Kirloskar Oil Engines, AIA Engineering
Friday, August 17, 2007
An editor of a pink paper asked me my opinion of the $3 billion Chinese investment in Blackstone. There are many angles to this news story. The media has dwelt upon how this is a 'professional' (and therefore scientific) use of the nation's burgeoning forex reserves.
I only asked rhetorically: “What do you say when the world's worst investor hands over his money to someone who claims to be the world's best investor…….for a price which is embedded in the IPO pricing?” What is the probability that this is not a bum deal?
Ok, let me make my points, one at a time. The whole concept of private equity (as opposed to the public equity, i.e, listed stock markets) is opposed to the efficient markets hypothesis. The EMH, as it has come to be called, is based on the rather simplistic worldview that if you get millions of people to look at something, you will achieve the highest level of perspective, i.e., Mr. Market knows more than any single individual, or for that matter, any smaller group of individuals. In other words, it is a restatement of the underlying logic of 'democracy', that the wisdom of many is always superior to the wisdom of the few.
Somebody got a Nobel Prize for putting out this fallacy, that the price given by the market factors in all known information. Perhaps it does, but he forgot that people have different perspectives on the same information. In politics, this (EMH) is perhaps true, but for the wrong reasons. Democracy is the superior way of (political) management not because it provides the best (combined) perspective, but because it provides the checks and balances that are needed to obviate the misuse (or distortion) of a political process. Anybody who has ever watched video clips of our parliamentary proceedings will agree that perspective is not strength of democratic (or collective) choice.
In Economics, we have always known that EMH is almost never true. The “Laws of Group Think” (which is part of behavioral economics) postulates the exact opposite of the EMH, saying that “crowds (or groups) are always and systematically wrong”.
Private equity offers itself as an alternative option to public equity. PE firms do buyouts of publicly-held firms because they feel that the public (listed) value is understated. Then they go back and sell these firms to the same market they bought it from. No doubt, there is some real arbitrage available through management actions, but the larger value is extracted because of mispricing in the underlying (public) value of the stock. Value Investors know that this is a regular occurrence in public stock markets.
Coming to Blackstone then. The firm, by its very existence, size and reputation, puts out the claim that they are the world's premier purveyors of value, i.e., when they buy, the stock is undervalued. Implicitly, when they sell, the stock is overvalued. By implication then, when Blackstone decides to sell stock, one presumes that it would be at a value higher than the intrinsic value of the stock.
Using the principles of Classical Finance, a public issue of capital by a private equity firm makes no sense. If you have a large 'spread' (i.e. asset return minus the cost of capital), then you get a huge margin of safety. Since equity capital is nothing but a bulwark against risk, why would you need equity capital to finance an activity that has a huge 'spread'. You only raise equity, either when you need the bulwark against risk……..or you are getting equity at a mouth-watering price. Obviously, Blackstone insiders think their shares are over-priced.
Blackstone normally goes to the markets to buy stocks from the unsuspecting public, which they will sell back to the poor dolts after a cooling period. When would Blackstone go to sell shares to the hoi polloi, reversing their normal pattern of behaviour? And who is on the other side of the trade? Half the placement is to the Chinese Government, which is arguably the world's worst allocator of capital. Now let us see just how this is a bum deal.
The Chinese are capitalistically communist, or is it the other way round? They grew up believing that labour is the most important of the four factors of production, if only because it is the only factor that has feelings. Our Indian Communists also know that it is the only factor that votes, an even bigger convenience. That is why they do so well politically, but so disastrously in their economic policy.
In Economics, value is captured by the factor that is the most flexible, has the highest opportunity cost and the ability to capture such value. That factor, unfortunately, is capital, which slips away at the slightest hint of a sub-optimal return (ask Jyoti Basu).
Labour on the other hand, is inflexible, emotional and responds to power by acquiescence, ensuring that it captures less of the cake than it deserves. Any attempt to give labour higher negotiating power through administrative or political fiat will always result in the flight of capital, as we saw in Kolkata in the 70s.
China's 'growth strategy' has been to over-supply labour to manufacturing and drive down product prices, shrinking the producer surplus captured in ITS part of the value chain. Wherever China goeth, the value captured goes down to zero. Hence, blue- collar manufacturing, where the Chinese presence is most visible, has seen price erosion to the point of insanity. Western companies in general, and the Americans in particular, have been complementary to China, i.e., they have occupied the spaces that China has not, e.g., retailing, supply chain and logistics, construction, banking and white collar services. These sectors have captured disproportionate value, challenging the Chinese to move in. So first, China makes goods for the US, gives up its producer surplus to US consumers. Whatever little it saves from what it produces, now lies fallow in its forex reserves, which must either fund US borrowings (through T-bills and mortgages) or create inflationary liquidity in its domestic economy.
So these savings are now invested in Blackstone IPOs at inflated prices. The money, one presumes, will be reinvested back in China to buy undervalued assets from the private equity market (or the listed stock markets). At every stage, the Communists get short-changed, ceding value to savvier investors/ consumers from the West.
“So what?" argue the Chinese. You value humanity because you have so little of it. We have no shortage of people, hence they are valued less. So what if the savings of a small proportion of our people are blown up either in NPAs incurred by our domestic banks, or for that matter, if the nation's forex reserves are invested sub-optimally. It is, after all, 'savings' of our native population, which is meant for strategic purposes. I am sure our Indian leaders would love to think like that. Unfortunately, long before they get their domestic populations to pick up the tab for their decisions, the government would have been brought down. Democracy ensures financial discipline.
There is another reason why India cannot afford the luxury of sub-optimal investment decisions. Our forex reserves are funded by external liabilities; they are not generated by trade surpluses, as in the case of China. If our government puts it away in long-term investments that do not generate adequate returns in foreign currency, we will trigger a run on the rupee, just like in case of the 1997 Far Eastern Crisis. The Chinese government has only its own population to answer to, and they have been taught not to ask. Indians have the havala option!!!
It was a blood bath on the streets this week with global markets collapsing as the problems from the US Subprime loans accelerated and there was bad news almost everyday. Falling home prices, delinquencies and more than everything lower consumer confidence with consumption reflected in the results of the largest retailer Wal Mart only made things worse. This was accompanied by a strong Yen which led to the carry trade unwinding. It was massacre in Asia as all these worries got priced in.
It was a holiday shortened week and domestic news was dominated by political debate on the 123 agreement which the Leftists protested against and the Prime Minister threatening to resign. Not a big worry but really that contributed to the pail of global woes in its own way. Sectoral news was on cement where the Government seems to be trying its hand at softening prices still. Imports are being encouraged and that not needing certification. Cement stocks however were losers but not as much as the others Inflation came in at 4.05% for week ended August 4th and that was some comfort that this is not tending to be a problem anymore. Crude is cooling off though above $70 a barrel its still seen as a problem. Metals on the other hand really had a crushing week and all metal stocks were smashed to pulp. The banks also were on the receiving end as the parched liquidity conditions had them all down. The rupee rallied on lower inflows as the changed ECB norms with the FIIs now turning net sellers.
The software stocks were all hammered and that was not very unexpected. However the surprise was that this was in the face of a weaker rupee which hit Rs 41.5 rising from Rs 40.3 levels to a dollar. The software stocks priced in the negatives of the US economy and a probable negative fallout on their business.
Sensex and Nifty down by 5% for the week. BSE metal index was down by 10%; BSE capital goods slipped by 6%; BSE IT index down by 6%; Mid cap Index was down 5% and Small caps were down by 2.5%.
This week we had lots of research as always. We had a research note on Navneet publication. The company did not put out exciting results as was expected. This year was the sylabus change for standard tenth in Maharashtra and should have been a big year. However the company had its reasons and were justified. The growth in the publication business is finally being pushed and thats good news. The stationary business will also be aggressively pushed and thats good news. Do read this follow up note.
