest, up from 474.8 million tons last year, the Agriculture Ministry said May 31.

Unica said mills had processed 131.3 million tons of cane this year through July 1, up 4.4 percent from a year earlier.

The global sugar surplus may reach 9.2 million metric tons for the year ending Sept. 30, according to the London-based International Sugar Organization.

``We are still saddled with a pretty big supply,'' Hartmann said.

Weekly Technicals - July 14 2007

Weekly Technicals - July 14 2007

Q1FY08 Media Earnings, Bajaj Auto

Q1FY2008 Media earnings preview

Key points

  • The first quarter of the financial year is seasonally weaker for majority of the media companies in the absence of any major events in the April-June period (unlike the festive season in Q3 and the annual budget in Q4).
  • Media and entertainment majors have sensed the opportunity provided by increasing consumerism and improving regulatory environment. The increasing ability of the consumer to pay for quality entertainment has resulted in a new wave of multiplexes and production of more and better movies. During Q1FY2008 the Television Eighteen (TV18) group and UTV raised funds overseas to expand their presence in the Indian movies business.
  • A major event during the quarter was Global Broadcast News' tie-up with Viacom to form Viacom-18 to launch a Hindi general entertainment channel (GEC). This amounts to a big leap for the TV18 group, as it would transform the group from a news broadcaster to a complete media and entertainment giant in the years to come.
  • This was the second quarter after the implementation of the conditional access system (CAS) in select areas of Mumbai, Delhi and Kolkata. While there is still some time to go before CAS can completely penetrate these areas, the government is contemplating its extension to another 55 cities. Though we believe this may not happen soon but the same comes as good news to broadcasters and multi-system operators as it indicates the intent of the regulator.
  • We expect the Q1 results of media companies to be a mixed bag with companies that have part of their businesses in investment mode showing lower overall profits and the others reporting a good growth in revenues and profits.


Bajaj Auto
Cluster: Apple Green
Recommendation: Hold
Price target: Rs2,271
Current market price: Rs2,195

Results below expectations

Result highlights

  • Bajaj Auto Ltd's (BAL) Q1FY2008 results are lower than our expectations, mainly on account of a higher than expected decline in the company's operating profit margin (OPM). The OPM decreased due to a fall in the sales volumes and cut-throat competition in the motorcycle segment.
  • The net sales declined by 4.2% to Rs2,109.1 crore, as the volumes for the quarter dropped by 12% and the realisations grew by 8.5%.
  • The OPM took a hit during the quarter owing to higher raw material and staff costs as well as intense competition in the market. As the company was unable to raise the prices of its products, its OPM for the quarter declined by 330 basis points to 13.1%, leading to a 23.9% drop in the operating profit to Rs275.4 crore.
  • A higher other income, and stable interest cost and tax outgo led to an 18.4% drop in the company's net profit to Rs226.5 crore.
  • BAL plans to launch its all non-100cc 4-stroke motorcycle in the first week of September. The volume growth in the motorcycle segment is expected to improve from then onwards along with the commencement of the festive season. The interest rates have more or less peaked and chances of any further rate hikes are very slim. The credit availability should improve from September onwards, considering that many banks have recently raised money and inflation too has come under control.
  • Though the profit margins seem to have bottomed out, the improvement in the profit margins will depend on the improvement in the volume growth. Considering the lower than expected profit margins in Q1FY2008, we are downgrading our estimates for FY2008 by 4% from Rs116 to Rs112 and for FY2009 by 1% from Rs129.5 to Rs128.1.
  • At the current market price of Rs2,195, the stock discounts its FY2009E earnings by 17.1x and quotes at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 10.4x. We maintain our Hold recommendation on the stock with a sum-of-parts price target of Rs2,271.


Fund Analysis: July 2007

An analysis has been undertaken on equity and mid-cap funds' portfolios, indicating the favourite picks of fund managers for the month of June 2007. Equity funds comprise all diversified, index, sector and tax planning funds, whereas mid-cap funds include a universe of 18 funds such as Reliance Growth, Franklin India Prima Fund, HDFC Capital Builder, Birla Midcap Fund etc.

