Monthly Technicals- Oct 11 2009
Sunday, October 11, 2009
Indian markets wrapped the week on an unpleasant note with a hefty loss of 491.89 points during the week failing to sustain the 17k-level. Aggressive selling by the foreign funds in frontline stocks amid discouraging global cues, dragged the index down. The better than expected earnings announced by IT major Infosys failed to lift the market sentiments.
The 30 share index, Sensex tumbled 491.89 points, or 2.87%, to 16,642 in the week ended Oct. 09, 2009. On the other hand, the broad based NSE Nifty lost 138.2 points, or 2.72%, to 4945.2.
Mid-cap stocks fell marginally 0.63 points, or 0.01%, to 6,301.38 in the week. Small-cap shares dropped 215.39 points, or 2.84%, to 7,371.79 during the week.
Major gainers over the week in the sectoral indices were FMCG, which soared 6.15% followed by Consumer durables, which surged 5.60%, Metal moved up by 2.17% and Healthcare up by 1.20%.
Top losers over the week in the sectoral indices were Teck, which tumbled 10.74%, IT plummeted 7.25%, Realty and Auto dropped over 2%, Bankex and Oil & gas down over 1% each.
The official Wholesale Price Index for `All Commodities` the week ended Sep. 26, 2009 stood at 0.70% as compared to 0.83% (Provisional) for the previous week ended Sep. 19, 2009 and 12.08% during the week ended Sep. 27, 2008 of the previous year.
Mukesh Ambani led India`s largest private sector company, Reliance Industries announced on Wednesday October 7, the board proposal to issue of bonus shares in the ratio of 1:1, subject to the shareholders approval. The announcement came as a surprise to the market which was reflected in its shares that gained over 3%. The board also declared dividend of Rs 13 a share for FY 09. This will result in a payment of Rs 22.19 billion inclusive of taxes of Rs 3.22 billion.
Both the bonus shares and dividend will accrue to the shareholders of erstwhile Reliance Petroleum which has been amalgamated recently with the company.
The company announced a marginal fall of 0.18% in consolidated net profit for the year ended Mar. 31 2009. During the year, the company reported a consolidated profit of Rs 152,960 million as against profit of Rs 153,240 million for the year ended Mar. 31, 2008.
Equity shares of Gujarat based Pipavav Shipyard got listed on the bourses on Oct.9, 2009. Shares of the company settled at Rs 57 a share, a discount of 1.72% as against its issue price of Rs 58 a share on the National Stock Exchange (NSE) on Friday.
The scrip touched a high of Rs 61.10 and a low of Rs 53.85 after opening at a premium of 5.34% at Rs 61.10. A total of 81.16 million shares changed hands on the NSE.
Infosys Technologies, India`s second largest software service provider, announced a 7.54% rise in consolidated net profit for the quarter ended September 2009. During the quarter, the consolidated net profit climbed to Rs 15.40 billion from Rs 14.32 billion in the same quarter last year. Consolidated income from software services, products and business process management for the quarter rose 3.08% to Rs 55.85 billion from the prior year period.
Mastek, a high-end IT solutions player announced its results for the quarter ended September 2009. During the quarter, the company posted a profit after tax (PAT) of Rs 264 million, a decline of 25.25% over the prior year period.
Major gainers in 30-share index were Hindustan Unilever (8.26%), Reliance Energy (7.20%), ITC (7.01%), Tata Steel (4.36%), and Bharat Heavy Electricals (3.37%) over the week.
On the other hand Reliance Communications (21.59%), Bharti Airtel (21.18%), Grasim Industries (11.17%), Tata Consultancy Services (11.12%), and Maruti Suzuki India (10.67%) were the biggest losers in the Sensex over the week
Investors with a long-term perspective can consider adding the stock of Dishman Pharmaceuticals and Chemicals to their portfolio. An established player in the contract research and manufacturing services (CRAMS) space, Dishman appears well-placed to benefit from the forced austerity drives of the global pharma majors. Driven by receding product lines, fewer blockbuster launches and patent expiries, global pharma companies are looking at ways to contain costs. When seen in this light, contracting research and manufacturing services to low-cost providers helps combat earnings slippages.