There was a detailed research note on Voltas and there was one on Blue star as well. Both businesses seem exciting and the order books are strong with good visibility. They are both dominant in the HVAC segment that they operate in. The prospects look mind blowing with the number of malls expected and expansion plans for the IT / ITES services and other infrastruture requirements of Airports not to mention in SEZs. However good businesses dont come cheap but these are extremely expensive. Do read the risks we mention in both these notes.
We had a research note on Honda Siel. This is one business we have been covering for some time now. The performance remains spectacular and the company is doing well with superb offtake of its LPG gensets and pumpsets. The cash holding per share adds to the positives. The Honda group company may find more focus over time.
Technically Speaking: Sensex took support on the trend line which has been a big support for many months. We had a Technical chart of the same. We mentioned in the day time that probably the worst was over for the near term. The markets closed higher from the lows. The low made around 13750 levels will probably be important support for now.
Fundamentally speaking: The problem which the global markets faced was global and there seems to be some solution put out by the US Fed. It cut its discount rate by 0.5 percent Feds 50 basis point cut in bank discount rate is nothing but liquidity infusion which it was anyway doing for the past few days. Liquidity infusion did not effect much in the past few days. However this is different this time as as it ensures unlimited liquidity at a particular cost and more than that it soothes nerves that liquidity crunch is over. Even more, it puts in an easing bias for the interest rates in US. Frankly, this should bring in some level of stability. Investors are likely to wait and the manic selling will stop. Some rationality is likely to come in. Markets may start off with a bounce on Monday.. but the core problem of poor home loans and consumer confidence needs to be addressed. Its that what needs to be tackled. So it would be wise not to jump into bouyant markets at the drop of a hat. It would be wise to use this as an opportunity. Performance will become tougher where stock specific selection would matter.
Performance for the week:::: Good week of performance despite what the market was doing. DTP was awesome with VJ's long calls on RIL and LNT & Short call on Infosys was bang on target. Quickies call on Timex watches was delightful which was booked half with 15% gains. Another call on Maruti by VJ was marvelous which fetched good gains and Rolta Short call in Futures was closed with fantastic Rs 40 gains per lot. Delivery Delights call W S Ind was wonderful which delivered 15% gains in falling market. There was a superlative short call on Suzlon and that delivered Rs 17000 per lot in a matter of two days. Unbelievable.. but this is available only from Delivery deights. Tata Power BTST by VJ was rocking one which delivered good gains. Wow calls was on target with Fedders lloyd delivering good performance on the market. More is expected. Bharat Fertiliser was another which showed major strength and is bound to deliver. Its these times that research pays off. It may seem odd but a cut in rates by the US is what we expected earlier in the week itself..and more.
Promoted by K.V.Bala and Subuthi Finance, Indowind Energy generates wind power, undertakes turnkey operations for windmill projects and operates and maintains (O&M) wind electric generators (WEGs). The company currently owns 16.825-MW windmill capacities in Karnataka and Tamil Nadu, and operates and maintains 17.915-MW capacity. It currently supplies power to a state utility and a few companies in Karnataka. Tamil Nadu Electricity Board (TNEB) is its major client.
Currently, Indowind Energy sells power to TNEB at Rs 2.70 per unit. It sells power to corporate clients in Karnataka at Rs. 4.05 per unit (however, the company has to pay wheeling charges at 10%).
- Is setting up a wind farm of 9-MW capacity in Karnataka at an investment of Rs 49.5 crore. Intends to sell this project for an appropriate price. The project division’s profit before tax (PBT) margin was 23.5% in the year ended March 2007 (FY 2007).
- As per the National Tariff Policy, state commissions have to fix a minimum percentage of energy from non-conventional sources. The Union government has also introduced a package of incentives, some of which include tax concessions such as 80% accelerated depreciation and tax holidays for power income under Section 80IA. Also, the gestation period for the wind power project is just six-nine months as compared with thermal power project’s 36 months. It has low variable cost, too. Thus, in near future, there is likely to be significant capacity additions. The wind power potential, based on data collected from 10 states and only 1% of land availability, has been estimated at around 45,195 MW. Thus, the overall scenario for companies with presence in wind power generation, project and O&M segments are favorable. Indowind Energy normally gets 10-15% of power generated from its O&M projects.
- From the issue proceeds, Rs 18.26 crore will be used for foreclosure of lease with ICICI Bank and Axis Bank. The company had entered into an operating lease with Axis Bank and ICICI Bank for windmills. The banks own the windmills and these have been given on operating lease to Indowind Energy. The company operates 10.75-MW capacity windmills under O&M contract for these two banks. The lease period is ending in 2012 and 2014, respectively, for the two banks. By foreclosing the lease transaction, Indowind Energy will be saving lease payments to these banks (saving of around Rs 4 crore). The impact of the power generated will be reflected in income generated from power.
- Rs 20 crore from the issue proceeds will be used to take over second-hand wind-energy-related assets of defaulting companies put up for sale by banks. This way, Indowind Energy plans to expand its capacity at a cheaper rate using its expertise in this field
- Claims to be the first company in India in the wind energy sector to get carbon credit certification from the United Nations Framework Convention for Climatic Change for its 12.3-MW projects. Indowind Energy expects income from carbon credit of Rs 0.7-0.75 crore from its balance capacity.
- Wind-power generation is seasonal in nature. Thus, there is likely to significantly variation in income from power generation, quarter on quarter. Year on year, the variation will depend on the quantum of wind received by the company’s wind farm.
- Group company Subuthi Finance has received a notice from the Reserve Bank of India (RBI) for irregularities/ violations of certain provisions of the RBI Act. It also had failed to meet certain listing requirement.
- Given a bank guarantee of Rs 5.3 crore to its group company Indonet Global. Other group company SGM Windfarms is in the same business.
Between FY 2003-FY 2007, revenue shot up from Rs 5.68 crore to Rs 24.12 crore. However, during the same period, operating profit margin (OPM) declined from 69.7% to 32.9%. This is likely to have happened on account of the fact that the share of the revenue from wind-power generation has declined from 100% to 32%. Wind-power generation has a low operating variable cost and a high fixed cost (depreciation /interest). Thus, net profit during the period has grown at almost half the pace as compared to revenue: from Rs 2.4 crore to Rs 6.58 crore.
FY 2007 EPS on post-issue equity works out to Rs 1.3. At the offer price band of Rs 55-Rs 65, the P/E range is 40.9-48.4, respectively. TTM P/E of Power Generation and General Electric Equipment Medium / Small is 13.6,14.5, respectively. There is no comparable listed entity. Suzlon Energy, one of the global leaders and the most integrated player in this filed, is trading at 43.9 times its consolidated TTM earning.
The Federal Reserve, reacting to concerns about the subprime lending crisis and the volatility in the financial markets that have resulted from it, announced Friday that it is cutting its so-called discount rate temporarily by a half percentage point, to 5.75 percent.
The discount rate is the rate the Federal Reserve banks across the country charge qualified lenders - mainly banks - for temporary loans. It is largely symbolic.
The central bank did not change its more closely watched federal funds rate, which affects rates that consumers pay on various types of loans. That rate remains at 5.25 percent.
The Fed last met Aug. 7 and decided to leave both the federal funds and discount rates unchanged. But since then, stocks have plunged further due to fears that some financial institutions and hedge funds were in serious trouble because of the mortgage meltdown.
Mortgage lender Countrywide Financial, for example, announced Thursday that it needed to tap an $11.5 billion line of credit because of liquidity problems. That came a day after an analyst at Merrill Lynch suggested that Countrywide might need to declare bankruptcy.
In a statement, the Fed said that it took the move to "promote the restoration of orderly conditions in financial markets."
In another statement, the central bank indicated that "financial market conditions have deteriorated, and tighter credit conditions and increased uncertainty have the potential to restrain economic growth going forward."