Investor's Eye July 12 2007

Infosys Technologies, IGATE, Sintex Industries

Infosys Technologies, IGATE, Sintex Industries

Commodities Outlook India

Commodities Outlook India

Jaiprakash Associates

Jaiprakash Associates

Weekly Industry Trends Report

Weekly Industry Trends Report

Why global markets are scaling new heights

Stock indices everywhere are hitting new highs. The Dow Jones Industrials, the Nasdaq, the Kospi, the Straits Times index, the Sensex and the Nifty, the Hang Seng, Australia’s ASX200 and even Egyptian stocks have all been breaking records.
How does one explain this fantastic surge in stock markets across the world barely a week after everybody came to know about the dangers lurking in the sub-prime mess in the US? Why is it that the Sensex and the Nifty are setting new records when almost everybody expects earnings growth to slow down and when the Infosys results have revealed the damage that can be caused by the strong rupee?

The usual answer to these questions is that it’s the result of liquidity. Liquidity has been the explanation offered for this bull run ever since it began in 2003, although there are differing accounts of why such a flood of money appeared in the first place.

Some blame it on profligate central banks, others on an excess of savings over investments. Liquidity is an all-encompassing term that means different things to different people, but in terms of numbers it boils down to one statistic: The ratio of global financial assets to annual world output has vaulted from 109% in 1980 to 316% in 2005, according to data compiled by the McKinsey Global Institute. Between 2002 and 2005, world financial assets increased from 272% to 316% of global gross domestic product (GDP).

Doesn’t the fact that interest rates have been rising across the world in the last couple of years mean that liquidity is coming down? Yet a rise in the Fed funds rate from a low of 1% to 5.25% seems to have had little impact on asset prices.

The same goes for the rising interest rates in Britain and the Euro area. Serhan Cevik, Morgan Stanley’s vice-president for North Africa and West Asia, points out that the market capitalization-weighted average of short-term interest rates in the world has increased from 1.5% at the end of 2003 to 4.3%.

There are several explanations. One of them is that interest rates are still low by historical standards. Till recently, despite the rise in policy rates, the yield on the US 10-year treasury note was well below 5%. Another version is that, because globalization has led to the induction of low-wage countries like India and China into the world economy, competition has increased and inflation is no longer a threat.

Accordingly, central banks find that they can stimulate their economies without stoking the inflationary fires. Part of the excess supply of money does go into the real economy, pushing up growth, but a lot of it flows into financial assets, boosting their prices. Yet another explanation is that interest rates in Japan are still very low, which is why the yen has become the funding currency for the carry trade. It’s only when the Bank of Japan starts to tighten, so goes the argument, or when the yen starts appreciating, that liquidity will be hit.

There are other reasons for liquidity to be abundant. The central banks of some developing countries, especially China, have been huge creators of liquidity, as they accumulate foreign exchange reserves, releasing local currency in return. (That’s exactly what’s currently happening with the Reserve Bank of India’s (RBI) attempts to prevent the rupee from appreciating.) The forex reserves, in turn, are parked in foreign currency bonds, usually in US treasuries, driving down interest rates there and adding to liquidity. Recent data show that China added $266 billion to its reserves in the first half of the year, while Russia, Brazil and India (Bric) added another $200 billion or so. That’s a $466 billion addition to liquidity by the Bric countries alone, without taking into account the surpluses of the West Asian oil exporters. As Cevik points out,

“The accumulation of foreign assets by oil exporters and Asian countries increased from 3.7% of global GDP in 1999 to 9.5% last year.”
Besides these central banks and the oil exporters, there are other players who add to liquidity by financial leverage, through the creation and widespread adoption of new financial instruments that cut up and bundle risk in new and complex ways. It’s estimated that the total amount of exchange-traded and over-the-counter derivatives have increased exponentially from 26% of global GDP to an astonishing 789%. The rapid growth of these instruments has enabled credit to be enhanced despite monetary tightening. Cevik says that derivatives and securitized debt instruments account for almost 90% of global liquidity, while traditional monetary aggregates represent a mere 10%. That is why commentators are so worried about the sub-prime contagion in the US—if its impact spills over to other asset classes, the contraction in credit could be explosive.

But for that to happen, interest rates need to go up further. The Bank for International Settlements has said that a rebound in the cost of oil as well as rising wages, increasing capacity utilization and falling unemployment may be stoking inflation. But it is by no means certain that inflation is rising.