Strengthening demand apart, what also builds the case in favour of Dishman is its wide client network, falling dependence on Solvay for revenues and relatively cheap valuations. At the current market price of Rs 228, the stock trades at about 11 times its likely FY-10 per share earnings. Not only does this leave sufficient room for growth, it also compares favourably with some of its peers.
The recent buyout of Solvay group’s pharma business by the US drug maker, Abbott, promises to provide the much-needed booster shot to Dishman, which derives over 15 per cent of its revenues from the former. For one, the contractual obligations of the Solvay Pharma entities, despite its acquisition by Abbott, have remained unchanged. This puts to rest concerns about the sustainability of Dishman’s revenue growth. It has a 10-year deal till 2013 with Solvay.
The deal is unlikely to have any near term adverse impact on Dishman in any case as the process of changing suppliers may have taken Abbott at least a year or two. Two, the deal also opens up a wide opportunity canvas for Dishman, given the larger market reach of the merged entity.
Though Dishman has indirectly been supplying to Abbott, the post-deal scenario may offer it a wider platform to test its working relations with the latter.
Dishman’s reducing dependence on Solvay for revenues is also a positive from over 80 per cent in 2003 to about 15 per cent now. In the process, it has also broad-based its client network that includes EU-based innovator firms such as AstraZeneca, Roche, Sanofi Aventis and Novartis.
The long-tenure contracts of innovator firms have also provided Dishman with relatively stable earnings — not to mention the benefits that accrue from a more diversified revenue basket. The company is also eyeing expanding its CRAMS presence in the key markets of the US and Japan. Though it may be a while before these efforts start paying off, the moves appear to be in the right direction.
CRAMS, which made up over 73 per cent of the company’s overall revenues last year, is likely to remain its main growth driver. Helped by new contracts, fresh capacities and entry into new markets, Dishman’s management has given a guidance of 15 per cent top line growth this year. This appears achievable given the pipeline of orders.
Dishman is likely to begin the API production for Omeprazole tablets for AstraZeneca soon; the company has signed contracts to supply 14APIs to AZ and expects $10 million revenues for the current fiscal from this contract. It has also received an order from Novartis for a new drug intermediary, which is in Phase-III production. Its entry into high potency (hipo) products, which typically enjoy low-volumes but high-margins, also would begin significant contributions from next fiscal.
The company’s China facility, which is expected to become operational soon, may also help scale growth. The management has already seen a high interest for its facility from companies such as Johnson & Johnson , Novartis and GlaxoSmithKline . The company’s increasing focus on cholesterol, oncology and disinfectant businesses may only add to its overall growth dimension.
Dishman’s June quarter results were a tad disappointing; revenues fell 4 per cent as also sustainable profits (sans forex gains). However, bulk of the poor performance was due to lower off-take by Solvay in the quarter. This has now been addressed as the shipment of Eposartan to Solvay has resumed from June.
Dishman may even get an additional product (Propetal, proffering incremental revenues of €3.5 million) from Solvay. On a segmental basis, while the CRAMS revenue fell by 7.8 per cent, revenues from the MM (marketable molecules) segment grew 11 per cent. Lower sales made to Solvay during the quarter weighed on its margins too, which reduced by about five percentage points to 23.4 per cent.
"In June 2005, with the blessings and approval of my respected mother Kokilaben Ambani, and in line with the vision and value creation philosophy of our beloved founder Chairman, Dhirubhai Ambani, we announced the restructuring of the Reliance Group.
I had sincerely believed then, that we had resolved all issues, and come to an amicable settlement that would create two of India's most dynamic business groups, bring peace and harmony to our family, and generate substantial wealth for millions of shareholders of the Reliance family.
Over the past 4 years, some parts of that promise have been realised.
Unfortunately, the joy of that achievement has been tempered by the sorrow, pain and anguish of continuing disagreement and acrimony with my elder brother, Mukeshbhai.
Over these past 4 years, I have persevered with utmost sincerity, humility and good faith, and left no stone unturned to try and resolve our differences.
To my lasting regret, despite all my well-meaning efforts, I have failed - pushing us even to the extreme step of recourse to litigation to protect the interests of over 11 million shareholders of our Group.