The Fed added that "although recent data suggest that the economy has continued to expand at a moderate pace, the Federal Open Market Committee judges that the downside risks to growth have increased appreciably" and that the Fed was prepared to take more action if necessary.
Stock futures, which were initially trading lower Friday following another wild day Thursday, surged higher following the Fed's announcement
The market surprised the traders with its sharp unexpected recovery in the afternoon and a fall of 217 points towards the close. Despite opening weak in line with its Asian peers, the Sensex recovered from its lows as investors used the sharp fall to pick up the stocks at a bargained price. Earlier in the first half, the market was extremely volatile and slipped around 580 points or over 4% at 13,780. However, sustained buying in Reliance Industries, banking and realty stocks helped the Sensex to erase most of its losses, but relentless selling in pivotal stocks assured that the Sensex remains in the red. The Sensex finally ended the day with a loss of 1.51% or 217 points at 14,142, while the Nifty declined by 1.69% or 71 points to close at 4,108.
The market breadth was extremely weak as the losers outpaced the gainers in the ratio of 2.15:1. Of the 2,719 stocks traded on the BSE, 1,835 stocks declined, 852 stocks advanced and 32 stocks ended unchanged. Except the BSE Realty index, all the sectoral indices slipped sharply. The BSE Metal index dropped 4.74% followed by the BSE IT index (down 2.95%), the BSE PSU index (down 2.78%), the BSE CD index (down 2.41%), the BSE FMEG (down 2.34%) and the BSE Teck index (down 2.23%).
Most of the index heavyweights witnessed heavy correction. Satyam Computers tumbled by 5.81% at Rs440, Tata Steel dropped 5.40% at Rs544, ONGC lost 4.41% at Rs783, Hindalco slumped by 3.65% at Rs140, Tata Motors slipped by 3.34% at Rs641, ITC shed 3% at Rs153, NTPC lost 2.98% at Rs163, Infosys fell by 2.91% at Rs1,855, TCS crumbled by 2.91% at Rs1,056 and ACC dipped 2.84% at Rs952. Other front-line stocks lost between 1-2% each. Select counters, however, bucked the downtrend and ended with gains. Wipro advanced by 1.31% at Rs476 and HDFC moved up by 1.30% at Rs1,910 while Reliance Industries, Reliance Energy and Cipla ended with modest gains.
Metal stocks were hit hard and dropped sharply. JSW Steel crumbled by 7.55% at Rs568, Shree Precoated Steel lost 7.50% at Rs269 and Sterlite Industries shed 7.47% at Rs517. Sail, Hindalco, Welspun Gujarat, Sesa Goa, Hindustan Zinc and Jindal Steel were down over 2-3% each.
Over 4.20 crore Nagarjuna Fertilisers shares changed hands on the BSE followed by Bella Steel (1.96 crore shares), IFCI (1.91 crore shares), Harig Cranks (1.58 crore shares) and Reliance Natural Resources (1.39 crore shares).
Reliance Industries was the most actively traded counter on the BSE and registered a turnover of Rs313 crore followed by Zylog Systems (Rs309 crore), Tata Steel (Rs211 crore), Reliance Capital (Rs205 crore) and SBI (Rs190 crore).
The market posted fourth straight weekly loss, tracking weak global markets. A whole host of factors right from yen carry trade unwinding, hedge fund redemption pressure, heavy FII selling and sub-prime concerns haunted local bourses throughout the week. The market declined in 3 out of 4 trading sessions. Markets across the globe were inflicted with intense volatility
The benchmark index BSE Sensex declined 726.73 points to 14,141.52 in the week ended Friday, 17 August 2007. The S&P CNX Nifty was down 225.30 points to 4,108.05 in the week.
The week began on an upbeat note with the BSE Sensex advancing 148.96 points to 15,017.21, on Monday, 13 August 2007, tracking firm Asian markets. All the sectoral indices on BSE posted gains, except BSE IT index.
Sensex posted marginal loss of 16.30 points to 15,000.91, on mixed global cues, on Tuesday, 14 August 2007. Turnover was low on that day. Stock markets remained closed on 15 August 2007 on account of Independence day.
On Thursday, 16 August 2007, the Sensex slumped 642.70 points at 14,358.21, its second biggest point fall in a day, on intense selling pressure throughout the day. Markets across the globe were gripped with selling pressure.
Selling continued a day later with Sensex declining 216.69 points at 14,141.52. The Sensex oscillated in a wide rage of 538.68 points. Volatility was intense.
Capital goods stocks declined on profit booking. Larsen & Toubro (L&T) and Bharat Heavy Electricals (Bhel) declined 5.22% and 8.01% respectively. India’s largest private sector engineering company Larsen & Toubro (L&T) won orders worth Rs 203 crore for Delhi's metro rail project to be executed in 30 months.
Bharat Heavy Electricals (Bhel), the country’s biggest power equipment maker, bagged orders worth over Rs 2900 crore for the supply and installation of the main plant package at the upcoming Jhajjar Super Thermal Power Project in Haryana involving three units of 500 MW each.
IT stocks declined. India's largest software service exporter TCS slipped 7.77% in the week. As per reports, it is interested in buying UK-based financial services firm Prudential’s captive back office, having centres in the UK, Ireland, Scotland and India.
Infosys (down 4.99%), Satyam Computers (down 8.18%), and Wipro (down 0.99%), also declined.
Metal stocks were hit hard as global metal prices came under pressure. Hindalco Industries, the country’s largest aluminium company, lost 7.38%. As per reports, it plans to become supplier to the car market.
Tata Steel tanked 14.40% while Sterlite Industries plunged 12.85%.
NTPC, India's biggest power generator, was down 1.10%. NTPC will replace Dabur India in S&P CNX Nifty from 24 September 2007.
State-run Oil and Natural Gas Corporation (ONGC) lost 7.13%. It has reportedly demanded a 12.5% hike in price of natural gas it produces from fields given to it on nomination basis as it was incurring losses at the present price of Rs 3.2 per cubic meter.
State Bank of India (SBI), the country’s largest bank, eased 5.46%. It plans to mop up nearly Rs 180000 crore over the next five years, including a Rs 14500-crore public offer this fiscal.
India’s largest private sector company and oil refiner Reliance Industries (RIL) declined 3.20%. As per reports, RIL has received clearance from West Bengal's Food Processing and Horticulture department for its agri-retail business in the state.
Ranbaxy Laboratories lost 4.13% on reports that Europe’s third-biggest drugmaker Novartis has sued the company to block sale of a blood-pressure medicine Diovan, in the United States.
On 14 August 2007, Omnitech InfoSolutions settled at Rs 164.55 on BSE, a premium of 56.71% over the IPO price of Rs 105. It debuted at Rs 183.75 on BSE, and hit a low and high of Rs 155 and 183.75, respectively.
IVR Prime Urban Developers settled at Rs 418.15 on BSE, a discount of 23.97% over the IPO price of Rs 550, on 16 August 2007. The IVR scrip debuted at Rs 500. It touched a high of Rs 500 and a low of Rs 388.
Zylog Systems settled at Rs 431.10 on BSE, a premium of 23.14% over the IPO price of Rs 350, on Friday, 17 August 2007. The scrip debuted at Rs 525, also its high. It also touched a low of Rs 356.20.
India's wholesale price index rose 4.05% in the 12 months to 4 August 2007, lower than the previous week's 4.45% due to a fall in food and manufactured product prices, government data showed on Friday, 17 August 2007.
Domestic bourses will continue to track global markets in the near term. Global markets have been rocked for weeks by news of problems in banks and funds exposed to risky investment in the US mortgage and asset-backed markets, triggering fears that the cheap credit that has fuelled global growth might dry up. The Japanese yen has rallied sharply against the dollar as investors who had borrowed the low-interest rate currency to buy riskier but higher yielding assets continued to unwind their positions.