Back home, however, the situation could be different. The topping out of interest rates has led to a sharp rally in equities. The Bombay Stock Exchange Auto index, for instance, is up around 9.5% in the past one month. But given the pressures on the rupee and the fact that market interest rates are lower than policy rates, the RBI may have no alternative to hiking the cash reserve ratio. The weight of money, however, tends to smother all doubts.

Eveninger - July 13 2007

Eveninger - July 13 2007

Stock Market Scam, Scandals

In February 1947, when the first finance minister Liaqat Ali Khan pulled the rug from under the business barons by raising the marginal income tax rate to 98.5 per cent, Dalal Street saw its biggest ever fall. Shares of Tata Deferred (now Tata Steel), tumbled close to 60 per cent and so did that of many others. Several brokers went under.

Markets can no longer go kaput these days; nor can brokers. Thanks to the sophisticated trading infrastructure and robust regulations, the market is a safer place to invest in.

While both business and markets have largely moved out of government shackles, the role of the government in the development of the stock market through setting up institutions like Unit Trust of India (UTI), National Stock Exchange (NSE) and the Securities and Exchange Board of India (Sebi) — each of which served a useful purpose — or by bringing in more companies to the public markets, cannot be undermined.

Through the seventies, eighties and till the mid-nineties, public sector institutions like UTI, LIC, GIC, and public sector mutual funds ruled the market. With the entry of foreign investors, these have become marginal players.

The real boost to the stock market came after the government asked foreign companies to dilute their stake to the public in the mid-seventies.

During 1976-77, about 120 foreign companies came out with initial public offers and raised Rs 140 crore, adding another 1.8 million shareholders. Some prominent companies that became public were Reckitt Benckiser, Russell Tea, Colgate, Ponds and Hindustan Lever.

Similarly, the real impetus to trading came after the introduction of the badla which enabled investors to carry forward positions, rendering greater liquidity to the market. With lingering doubts about the misuse of the system, badla was banned and re-introduced several times before it was finally replaced by derivatives in 2001.

According to M R Mayya, who served as executive director of the Bombay Stock Exchange for seven years between 1987-93, the government-administered pricing for IPOs worked in favour of investors.

“Since public issue pricing was regulated by the Controller of Capital Issues, there was gross underpricing of shares during the IPO with the result that stocks would quote at multiple-times their issue price when they made the debut on the bourses,” he says.

The issue price was decided based on three years’ average profits and these profits were discounted at 15 per cent to determine the price-earnings ratio and the final issue price. Most issues were thus priced at a significant discount to the worth of the company. For example, Colgate came out with its issue priced at Rs 25 and was subsequently quoted at Rs 105.

Once the CCI was abolished and free pricing allowed, the primary market exploded with gross mispricing of shares and ultimately collapsed in 1993. The new issues prompted many new stock exchanges to come into effect like Jaipur, Ahmedabad, Kochi and so on. The NSE and Sebi came into being as a fall-out of the frequent scams in the capital markets.

Some concerns of the past still remain, as in the case of a roaring bull market, that merchant bankers may be pricing public issues at levels not justified by fundamentals purely because of excessive demand from foreign investors. Another concern is the grey market.

In the initial years, official trading used to happen only for a couple of hours a day (12-30 to 2.30 pm). This was followed by kerb (unofficial) trading because players liked to react to late news. But even after official trading hours were extended, kerb deals continued.

“Kerb trading used to take place notoriously on the street. I use to bring the police and drive them away,” says Mayya; “there was a class of people from Rajasthan who specialised in kerb trades. They used to run the market and execute the off-market transactions.”

Initially, newspapers used to publish both official as well as kerb rates because they had a bearing on the market price the next day and also threatened the integrity of the market.

Similarly, even before the introduction of derivatives, traders had access to these instruments. A veteran trader, Babu Phatak, pioneered the idea of option trading called Jota Phatak. Jota was the right to buy (call option) and Phatak was the right to see (put).

“At one level we could not stop this, and at the other level there was a feeling that it caused no harm to the overall market,” Mayya remembers.

Share Dalal - then and now..


When Kisan Ratilal Choksey participated in the annual general meeting of Madras Cements Limited in Rajapalayam in interior Tamil Nadu five decades ago, he was one of 15 shareholders at the AGM and the only one coming from 1,500 miles away. “Two company officials came to the railway station to see me off,” recalls Choksey.