Over the past few weeks, many elder statesmen, trusted family members, and long-standing friends of my father, Dhirubhai Ambani, who have always had the best interests of the nation and the Ambani family at heart, have talked of the need to break the current impasse, and to find a solution that puts an end to this bitterness and rancor; and paves the way for substantial future growth and value creation for the country and millions of our shareholders.
I agree with each one of them. This has been a time of deep sadness and pain for me personally.
Yet, throughout this very trying period, I have maintained the greatest of love, affection and respect for Mukeshbhai - as I have done since my birth.
In that spirit, I have made this pilgrimage today to the holy shrines of Kedarnath and Badrinath, in the hope of seeking divine inspiration and blessings, in trying to heal the wounds, and in making a renewed effort to resolve, reconcile and reciprocate.
I sincerely believe that Mukeshbhai and I can, even at this late stage, sort out all our disagreements, in a constructive, cordial and conciliatory manner, if we both commit to getting this done.
The issues are only a handful, and the facts are well known. My judgement says that they can all be resolved in a matter of weeks, and will not require several months of discussions.
Accordingly, with the blessings of my mother, and invoking the power of Lord Shiva from this most sacred of holy places, I am once again reaching out to Mukeshbhai - and hope and pray that my feelings will be reciprocated, and we will arrive at a solution to all outstanding issues, with a generous heart, a willing mind, and an accommodating spirit.
There can be no better gift to my mother, Kokilaben Ambani in her 75th year, and to the legacy of our beloved father, Dhirubhai Ambani, the proud creator of the Reliance Group."
Investors with a two-year perspective can consider adding the stock of integrated engineering solutions provider Hindustan Dorr Oliver (HDO).
The stock has risen sharply in the latest rally. The company’s strong June quarter earnings, steady order inflows and scaling up of manufacturing facilities to cater to diversified sectors have heightened the earnings prospects, calling for a re-rating.
At the current price of Rs 132, the stock trades at seven times its expected per share earnings for FY10 and 4.5 times its likely earnings for 2010-11.
The earnings have grown at a compounded annual rate of 40 per cent over the last two years, after it became a subsidiary of IVRCL Infrastructures & Projects.
HDO has quickly ramped up its operations from providing engineering solutions primarily in the water and environment management space to providing engineering, procurement and construction (EPC) services for most of the process industries in the commodity space.
It has diversified its product portfolio to cater to the hydrocarbon sector, apart from supplying to the water, pulp and paper and fertiliser industries.
While the manufacturing division accounted for only 10 per cent of the revenue for FY09, we expect this segment to add further value, given the increased activity in the oil and gas space.
Besides, the company has agreements with global players to cater to their outsourced manufacturing requirements. A ramp-up in this segment’s revenue could also provide more steady income than that by the EPC division.
While HDO is not new to the mineral processing industry, it made a major breakthrough by winning an order worth Rs 441 crore from the Uranium Corporation of India for a processing plant in 2008-09. It appears keen to make progress in this sector as it recently received board approval to execute projects relating to nuclear power plants and allied activities. This segment, together with new areas such as equipment for material handling and components for oil and gas space, could be the new driver of revenue going forward.
The current order book of close to Rs 1,800 crore can be expected to be executed over the next 18-24 months. This order book is thrice its FY09 revenues of Rs 522 crore.
High concentration of public sector orders, all of which may not have cost-escalation clauses, can dampen operating profit margins if input prices rally significantly.
BALAJI TELEFILMS LIMITED
ANNUAL REPORT 2008-2009
Your Directors take pleasure in presenting the Fifteenth Annual Report
together with the audited statement of accounts of the Company for the
year ended 31st March, 2009.