Foreign institutional investors (FIIs) have pressed heavy sales on the domestic bourses. The rupee's fall from last month's nine-year high against the dollar was another reason why FIIs took some profits on Indian stocks, to capture some of this year's currency gains. FIIs sold shares worth a net Rs 2548.50 crore in this month, till 14 August 2007.
On the flip side, domestic liquidity remains strong and it may cap downside on the domestic bourses. Domestic private insurance firms have been putting in money raised through unit linked insurance plans (with a very high weighting in equity) in equities. Mutual funds, too, are sitting on cash.
Corporate fundamentals remain strong. A number of firms reported decent to strong results in Q1 June 2007.
India’s long-term growth drivers remain in tact. They are a favourable demography (large share of young population), robust domestic consumption and acceleration in infrastructure creation.
The market suffered losses for the third straight day today, 17 August 2007. Domestic markets were dancing to world market tunes. Markets across the globe were inflicted with intense volatility. The benchmark BSE Sensex, however, gained substantial ground from an intra-day steep fall on back of recover in world markets. Turnover was quite high today.
The Sensex lost 216.69 points, or 1.51%, to 14,141.52. At the day’s low, the Sensex had tumbled 578.33 points for the day. The Sensex oscillated 538.68 points between 13,779.88 and 14,318.56 during the day.
From 15,017.21 on 13 August 2007, the Sensex has lost 875.69 points in three trading sessions at the current 14,141.52.
The S&P CNX Nifty shed 70.55 points, or 1.69%, to 4,108.05 today. The Nifty August 2007 futures settled at 4082, a discount of 26.05 points as compared to spot closing.
Most of the European markets opened on positive note, but later succumbed to selling pressure. Key benchmark indices in London, Germany and France were down by between 0.1% to 0.3%
Meanwhile, India's wholesale price index rose 4.05% in the 12 months to 4 August 2007, lower than the previous week's 4.45% due to a fall in food and manufactured product prices, government data showed on Friday, 17 August 2007.
Global markets have seen sell-off in the past few days on fears of liquidity crunch arising from mortgage defaults in the US housing's sub-prime sector coupled with yen carry trade unwinding. Investors have been borrowing in low interest-rate carrying yen and investing in high-yielding emerging markets.
FIIs sold shares worth Rs 2,548.50 crore in August 2007, till 14 August.
The market breadth was weak on BSE with 1,833 shares declining as compared to 888 that advanced, while 40 remained unchanged.
The BSE Mid-Cap index lost 92.97 points, or 1.46%, to 6,259.47 while the BSE Small-Cap index declined 102.46 points, or 1.31%, to 7,694.80. This means the fall in large caps was more severe than the decline in mid- and small-caps.
All the sectoral indices on BSE settled with losses, except the BSE Realty index, which gained 0.57% to 7,019.88.
The BSE Metal index (down 4.74% to 9,811.61), BSE Oil & Gas index (down 1.03% to 7,427.15), BSE PSU index (down 2.78% to 6,542.63), BSE Auto index (down 2.17% to 4,560.85), BSE Capital Goods index (down 1.51% to 12,029.90), BSE Healthcare index (down 1.12% to 3,487.30), Bankex (down 0.94% to 7,351.37), BSE IT index (down 2.95% to 4,500.40), and BSE TECk index (down 2.23% to 3,456.66) ended lower.
BSE clocked a turnover of Rs 6,482 crore as against Rs 5,646.63 crore on Thursday, 16 August 2007.
The NSE F&O turnover was Rs 64,879.41 crore as compared to Rs 46,447.43 crore on Thursday, 16 August 2007
Among the 30-members Sensex pack, 26 declined while the rest advanced.
Housing finance major HDFC was the top gainer. It gained 2.36% to Rs 1930 on 1.46 lakh shares. It recovered sharply from day’s low of Rs 1788.
Reliance Industries, the country’s largest private sector company and oil refining major, staged a sharp recovery from its day’s low of Rs 1700. It ended 0.59% higher at Rs 1749.35 on 18.12 lakh shares. It also hit a high of Rs 1775.
Reliance Energy (up 0.57% to Rs 721.60) and Wipro (up 0.56% to Rs 472) were the other gainers from the Sensex pack.
IT shares tumbled on intense selling pressure. India’s fourth largest software services exporter Satyam Computer Services plunged 6.07% to Rs 439 on high volumes of 41.87 lakh shares. It was the top loser from the Sensex pack. The fall was despite two block deals of 5.05 lakh shares struck in the counter at an average price of Rs 455.50 per share on BSE by 10:01 IST.
Infosys Technologies was down 3.11% to Rs 1851. It had plunged to a low of Rs 1745.15, a fall of 8.6% for the day.
India's largest software service exporter TCS slipped 3% to Rs 1055. As per reports, it is interested in buying UK-based financial services firm Prudential’s captive back office, having centres in the UK, Ireland, Scotland and India. Prudential has offshoring centres in London and Reading in UK, Dublin and Belfast in Ireland, Sterling in Scotland and two centres in Mumbai.
Metal scrips suffered a severe setback in the market meltdown after copper and zinc three-month futures fell on the Shanghai exchange today, 17 august 2007. Tata Steel (down 5.45% to Rs 544), Sterlite Industries (down 7.59% to Rs 516), Hindustan Zinc (down 2.70% to Rs 670), Hindalco Industries (down 3.70% to Rs 140), and Sail (down 4.65% to Rs 136.50), edged lower. The BSE metal index had fallen 6.5% to 10,299.61 yesterday, 16 August 2007.
ONGC (down 4.45% to Rs 782.25), Tata Steel (down 5.45% to Rs 544), and Hindlaco (down 3.72% to Rs 139.90) were the other losers from the Sensex pack.
Zylog Systems settled at Rs 431.10 on BSE, a premium of 23.14% over the IPO price of Rs 350. The scrip debuted at Rs 525, also its high. It also touched a low of Rs 356.20. On BSE, 70.18 lakh shares of the scrip were traded.
Gabriel India (down 13.85% to Rs 26.80), Alpa Labs (down 11.42% to Rs 43.45), Baba Arts (down 13.64% to Rs 50), Sakthi Sugars (down 10.56% to Rs 66.05), ABC Bearings (down 7.95% to Rs 101.30), and Advanta (down 7.70% to Rs 768), were the top losers from small-cap and mid-cap basket.
Sahara Housing (up 20% to Rs 51.30), Nahar Industrial (up 9.67% to Rs 122.50), Siel (up 12.94% to Rs 24), Speciality Papers (up 10% to Rs 70.20), and Kirloskar Pneumatic (up 10% to Rs 525), were the top gainers from small-cap and mid-cap basket.
Nagarjuna Fertilisers galloped 16.70% to Rs 32.15 on huge volumes of 4.20 crore shares boosted by rumors that Reliance Industries is looking to acquire the company at a price of around Rs 45 per share. However the company denied the rumours. Meanwhile, NSE lifted the ban on building fresh derivatives positions in the stock.
India’s largest real-estate developer DLF slipped 0.52% to Rs 581, off its day’s high of Rs 596, after it paid Rs 1675 crore for acquiring 38 acres of land in west Delhi from DCM Shriram Consolidated (DSCL) and the Lohia Group. This is the most expensive land deal in the country so far. It surpasses the Rs 1582 crore rival Unitech paid for 300 acres in Noida last year.
Unitech (up 3.60% to Rs 483.10) and Sobha Developers (up 4.30% to Rs 775.10) gained from the real-estate pack.
Batliboi gained 1.56% to Rs 160 after it scheduled an extra-ordinary general meeting (EGM) on 12 September 2007 to consider stock-split proposal from the present face value of Rs 10 to Rs 5 each.
PSU Hindustan Petroleum Corporation (HPCL), India's fifth largest refiner, slumped 9.20% to Rs 224 after it went ex-dividend from today for a dividend of Rs 12 per share on face value of Rs 10 each.