Incorporated in 1961, Madras Cement is not a favourite stock on the bourses today, but Choksey, 69, says he has earned enough and more from the stock. Choksey’s experience with Madras Cements is the story of the enormous change in the India stock market over the past decades.

For starters, the size of the investor base has gone up dramatically. “Even raising a few lakhs was a Herculean task because people did not understand shares as an asset class like we do today,” Choksey says.

Most capital investments were funded by borrowings and the equity cult only really took off after the seventies when Dhirubhai Ambani entered with his big bang public offer that laid the foundation for the Indian stock market.

“Dhirubhai had an overwhelming feeling that if investors were not kept happy, he couldn’t get more money and that would limit his growth. So he treated investors as family members,” says Choksey, who runs his 28-year-old broking firm, K R Choksey Shares and Securities. Reliance Industries Limited now boasts a shareholder base of over 1.8 million crore investors.

Then, again, from an information scarce world we have an information overload today. Choksey had to wait for a company’s annual shareholder meeting to know about its plans and prospects, while today companies have to mandatorily report quarterly financials and material events impacting share price.

“At that time we did not have even telephones, but now we have conference calls organised by companies, and also websites, television channels and pink papers analyse the market threadbare everyday.”

As against today’s fat research reports, Choksey says he was one of the very few to do one-page reports on companies.

Though the basics of investing were the same, research was constrained by lack of adequate resources. Finance as a science too was still evolving.

“I used to look at the gross block for the past years to see if the company was building capacities to sustain growth, and then see if the price-earnings for the share were justified or not,” says Choksey, who started off as a partner in his family-owned M K Choksey & Company in 1961 after acquiring a commerce degree from Mumbai’s Poddar College.

It is the faith in fundamentals that helped Choksey and others survive stormy times and grow their businesses.

“I used to study during lean markets and sharpen my skills,” adds Choksey who still attends his office in Jeejeebhoy Tower. Being up-to-date is even more important today because very few companies are able to sustain businesses successfully for a length of time due to changes in the economic climate.

Even as unsuccessful companies perish, new companies are added to the list, increasing the choice for investors. Till the eighties, the number of securities traded was less than 400; the IPO boom of the early nineties took this number to around 4,000.

If it was fundamentals for some like Choksey, it was gambling for others. A leading operator in the seventies and eighties, Manu Manek ruled the market till Harshad Mehta came to the forefront.

“Manek was a legendary personality and a powerful operator who dictated the market,” says Choksi. Without his nod, it was impossible to become the director of a company. Apparently, on the day of election, he would send the name or list of directors to companies — and only those people ever got elected.

Though everybody appeared aware of this, no charges were ever levied against him. Omnipresent in the stock market, his favourite hunting ground was Indian Iron, which recently merged with SAIL.

Among leading operators in those times were San Bagh Chand for Scindia Steamship Navigator and Sumtilal Jamnalal for Century Mills. Harshad Mehta and Ketan Parekh came much later, in the early and late nineties.

One thing that has not changed though is rampant speculation. Ever since stock trading began some 180 years ago, speculation has been rampant and, after the introduction of badla, there would be speculation on speculation!

“Since positions could be carried forward under badla, members would come to know who is building positions in which counter. Speculators would then bet on the strength and weakness of the operator in the stock. In fact, a number of operators/brokers failed because they accumulated huge positions and finally could not exit from the stock,” remembers Choksey.

This was one of the factors the capital market watchdog was investigating during the Ketan Parekh-led scam in 2001, when Anand Rathi, the president of BSE, was charged with misusing his position to support a bear cartel allegedly formed by market operators Shankar Sharma and Nirmal Bang to bring down the bulls of the time. All three were eventually exonerated.

Choksey’s business values have not changed in the face of changes in the broking industry.

“It was a royal business with two hours of trading, and a lot of holidays — about 4-5 days for Diwali, a week or 10 days for Christmas, and holidays for festivals and state and central government holidays. Now, you’ve got to serve clients round the clock, all through the year, and even that’s not enough.”