(Rupees in lacs)
Particulars 2008-09 2007-08
Income from operations 29,491.89 32,896.85
Total expenditure 25,515.28 20,506.48
Operating profit 3,976.61 12,390.37
Interest 0.00 0.00
Depreciation 2,352.26 1,270.06
Operating profit after interest and depreciation 1,624.35 11,120.31
Other income 2,127.03 1,728.08
Profit before tax 3,751.38 12,848.39
Provision for taxation 1,084.47 4,055.08
Net profit after tax 2,666.91 8,793.31
Balance brought forward from previous year 16,154.01 10,965.09
(Short)/excess provision for tax in respect
of earlier years (34.79) (54.80)
Disposable profits 18,786.13 19,703.60
Proposed dividend 195.63 2,282.37
Corporate dividend tax 33,26 387.89
Transfer to general reserve 266.69 879.33
Balance carried to Balance Sheet 18,290.55 16,154.01
RESULTS OF OPERATIONS:
For the year ended 31st March, 2009, the Company earned total revenue of
Rs.31,618.92 lacs, a decrease of 8.68% over the previous year's
Rs.34,624.93 lacs. As per the consolidated accounts, the total revenues
have decreased by 9.98% from Rs. 39,591.40 lacs to Rs. 35,641.37 lacs in
the year under review. The net profit of the Company for the year decreased
from Rs. 8,793.31 lacs to Rs. 2,666.91 lacs in the year under review, a
decrease of 69.67%.
A detailed discussion on the business performance is presented in the
Management Discussion and Analysis section of the Annual Report.
EVERONN SYSTEMS INDIA LIMITED
ANNUAL REPORT 2008-2009
Your Directors have pleasure in presenting the Ninth Annual Report together
with the Audited Accounts of the Company for the year ended 31st March
I. FINANCIAL RESULTS
Particulars for the year as at
Total Revenue 12137.94 9123.21
Operating Profit 5720.62 3478.92
Depreciation 1532.44 972.75
Interest 518.18 332.04
Profit/(Loss) before tax 3670.00 2174.13
Provision for Taxation 1285.78 795.56
Profit after Tax 2384.22 1378.57
Add: Profit brought
previous year 2331.46 952.89
Profit available for
appropriations 4715.68 2331.46
Balance Carried to
Balance sheet 4715.68 2331.46
II. Operating Results and Business Overview
The company's performance in the year 2008-09, continued its strong
momentum and showed a healthy growth. The company earned as total revenue
of Rs.12137.94 lakhs in the year 2008-09 as against Rs.9123.21 lakhs in the
year 2007-08. The revenue growth has been 33% over the previous year. The
operating profit for the year 2008-09 was Rs.5720.62 lakhs as against
Rs.3478.92 lakhs for the year 2007-08. There is a significant increase of
64% in the operating profit as compared to the last fiscal. Net Profit has
grown from Rs.1378.57 lakhs to Rs.2384.22 lakhs, a growth over 73% over the
Everonn's initiative for facilitating Computer Education in Govt. Schools,
Computer Literacy, Computer aided learning etc has expanded its footprint
to 3 more states in FY08-09 -Himachal Pradesh, Maharashtra and Tripura.
Our strong visibility and the guarantee of a steady stream of revenue,
continues to propel Everonn's growth in this division.
The company is currently operating in 4442 schools as compared to 3164
schools in the year 2007-08 and the presence has increased to 12 states.
The revenues from ICT division are Rs. 4712 lakhs for the year 2008-09.
Everonn's growth in its VITELS [Virtual and Technology Enabled Learning
Solutions] division, is reflected by the phenomenal increase in the number
of Everonn Learning Centers - 557 Schools, 800 Colleges and 35 retail
centers as against 180 Schools, 230 colleges and 29 retail centers
respectively last year. In tune with the growth, the company has made
substantial investments in terms of-technology and delivery model.
The revenue from Vitels has grown up from Rs.3754.2 Lakhs in 2007-08 to
Rs.7425 lakhs in 2008-09.