Balmer Lawrie jumped 3.67% to Rs 394.45 after Reliance Capital Trustee Company purchased 1.54 lakh shares in a block deal at Rs 380.19 per share on BSE yesterday, 16 August 2007.
NIIT fell 5.10% to Rs 880. Its shareholders approved raising FII investment limit from 49% to 60% at its 24th annual general meeting (AGM) held on 25 July 2007.
PTC India slipped 1.24% to Rs 75.80, off its high of Rs 78.90 on reports that Tata Power had offloaded a 4.2% stake in the company for Rs 50 crore in the open market since April 2007.
Triveni Engineering and Industries rose 2% to Rs 63.60 after it signed an agreement with Beijing's Beizhong Steam Turbine Generator for distribution of the Chinese firm's products. The agreement facilitates Triveni Engineering & Industries to enter technology transfers.
Wyeth eased 6% to Rs 525 on turning ex-dividend for a dividend of Rs 30 per share on face value of Rs 10 per share. The company has fixed a book closure from 22 August to 31 August 2007 for the payment of dividend.
Gulf Oil Corporation declined 3.10% to Rs 861.10 despite its board approving 5-for-1 stock-split.
Educomp Solutions was down 5.88% to Rs 2350. It acquired a 51% stake in US-based online learning firm AuthorGen Technologies. The investment will enable Educomp to leverage and consolidate its position on online tutoring by having access to key technology competence and student-teacher marketplace models.
Siemens moved up 1.30% to Rs 1200 on bagging an order from Jindal Stainless for a completely new hot strip rolling mill for its Orissa greenfield project. The order includes the plant layout, the mechanical equipment, the drives as well as the entire basic and process automation. Production is scheduled to start in 2009.
Asian markets were in the red today, 17 August 2007, but were off their day’s lows. Japan's Nikkei (down 5.42% at 15,273.65), Hong Kong's Hang Seng (down 1.38% at 20,387.13), Shanghai Composite (down 2.28% to 4,656.67), Singapore's Straits Times (down 0.68% at 3,130.71), Taiwan Weighted (down 1.35% to 8,090.29) and South Korea's Seoul Composite (down 3.19% at 1,638.07) declined
Wall Street pulled off a dramatic late-session turnaround to close mixed yesterday, 16 August 2007, after bargain hunters lured by weeks of massive declines came back to the stock market.
The Dow Jones Industrial Average fell 15.69 points, or 0.12%, to 12,845.78. At one point of time it was down more than 340 points. The Standard & Poor's 500 rose 4.57 points, or 0.32%, to 1,411.27, and the Nasdaq Composite index dropped 7.76 points, or 0.32%, to 2,451.07.
Oil prices rebounded half a dollar on Friday, 17 August 2007, lifted by a late Wall Street recovery and news of a fire at a big Gulf Coast refinery. US crude rose 57 cents to $71.57 a barrel.
The domestic bourses are expected to correct further after 642.70 points or 4.28% plunge in Sensex to 14,358.21, the second biggest point fall in a day, on Thursday, 16 August 2007. However some bargain hunting might emerge in the later half of the day. Also volatility is expected to remain high.
Weekly inflation data will be released today, 17 August 2007, afternoon.
Domestic bourses have been closely tracking global markets in the recent past. All the Asian markets opened weak today, 17 August 2007.
Japan's Nikkei (down 2.33% at 15,772.39), Hong Kong's Hang Seng (down 0.24% at 20,623.71), Singapore's Straits Times (down 1.31% at 3,110.99), Taiwan Weighted (down 0.94% to 8,123.87) and South Korea's Seoul Composite (down 0.92% at 1,676.46) declined
Wall Street pulled off a dramatic late-session turnaround to close mixed yesterday, 16 August 2007 after bargain hunters lured by weeks of massive declines came back to the stock market. The Dow Jones Industrial Average fell 15.69 points, or 0.12%, to 12,845.78. At one point of time it was down more than 340 points. The Standard & Poor's 500 rose 4.57 points, or 0.32%, to 1,411.27, and the Nasdaq Composite index dropped 7.76 points, or 0.32%, to 2,451.07.
As per provisional data, foreign institutional investors (FIIs) sold shares worth a net Rs 3108.45 crore, while domestic institutional investors (DIIs) were net buyers of shares worth Rs 1398.90 crore on Thursday, 16 August 2007.
Oil prices rebounded half a dollar on Friday, 17 August 2007 lifted by a late Wall Street recovery and news of a fire at a big Gulf Coast refinery. US crude rose 57 cents to $71.57 a barrel
. a sudden overwhelming fear, with or without cause, that produces hysterical or irrational behavior, and that often spreads quickly through a group of persons or animals.
2. an instance, outbreak, or period of such fear.
3. Finance. a sudden widespread fear concerning financial affairs leading to credit contraction and widespread sale of securities at depressed prices in an effort to acquire cash.
4. Slang. someone or something that is considered hilariously funny: The comedian was an absolute panic.
5. of the nature of, caused by, or indicating panic: A wave of panic buying shook the stock market.
6. (of fear, terror, etc.) suddenly destroying the self-control and impelling to some frantic action.
7. to affect with panic; terrify and cause to flee or lose self-control.
8. Slang. to keep (an audience or the like) highly amused.
–verb (used without object)
10. to be stricken with panic; become frantic with fear
Market Grape Wine :
In House :
Nifty at a supp of 4142 and 4092 levels with resistance at 4245 and 4310 levels .
Gap down opening .
Sell : Intraday : Unitech below 456 with s/l 471
Buy : Intraday : Bongaigaon above 57.5 target 61 s/l of 55
Out House :
Markets at a support of 14235 & 14171 levels with resistance at 14515 & 14646 levels .
Markets to correct more sell at every rise and book profit and reduce position .
Buy : SBIN at dips
Buy : RIL & REL at dips
Buy : IFCI & IDBI at dips
Buy : ITC at dips
Buy : Gacl at dips
Dark Horse : IDBI , ITC , SBIN , ONGC , Gacl & INFY & REL
TGIF : Thank God Its Friday : Markets at correction mode sell high buy low call for the day .
Dow recovers from a 340 point drop to close marginally lower
US Market witnessed an amazing turnaround today, Thursday, 16 August, 2007 in the final fifteen minutes of trading. The Dow Jones Industrial Average recovered from being down by more than 340 points and finished marginally lower for the day. In fact minutes before closing bell rang, Dow had inched up in the positive territory. The hardest hit sector for weeks, the financials, led the late day rally going into close.
Market finally closed mixed with S&P 500 being the only index gaining for the day. The Dow Jones Industrial Average closed down by 15.69 points at 12845.78. Tech-heavy Nasdaq shed 7.76 points to close at 2451.07. S&P 500 gained 4.56 points to close at 1411.26.
Seventeen of the thirty Dow stocks closed in the red today. JP Morgan, American Express and Citigroup were the main Dow winners today. General Motors and Intel were the notable Dow laggards. JP Morgan, Bank of America, Citigroup – all stocks gained more than 4%-5% for the day.
Sellers were in full control for major part of the day after Countrywide Financial said it was being forced to use its 100% lines of credit ($11.5 billion) to fund its operations because other sources of short-term credit were not available.
Weak housing starts and Building permits in July
When market opened in the morning, all the three indices opened in red. Since the day’s start, weak economic data and more distress signals from Countrywide Financial, spread overall nervousness about credit markets in Wall Street. Indices lingered in the red for most part of the day.
Fed stepped in for a second time this morning adding $12 bln in overnight repos making it a total of $17 billion for the day. But St. Louis Fed President made it clear that rate cut possibility is out of question and only a "calamity" would justify a rate cut.
Also, during the morning hours, the Commerce Department reported that housing starts (the number of privately owned new homes on which construction has been started over some period) fell 6.1% in July to a seasonally adjusted annual rate of 1.38 million. That was the lowest level since January 1997.