India Equity Strategy

India Equity Strategy

Infosys Result Update

Infosys Result Update


The bulls are showing no signs of getting dizzy at the top. Stock specific or rather result specific approach needs to be adopted at this stage. Bears will hope that the bulls cave in after spending some time at the peak. Only a global meltdown could dampen sentiment at this stage.

While valuations may seem expensive, investors don’t seem to be in a hurry to book profits. With many more results awaited, a sudden collapse is always in the cards. We don’t want to sound pessimistic. Just reiterating caution at these levels. Expect alternate bouts of gains and pains in the week ahead.

TCS, Zee News, Petronet LNG, GDL, LIC Housing Finance, Cummins, Tata Tea, REL, IDBI, RNRL, Polaris, ACC, L&T, Tech Mahindra, Ranbaxy and Satyam Comp are among the major companies, which are expected to deliver their earnings in the coming week.

Liquidity seems to flow in with FIIs investing around Rs20bn (excluding Friday’s figures) in the cash segment.

Either stay put with fundamentally sound stocks or do your churning and exit counters which have run up too quickly, especially during the last couple of weeks.

Weekly Stock Ideas

Buy HDFC (1988)
SL 1970 Target 2030, 2040

Buy R Com (555)
SL 547 Target 575, 580

Buy Bharat Forge (316)
SL 310 Target 328, 333

Buy Crompton Greaves (259)
SL 252 Target 273, 277

Buy GAIL (319)
SL 313 Target 332, 336

Market Mood

Bulls fall in love with stocks!

I was just guessin', At numbers and figures,
Pullin' the puzzles apart Questions of science,
Science and progress, do not speak as loud as my heart.

Love is blind and the bulls seem to be closing their eyes on any concerns coming their way. The indices are at yet another high. The news flow this week has not been very encouraging. To begin with, Infosys cut guidance. Industrial production for May dipped. Bajaj Auto results disappointed and the coming quarter is again expected to be weak. Valuations, though being questioned, are taking a back seat temporarily. FIIs have lend support to the bulls. Higher metal prices on LME added to the positives.

Tech stocks remained lackluster while metals, Real Estate, Power and Construction stocks clocked gains. Hindalco, REL, L&T, BHEL and Tata Steel were among the major gainers guiding the Sensex above the 15,200 mark. Interestingly, the markets have been changing its leaders from time to time.

The major indices recorded their fifth weekly gain with benchmark Sensex adding 308 points or 2.06% to close at 15272 and NSE Nifty advancing by 120 points or 2.75% to close above 4500 mark at 4504.

Global indices too had a good run. Hang Seng Index closed above 23,000 for the first time. Shares also rose after Fitch Ratings upgraded Hong Kong's long-term foreign-currency debt rating to AA, the third-highest ranking, from AA-. The US markets managed to shrug off disappointing earnings forecasts from the retail sector, renewed concerns about the sub-prime mortgages and rising crude oil prices. Dow Jones recorded its biggest gain since 2003 on Thursday.

Metal stocks shone brightly on Dalal Street. Talks of consolidation in the global metal industry and firm metal prices contributed significantly to the rise in metal stocks. Takeovers in the metals industry and higher commodity prices have been driving up metal stocks in recent weeks. Alcoa led the gains in US Market after Rio Tinto's plan to buy Alcan spurred expectations of more takeovers. SAIL skyrocketed by over 23% during the week. JSW Steel was another performer of the week as the scrip rallied by over 15% to Rs721. Heavyweight Tata Steel was among the major gainers advancing over 11% to Rs692. Hindalco surged by 13% to close at Rs174.

Power stocks were in the limelight on back of increase in Government spending for electricity generation. REL led the charge among the power stocks after Anil Ambani, said he could raise Rs1 trillion to invest in his energy, telecommunications and finance group to tap opportunities in the world's second-fastest growing economy. Tata Power rose by nearly 4% to Rs685 and REL advanced by 13% to Rs675.

Capital Good stocks continued its strong uptrend trend as the index yet again rose over 2.2%. BHEL led the way as the scrip advanced over 8.5% to Rs1690, L&T gained 1.5% to Rs2400, Siemens surged nearly by 5% to Rs1,476 and Punj Lloyd added 3.5% to Rs277.