With this division growing further in the past year, we have successfully
established ourselves as one of the leading providers of technology for
HAVELLS INDIA LIMITED
ANNUAL REPORT 2008-2009
Your Directors are pleased to present the 26th Annual Report along with the
Audited Accounts of your Company for the financial year ended 31st March,
Financial Highlights (Rs. in crores)
Consolidated Stand Alone
Particulars 2008-09 2007-08 2008-09 2007-08
Net Profit (160.12) 160.96 145.23 143.54
Profit available for
appropriation 162.60 354.16 450.56 336.77
Appropriation of Profits 162.60 354.16 450.56 336.77
Net Sales 5,477.49 5,002.93 2,198.36 2,055.57
Operating Profit before
Interest, Depreciation, 278.34 358.71 203.31 199.14
Tax and Amortisation (EBIDTA)
Exceptional Items 198.69 - - -
Depreciation 90.50 69.43 17.86 13.06
Interest 108.38 93.92 19.34 20.65
Add: Other Income 2.02 3.25 1.16 0.82
Profit before Tax (117.21) 198.61 167.27 166.25
Tax 42.91 37.65 22.04 22.71
Add: Balance brought forward
from previous year 322.72 193.20 305.33 193.23
Transfer to General Reserve 14.55 14.50 14.55 14.50
Proposed Dividend 15.04 14.48 15.04 14.48
Corporate Dividend Tax 2.56 2.46 2.56 2.46
Balance carried over to
Balance Sheet 130.45 322.72 418.41 305.33
Havells, on a consolidated basis had net sales of Rs. 5,477.49 crores in
financial year 2008-09 against Rs. 5,002.93 crores in previous financial
Havells, on stand-alone basis had net sales of Rs. 2,198.36 crores in
financial year 2008-09 against Rs. 2,055.57 crores in financial year 2007-
08. The operating profit before interest and depreciation was Rs. 203.31
crores in financial year 2008-09 against Rs. 199.14 crores in financial
year 2007-08. During third quarter ended 31 December 2008, sharp and
immediate reduction in the general prices of commodities mainly copper and
aluminum caused the margins to decline during current financial year 2008-
09 as compared to financial year 2007-08. The interest charges for
financial year 2008-09 were Rs. 19.34 crores against Rs. 20.65 crores in
financial year 2007-08. Profit after tax was Rs. 145.23 crores in financial
year 2008-09 against Rs. 143.54 crores in financial year 2007-08.
Sylvania, on stand-alone basis recorded a Net Revenue of Rs. 3,279 crores
in financial year 2008-09 against Rs. 2,947 crores in financial year 2007-
08. Operating profit/(loss) before interest and depreciation and
exceptional items was Rs. 75 crores.
LIC HOUSING FINANCE LIMITED
ANNUAL REPORT 2008-2009
The members of
LIC Housing Finance Limited
The Directors have great pleasure in presenting the Twentieth Annual Report
together with the audited accounts for the year ended 31st March, 2009.
The profit and loss account shows a profit before tax of Rs. 727.23 crore
after writing off bad loans of Rs.5.40 crore and provision of Rs.8.12 crore
towards contingencies and considering the amount recovered of Rs. 8.26
crore out of earlier write off and taking into account all expenses,
including depreciation. Considering the prior period items of Rs.0.81
crore, the profit before tax is Rs. 726.42 crore. After considering the
provision for income tax, (net of deferred tax) including that of earlier
years and fringe benefit tax of Rs. 194.80 crore, the profit after tax for
the year is Rs. 531.62 crore.
Taking into account the balance of Rs. 101.38 crore being brought forward
from the previous year, the distributable profit is Rs. 633.00 crore.
With Grasim Industries’ stock price correcting by 11 per cent over the past week, the market appears to have largely discounted the marginal value erosion that shareholders are likely to suffer due to the transfer of the company’s cement business to a subsidiary. Except for this ‘holding company’ discount, the move to de-merge the cement business does not have any major negative implications for Grasim investors.
Investors can hold the stock for the present, as listing of the cement business has the potential to discover a better price for it than it currently enjoys. Devoid of cement, Grasim will be a pure VSF (viscose staple fibre) and chemicals manufacturer and is likely to see lower valuation multiples. Post-demerger, Grasim is likely to be valued more for its group holdings — the stake in UltraTech Cement and Samruddhi Cement together with investments in group companies such as Hindalco Industries, Idea Cellular, L&T. The company’s cash-rich status and plans to expand its VSF capacity by 25 per cent and increase its global market share may also prove value-accretive for the core business.
What is the deal?
Under the demerger scheme announced last week, Grasim’s shareholders are promised one share in the new subsidiary (Samruddhi Cement Limited — SCL) for every share held by them in the parent entity. Grasim’s shareholders are to get a direct exposure to the cement business with a 35 per cent stake in SCL (the remaining 65 per cent to be held by Grasim).