Also, Building permits (permit required in most jurisdictions for new construction, or adding onto pre-existing structures, and in some cases for major renovations), an indication of future construction, fell 2.8% last month to a seasonally adjusted annual rate of 1.37 million, the lowest level since October 1996.
Rediff.com slips by more than 7%
Among the Indian ADRs, the banking stocks continued to be hard hit even today. ICICI Bank fell by 3.6% while HDFC Bank fell by 2.6%. Other ADRs which were hard hit were VSNL and MTNL and were down by 6.2% and 4.5% respectively. Rediff.com suffered loss of 7.1%.
Trading volume remained very high at the New York Stock Exchange, where 2.9 billion shares traded, with declining stocks beating advancers by 20 to 13. At the Nasdaq, 3.4 billion shares traded, and decliners topped advancing issues 17 to 13.
H-P comes out with a blowout report
Crude oil futures finished considerably lower today after stock market continued to to affected from mortgage problems. Traders speculated that economic expansion might slowdown leading to reduced energy demand. Crude-oil futures for light sweet crude for September delivery closed at $71.00/barrel (lower by $2.33/barrel or 3.1%) on the New York Mercantile Exchange.
After the close, H-P came out with a blowout third quarter earnings report. The company reported a 29% gain in profit and a 16% gain in revenue for its fiscal third quarter. The company also upped its guidance for the next quarter. The stock which ended in red today, was trading marginally up in the after hours trading.
For tomorrow, the only economic report expected is the Consumer Sentiment Survey issued by the University of Michigan. The report polls households inquiring about their financial condition and attitude toward the economy and such sentiment can be related to expectations for consumer spending, which represents roughly two-thirds of the economy.
With the markets around the globe sliding on US subprime worries and its wider fallout, we will desist from giving any intra-day calls. Traders should employ strict stop losses as the undertone is fairly weak. Aggressive buying should be strictly avoided, especially for the short term. At lower levels though long-term investors could look to pick up their favorite scrips.
Politics is the art of looking for trouble, finding it whether it exists or not, diagnosing it incorrectly, and applying the wrong remedy. - Ernest Benn.
Besides the market mayhem, we also have to grapple with the relations between the Left parties and the Congress-led government reaching a flashpoint over the recently concluded civilian nuclear deal with the US. The recovery in the US markets may raise hopes that margin call pressures will be minimal. Else, brokers may well ask their over-leveraged clients for cheques.
The Dow made a stunning comeback, closing 8 points higher after plummeting 341 points earlier. But Asian markets have not reacted to Wall Street cues, and have extended their losses. The Nikkei and Hang Seng are down over 300 points and 600 points, respectively. The current crisis of confidence due to the sub prime woes in the US is still not over as yet.
Things will remain volatile with a negative bias in the near term, though long-term outlook continues to be upbeat. All the more reason for Indian bulls to stay on the sidelines for a while before the global carnage settles down. We expect a cautious to lower opening. A technical bounce back could well be on the cards, but volatility will reign supreme.
US stocks staged a remarkable comeback on Thursday in the closing hours of the day, buoyed by a recovery in banks and securities firms.
Bear Stearns climbed the most since 1998 on speculation that it may get an infusion of capital. Citigroup, Bank of America and JPMorgan Chase led to the biggest rally in a week for financial shares. There is speculation that the Fed may lower interest rates this year.
US stocks were sharply down for most of the day after Countrywide Financial, the biggest US mortgage lender, said it borrowed the entire $11.5bn available in a bank credit line as the global financial crisis curbed access to short-term financing.
The S&P 500 advanced 4.57 points, or 0.3%, to 1,411.27. The Dow Jones lost 15.69 points, or 0.1%, to 12,845.78 after earlier falling 344 points. The Nasdaq Composite Index slipped 7.76 points, or 0.3%, to 2,451.07.
Treasury prices rallied as investors sought safety. The dollar slumped versus the yen and fell versus the euro. Oil and gold prices tumbled.
Losses accelerated in the early afternoon after the release of a surprisingly weak Philadelphia Fed index. Around the same time, the New York Stock Exchange put in trading curbs to limit the market's downside.
Meanwhile, Moody's Investor Service said that the crisis could cause the collapse of a major hedge fund on the same scale as Long-Term Capital Management LP in 1998.
Also impacting Thursday's trading were reports showing that July housing starts and building permits have fallen to a decade low.
US light crude oil for September delivery fell $2.53 to settle at $70.80 a barrel on the New York Mercantile Exchange. COMEX gold for December delivery fell $21.70 to settle at $658 an ounce.
Treasury prices surged in a flight to quality, lowering the benchmark 10-year note yield to 4.65% from 4.71% late on Wednesday.
In currency trading, the dollar slumped versus the yen, but erased bigger losses accrued before the stock market turned around. The greenback inched higher versus the euro.
European shares sank in the worst one-day decline since the Iraq war. Metals producers and financial services firms bore the brunt of the selling as investors worried about the extent of current credit-market woes.
In London, the FTSE 100 closed down 4.1% at 5,858.90. The German DAX 30 slid 2.4% to 7,270.07 and the French CAC-40 fell 3.3% to 5,265.47. The DAX hasn't traded at around these levels since April, while the CAC is around levels not seen since last December. Broadly, the pan-European Dow Jones Stoxx 600 index dropped 3.6% to 352.37.
Bulls were trashed as global carnage spilled over to Indian bourses. Benchmark Sensex witnessed second biggest single day point fall as front liners like RIL, Tata Steel, Bharti Airtel, Reliance Communication and BHEL witnessed heavy selling pressure. Global subprime woes weighed all over as even the Asian and the European markets fell sharply. Japanese stocks dropped to the lowest since November as Nikkei 225 fell 2% while the Hang Seng in Hong Kong fell 3.29%. All the key constituents in the Sensex ended in red. Finally, the BSE 30-share Sensex closed at 14358 losing 642 points. NSE Nifty lost 191points to close at 4178.
Bharti Airtel plunged by over 6.5% to Rs801. India's largest mobile-phone operator announced it plans that it would spend $200mn in the next five years in Sri Lanka to tap users of South Asia's first high- speed wireless network. The scrip touched an intra-day high of Rs831 and a low of Rs795 and recorded volumes of over 20,00,000 shares on NSE.
Reliance Industries crumbled by 5% to Rs1739. Reliance Retail Ltd., a unit of India's most valuable company, plans to open 500 hypermarket stores by the end of 2010 as it seeks to gain a start over local and overseas rivals. The scrip touched an intra-day high of Rs1792 and a low of Rs1725 and recorded volumes of over 40,00,000 shares on NSE.
HDIL dropped by 7% to Rs506. Reports stated that Lehman Brothers Holdings Inc. may team with India's Housing Development & Infrastructure Ltd., to develop Mumbai's Dharavi slum. The scrip touched an intra-day high of Rs540 and a low of Rs502 and recorded volumes of over 17,00,000 shares on NSE.
Bhushan Steel was down by 2.6% to Rs630. Reports stated that the company has picked up 15% stake in Bowen Energy. The scrip touched an intra-day high of Rs638 and a low of Rs629 and recorded volumes of over 74,000 shares on NSE.
Gammon India declined 1.5% to Rs420. The company consortium announced that it has secured Container Terminal project. The scrip touched an intra-day high of Rs443 and a low of Rs401 and recorded volumes of over 1,00,000 shares on NSE.
Heavy selling pressure in the Metal stocks dragged the metal index lower, it fell the most, by 6.51%. Heavyweight like Tata Steel fell by over 10% to Rs575, Sterlite Industries plunged by 8% to Rs558, Hindustan Zinc slipped 2.7% to Rs691as the company announced that it lowered lead prices to Rs137,000 per ton. However, National Aluminum recovered 0.6% to Rs256.