IT stocks continue to be laggard again this wining week loosing by over 1% in a historic day week for the markets. Infosys reported a consolidated net profit of Rs10.79bn for Q1 FY08 versus Rs11.44bn in the previous quarter. The company also missed its revenue guidance for the first quarter. The company says its FY08 revenues will grow by 17-18% year-on-year and earnings per share (EPS) by 13-14%. FY08 EPS is now seen a t Rs78-79. TCS was down by over 2% to Rs1136, IT Bellwether Infosys slipped 1.8% to Rs1935, Wipro was declined 1.3% to Rs512 and Financial Technology declined 1% to Rs2844. However, Satyam Computer gained 1% to Rs493.

Banking and Real Estate stocks advanced further on expectations that Government may not tinker with the interest rates in RBI meet later this month. DLF, the real estate major rose nearly by 5% to Rs600, IVRCL Infrastructure surged by over 8.5% to Rs423 and Akruti Nirman added 4.2% to Rs496.

Auto stocks gained momentum this week as the index was up by over 3% led by frontline stock Tata Motor as the scrip paced ahead by over 7.5% to Rs766, followed by M&M which gained over 4% to Rs821, Maruti advanced 3.5% to Rs825 and Ashok Leyland added 2% to Rs39.

Infosys... poor results, grim outlook

A 7% gain in the rupee since April knocked Rs2.76bn off Infosys' topline in the first quarter. Gross margins were down 390 basis points while EBITDA margins fell by 300 basis points. Overall volume growth stood at 6.9% while revenue growth was flat QoQ at Rs37.73bn (vs Rs37.72bn). PAT of Rs10.79bn was boosted by other income of Rs2.53bn (coming from forex gains and higher interest rates) and Rs510m of tax write-backs. EPS declined to Rs18.89 from Rs20.30 in the fourth quarter of FY07. Excluding this reversal, the EPS for the quarter would have been Rs18.

The company missed its revenue guidance for the first quarter. It had given Q1 revenue guidance of Rs38.96-39.13bn while reporting its full-year results in April. On the bottomline however, Infosys has surpassed its own EPS guidance of Rs17.84. Infosys cut its full year earnings and revenue guidance in rupee terms considering the sharp appreciation in the Indian currency vis-a-vis the dollar. At the same time, the IT giant marginally hiked its FY08 guidance in dollar terms.

"The sharp appreciation of the rupee against all major currencies impacted our operating margins during the quarter," said V. Balakrishnan, CFO, Infosys. "However, our robust and flexible operating and financial model enabled us to maintain our net margins while absorbing the impact of appreciating currency, higher wages and visa costs." Given the continuing strength in the rupee, the IT sector's misery is unlikely to end soon. Such has been the impact of the rupee that the sector has gone out of favour with most investors. Infosys and the software sector will continue to underperform the market as there is a likelihood of some more pain going forward.

Govt to bail out other exporters

The Government has thrown in a life jacket at the beleaguered exporters, especially the small and medium sized companies, to cushion them from the adverse impact of the sharp appreciation in the rupee this year. The Rs14bn package includes hike in both drawback and Duty Entitlement Passbook (DEPB) rates, besides cheaper pre-shipment and post-shipment loans to SMEs from banks. Commerce Minister Kamal Nath stated that the new DEPB rates are expected to help sustain the export growth. He expressed hope that the package would neutralise the adverse impact of rising rupee on exports.

DEPB rates have been enhanced by 3% for nine sectors i.e., textiles (including handloom), readymade garments, leather products, handicrafts, engineering products, processed agricultural products, marine products, sports goods and toys. For the rest of the items, DEPB rates have been enhanced by 2%. ECGC premium has been reduced by 10% of the existing premium rates. To clear all arrears of terminal excise duties and CST reimbursement, an amount of around Rs6bn has been released. The rates of duty drawback has been enhanced by around 10% to 40% of the existing rates. The rate of interest on pre and post-shipment credit has been reduced by 2%. Responding to requests from exporters, the Government has introduced some additional lines in the Drawback Schedule.

The higher rate of duty drawback would cost the exchequer Rs8bn in FY08, while the Government would bear another Rs6bn to provide a 2% subvention to banks for providing concessional credit to exporters in certain sectors. The subvention would be provided to the banks through the Reserve Bank of India (RBI). The central bank is being requested to issue a circular to the scheduled commercial banks in this respect.

Reliance Capital

Reliance Capital