IT stocks also were under the bear attack despite rupee weakening to Rs41.36 per US$. TCS dropped by 3.8% to Rs1088, Infosys was down by 2.3% to Rs1913, Wipro dropped 2.5% to Rs469 and Satyam Computer declined 1.8% to Rs467.
Realty stocks were also badly beaten up as the index was down by 5.56%. Unitech slipped 8% to Rs466, Parsvnath was down by over 8.5% to Rs301, Sobha declined by 5.6% to Rs743 and Akruti dropped 7% to Rs496.
Capital Good stocks also were brutally battered. ABB declined 4.6% to Rs1058, BHEL fell over 5% to Rs1603, Punj Lloyd was down by over 4% to Rs259 and L&T lost 4% to Rs2320.
Banking stocks also were among the major losers as the index was down by 5.42%. SBI slipped 5.8% to Rs1520, ICICI Bank was down by 5% to Rs832 and HDFC Bank lost 4.6% to Rs1094. Union Bank, Bank of India and Corp Bank were the major losers among the Mid- Cap stocks.
FIIs were net sellers of Rs31.08bn (provisional) in the cash segment on Thursday and the local institutions pumped in Rs13.99bn. In the F&O segment, FIIs were net sellers at Rs30.59bn. On Tuesday, foreign funds pulled out Rs1.28bn from the cash segment. Mutual Funds were net buyers at Rs1.52bn on the same day.
Major Bulk Deals:
Fidelity Indian MF has bought Alembic while Morgan Stanley has sold it; Reliance Capital has picked up Balmer Lawrie; Hsbc Financial has purchased Centurion Bank of Punjab while Hsbc Global has sold the stock; Merrill Lynch has sold Mangalore Chemicals & Fertilizers.
Jindal Saw Limited: Reliance Growth Fund, Reliance Equity Opportunities Fund, Reliance
Tax Saver (ELSS) Fund and Reliance Equity Advantage Fund - Scheme of Reliance Mutual Fund has purchased from open market 450000 equity shares of the company on 9th August, 2007.
IFCI Limited: Goldman Sachs Investments (Mauritius) I Limited (GSIMI) has purchased
from open market 2000000 equity shares of the company on 8th August, 2007
Reliance Capital Limited: (1) Morgan Stanley & Co International Ltd a/c Morgan
Stanley Dean Witter Mauritius Company Ltd has purchased from open market 50000 equity shares of the company on 9th August, 2007.
Cipla Ltd: Mrs. Geeta Amar Lulla (Wife of Mr. Amar Lulla, Joint Managing Director) has
purchased from open market 95000 equity shares of the company on 9th August, 2007.
GTC Industries, Mangalore Chemicals, Radha Madhav, Prime Focus, Karuturi Networks, Silverline, Swan Mils, Nirlon, Yashraj Securities, IOL Broadband and Shaw Wallace.
LML, Assam Company, Walchand Industries, Balasore Alloys, Jai Corp, Bank of Rajasthan, Kernex and Diamond Cables.
Delivery Delight (Rising Price & Rising Delivery):
Carborundum Universal, Century Enka, Gujarat NRE Coke, Kirloskar Electric and Axis
HDFC Bank, Tata Steel, Sesa Goa, Bharti Airtel and Reliance Capital.
Major News & Announcements:
Damodaran says hedge funds free to register with SEBI as FIIs
DLF agrees to buy 38 acres in Delhi for Rs16.75bn
LIC raises stake in IPCL to 14.02%
Gammon Consortium gets Container Terminal project
ONGC's output may rise 11% in next 3 years
POSCO, SAIL sign strategic alliance to exchange technology, information
Mangalam Cement commissions 17.5MW Captive Thermal Power plant
Sical Logistics acquires cutter section Dredger for $24.92mn
Hindustan Zinc lowers lead prices to Rs137,000 per tons.
Crude prices fall as traders speculate about slowing energy demand
Crude oil futures finished considerably lower today after stock market continued to to affected from mortgage problems. Traders speculated that economic expansion might slowdown leading to reduced energy demand.
For the day ending Thursday, 16 August, 2007 crude-oil futures for light sweet crude for September delivery closed at $71.00/barrel (lower by $2.33/barrel or 3.1%) on the New York Mercantile Exchange.
Brent crude oil for September settlement fell $2.22 (3.1%) to $69.42 on the ICE Futures exchange in London.
Yesterday, as per this week’s weekly inventory report by the Energy Department, crude oil supplies fell 5.2 million barrels to 335.2 million barrels in the week ending 10 August. Gasoline stocks declined 1.1 million barrels to 201.9 million barrels, while distillate stocks rose by 200,000 barrels to 127.7 million barrels. Refineries operated at 91.8% of their operable capacity last week.
Erin weakens but Dean still a threat
Natural gas in New York was little changed today as the weekly report showed inventories remained above the five-year average and Hurricane Dean might bypass key production areas in the Gulf of Mexico.
U.S. inventories of natural gas increased 21 billion cubic feet last week to 2.9 trillion cubic feet, leaving supplies 15% above the five- year average for this time of year. Gas for September delivery rose 1.1 cents (0.2%) to $6.875 per million British thermal units.
Against this backdrop, September reformulated gasoline fell 3.05 cents at 1.9783 a gallon and September heating oil shed 4.40 cents to end at $1.9829 a gallon.
Attacks on oil facilities in Nigeria have curtailed shipments and tight supplies from OPEC have bolstered crude prices this year. Crude oil prices are also higher because of concern that shipments from Iran, Nigeria and Iraq may be disrupted. OPEC is scheduled to meet at Vienna on 11 September, 2007 for their next meeting.
As of latest reports, tropical storm Erin has weakened to a tropical depression. But Tropical storm Dean was upgraded to Atlantic hurricane Dean and continued to be a threat to the Caribbean. About 27% of U.S. oil production and half of the country's refining capacity is in the Gulf of Mexico region
MindTree Consulting (MindTree), a mid-sized IT and R&D services company, has strong management bandwidth. It services marquee clients like Volvo, AIG, LSI Logic, United Technologies, Symantec, Avis and Unilever. However, a high share of development services in revenues creates a project-based business profile, which lowers sales productivity, hurts utilization and leads to poor client mining. Thus, contrary to street expectations of an expansion, we see margins declining by 170bp over FY07-09 due to rupee appreciation and salary inflation. The management has cut its FY08 earnings guidance after Q1FY08 results, but we see further risk to consensus estimates for FY09. While the stock price has fallen 23% in just one month, further downside is likely at valuations of 19.8x FY09E earnings (19.2x for Infosys). Initiating coverage with Underperformer and a price target of Rs510.
Superior quality management: A strong management has successfully steered MindTree even through troubled times, which is a testimony to its ability. MindTree registered a robust 65% revenue CAGR over FY04-07 on the back of its positioning as the second best choice for clients offshoring IT and R&D services and looking for management attention. While R&D services are a good differentiator, we believe MindTree offers generic IT services with little differentiation.
Project-based nature of business and poor client mining haze visibility: Mindtree derived 65% of its FY07 revenues from development services, which tend to be volatile as they are project-based. Despite having a 71% share of offshore revenue compared to 35% for Hexaware (a comparable peer), MindTree fares poorly in terms of client mining with an average of just 15 billed people per client compared to 23 for Hexaware. Poor client mining lowers sales productivity, reduces visibility and affects utilization.
Valuation premium to tier-1 peers unjustified: Mindtree trades at premium valuations even to tier-1 companies, which we attribute to its superior management. However, we expect margins to decline by 170bp over FY07-09 due to the impact of rupee appreciation and salary inflation. We do not see too many operating levers playing out as most of the metrics are inherent to the business. At 19.8x FY09E earnings and 12.1x EV/EBITDA, we initiate coverage with Underperformer and a price target of Rs510.
HCLT’s Q4FY07 (June- year ending) results were marginally below our expectation, though, $ terms revenues were exactly in line. HCLT’s realized rate at Rs40.74/$ was below our assumed rate of Rs41.33/$. Hence revenues at $396m (9.2% qoq and 45.3% yoy) were in line but in Rupee terms revenues at Rs16.12b (2.2% qoq and 28.6% yoy) was lower than our forecast of Rs16.36b. HCLT reported 7 large deal wins in Q4FY07. With HCLT continuing to win large deals of over $50m (it has signed 3 large deals so far of $200-500m), we believe, sales productivity would keep rising. The company indicated a gross hiring target of 25,000 people including just 8,000 freshers, which points towards the imminent growth momentum in business. It also indicated that margins would remain stable as pricing moves away from a people-based model to a transaction oriented one. As the realized exchange rate was lower than our earlier forecast we are lowering our revenue forecast by 1.4% for FY08 and FY09. We are maintaining our earnings forecast for FY08 but raising FY09 earnings by 2.4%. We believe, HCLT has scaled up significantly and given its large deal market share, at 17.3x FY08 and 13.4x FY09 earnings, there is likely re-rating possible in FY08. It is one of our top picks in the sector. Maintain Outperformer.
Geodesic Information System (Geodesic) reported 18.2% qoq (+70.6% yoy) growth in revenues, the highest growth in last 6 quarters, to Rs579m against our expectation of Rs507m. The performance beat our forecast mainly because of advance received from a few enterprise customers including BenQ as initial fees for Mundu. EBITDA margins grew significantly from 64.8% in FY07 to 66.2% in Q1FY08 mainly due to the incremental fees booked from enterprise customers. Accordingly, PAT at Rs287m beat our estimate of Rs252m despite Rs36m loss on account of forex movement. Geodesic added five new clients including a large publishing house in Malaysia, a social networking site in Europe and an India based wireless service provider. Geodesic has managed to sign up with a few handset manufacturers including BenQ, Mitac and Asus and is in discussions with others, which would enable it to scale up its customer base. It is also planning to pursue initiatives to strike relationships with service providers both local as well international. Its other products including the Simputer, Spyder and Radio (could bundle along with the IM and offer to users for an annual fee rather than a one-time fee) would provide additional revenue streams. We are raising our revenue forecast by 14% and 19% and earnings forecast by only 2% (due to expected higher marketing expenses) and 24% for FY08 and FY09 respectively. At 19.4x FY08 and 11.9x FY09 earnings, we maintain out performer.
Is it safe to invest money in equities? — would seem to be the all-important question at the moment. Though benchmark indices have shed about 950 points over the past month, the prevailing market sentiment is that there is no need to reduce risk over the long term.
A quick sectoral analysis over the past one month shows that sectors like capital goods, FMCG and shipping have managed to stay put where others have failed to stand their ground. Sectors like consumer durables and textile (ET index) have even managed to gain 1.95% and 2.57%, respectively, during the said period. Key stocks in these sectors have managed to log returns in the range 6% and 85% over the past one month.
Sectors like sugar (down 16%), oil & gas and NBFC (both down 9%), logistics, capital goods and construction (all down 10%) have been the worst-hit sectors over the past one month. So, do investors need to run for cover during a broad market fall? A cautious approach to investing would be to invest in ‘healthy’ sectors, which have the strength to bounce back once the market recovers from the corrective trend, said experts.
Sectors like banking, realty, consumer goods and IT continue to remain favourites with market participants. Though most broking houses have sounded an alert to clients, their advice is to indulge in ‘bottom-fishing’ for bluechips while the market is on a downtrend. Should investors need the protection of slow-moving defensive sectors in current market conditions?
Fundamentally, defensive slow-moving sectors are a group of stocks that continue to perform irrespective of where the economy is heading. Traditionally, sectors like pharma, FMCG and utilities have been spot-on defensive sectors. “From the trend evident over the past one month, sectors like capital goods, textiles, consumer durables and shipping have been doing moderately well,” said Religare Securities head-institutional business Sangeeta Purushottam.
“Current market conditions make it difficult to spot defensive sectors using historical data. Investors should forget the idea of investing in slow-moving sectors; they should continue to invest in sectors that have a growth horizon of 2-3 years,” Ms Purushottam added.
Given the fact that there are many ongoing infrastructure projects in the country, capital goods sector is expected to do well over the next four years. As regards the textiles sector, many manufacturing companies are moving towards expansion and modernisation. The import-dependent consumer durables industry would do really well if the rupee gains strength, analysts said. Performance of FMCG and shipping stocks are cyclical in nature. FMCG has not done well over the past one year. Investments in shipping should give moderate returns as there has been a sudden spurt in cargo activity.
ICICI Bank has made inroads into the complex world of financial derivatives, which till not long ago was the exclusive domain of foreign banks.
In about three years, the bank says it has captured a 23 per cent market share in the derivative business, helped by its relationships with Indian companies which are growing their operations globally.
The largest private sector bank began gradually building up its derivatives capabilities, in terms of people and technology in 2004 and now has a fairly large treasury team.
As the bank tastes success in derivatives business, the country’s largest lender, State Bank of India (SBI), is taking the initial steps to acquire derivatives capabilities. The public sector banks has also deployed marketing staff across cities to source business for its core treasury team.
As it considers whether to organically build its own capabilities or acquire a derivatives house in Europe for a price as high as $200-300 million, the public sector bank has in the meanwhile entered into arrangements with foreign banks JP Morgan Chase and DSP Merrill Lynch to source products that would meet the requirements of its corporate clients.
Foreign banks had near monopoly in offering complex foreign exchange and interest rate derivative products to Indian companies, as they could also import any product required from their global experts.
Indian banks in the first place did not have the necessary expertise, but have not begun to feel the need to built such expertise. ICICI Bank has reached quite a distance and SBI has made serious beginnings towards acquiring the necessary expertise for offering full range of derivatives products.
Chanda Kochhar, ICICI Bank’s Deputy Managing Director, said “So far, banks like us had the capability in lending but we did not have access to the structured market business. Now that we have built these capabilities, we have a larger pie of the fee. Large part of the fee income comes from advisory, syndication, transaction banking fee, derivatives and others. A very small part of the fee income comes from lending.’’
In fact, treasury operations helped ICICI Bank report a good increase in profit in 2006-07. The bank’s profit before tax from retail and corporate banking had fallen by 12 per cent to Rs 2,338.38 crore but from treasury operations it nearly tripled to Rs 1,348.06 crore, ensuring a good 22 per cent rise in net profit to Rs 3,110.22 crore from a year earlier.
SBI is also reaping the fruits of seriously getting into the treasury business having earned a total income of over Rs 100 crore in the first quarter of 2007-08, against Rs 44 crore in the whole of 2006-07. For foreign banks like Citibank, Standard Chartered Bank and HSBC, the contribution to profits from corporate banking in 2006-07 ranged from 70 per cent close to 100 per cent.
Kochhar said “We have set up a dedicated foreign exchange derivatives business team of 100 people. The volumes and transaction sizes have also increased.”
ICICI Bank’s trading volumes in currency derivatives increased by 70 per cent to Rs 73,093.16 crore in 2006-07 from a year earlier and in interest rate derivatives by 28 per cent to Rs 2,79,474.31 crore from a year earlier.
Shilpa Kumar, joint general manager-global markets group at ICICI Bank , said ``We set up the treasury team after the merger in 2004. From 15 members, we have ramped up our team. Our model has always been to garner market share which would help us give our corporate clients better pricing power. The derivatives business is driven by volatility in the foreign exchange market.’’
The bank has product experts that assist corporate bankers in helping companies understand various derivatives products which would best suit their operations.
“Our large franchise, corporate and SME relationship and the talent pool have been an advantage. We had to develop an in-house facility on structuring. The franchise and technology are fairly important in driving the derivative business. For foreign banks, this is easy as they can import products from their group headquarters,’’ pointed Shilpa Kumar.