But is this deal a value-eroding one for the shareholders of Grasim Industries? A rough calculation, based on the segment results reported by Grasim in 2008-09, suggests it is not. Consider this:
The non-cement businesses of Grasim (pulp, chemicals and textiles divisions) reported operating profits of about Rs 935 crore in 2008-09. This works out to net profits of about Rs 522 crore, after apportioning interest costs (based on liabilities), depreciation and taxes, translating into per share earnings of Rs 57 on Grasim’s equity base.
Assuming this business manages a PE multiple of about eight times, post demerger, Grasim’s residual businesses will give the holders of the stock a value of only Rs 455 per share. Investment in group entities including the interest in UltraTech Cement will bring Rs 858 per share at today’s market prices.
Based on the cement division’s operating profit of Rs 1,912 crore in 2008-09, net profits of about Rs 1,011 crore and per share earnings of about Rs 39 appear likely for the cement subsidiary — Samruddhi Cement. At a PE multiple of about 10 enjoyed by cement companies now, as Samruddhi lists it could trade at a price of about Rs 390. Assuming that Grasim’s 65 per cent stake in Samruddhi is valued at a 10 per cent discount due to the indirect holding, the value of this holding works out to Rs 645 per Grasim share.
This calculation suggests that the value of Grasim, post-demerger, may work out to about Rs 1,958 per share, with Rs 455 for the core business and the remaining for its investment book and holding in Samruddhi.
Investors will in addition be entitled to one Samruddhi share valued at Rs 390, taking the total value to Rs 2,348, not much below current market price.
Valuations apart, what are the prospects for Grasim, post-demerger? Grasim derived close to 75 per cent of its revenues from the cement business last year. With cement being hivedoff into a separate subsidiary now, Grasim’s core revenue generating business will be textiles.
The company’s fibre division manufactures an artificial fibre — viscose staple fibre (VSF). The company claims to meet almost 98 per cent of India’s VSF requirements. But as a significant portion of the segment’s revenues are from overseas, this division didn’t perform well in 2008-09. The company’s VSF sales volume was down 12 per cent in the last year.
Over the last five years, the VSF segment has posted less than one per cent annualised volume growth, with realisations lifting overall growth rates.
The challenges to the VSF business come from rising input prices, global economic slowdown and the related fall in textile exports to countries such as the US, Brazil and Turkey. With small and mid-sized players going though a squeeze, Grasim plans to take this as an opportunity to spread its wings in the global VSF market (it holds a current share of 10 per cent).
Plans have been outlined to set up an 80,000 tonnes per annum VSF plant in Vilayat, Gujarat, raising its capacity by 25 per cent at an investment of Rs 1000 crore in the next three years.
The carving out of the cement division will reduce Grasim’s debt burden (70 per cent of the company’s overall debt is for cement related investments) giving it leeway for fresh borrowings for the new investment activity.
However, demand and prices need to catch up to make Grasim’s VSF division a lucrative investment for investors.
Grasim has a capacity of 2.58 lakh tonnes per annum for caustic soda. This division mainly caters to the VSF business’ raw material requirements, but has diversified into products such as hydrogen gas, bleaching powder, hydrochloric acid, etc. This division’s volume sales rose 11 per cent and margins (operating) expanded 3 per cent points in 2008-09. CAGR growth in sales volumes of this division over the past five years were at 6 per cent. Though the company is taking initiatives to cut costs in this division there are no expansion plans.
Post the de-merger it is Grasim’s investment book that will hold greater value for investors than its core business, the major components being holdings in UltraTech Cement and Samruddhi Cement.
The other listed companies in which Grasim holds a stake are Hindalco Industries, Idea Cellular and Larsen & Toubro. In all these three companies, Grasim holds less than a 6 per cent stake each.
The step-up in revenues in the subsidiaries — UltraTech Cement & Samruddhi Cement — and the other group companies will be closely watched by the market as it values Grasim when Samruddhi lists soon, as proposed by the company.
Grasim’s entire cement business — grey cement (of 25.7 mtpa capacity), white cement (of 0.6 mtpa capacity), ready-mix concrete (36 plants of 6.8 million cubic metres capacity) together with the 268 MW capacity thermal power plants have been carved out into the subsidiary — Samruddhi Cement.
Grasim had spent Rs 1,467 crore in the last year for various capex activities in cement and from now it is expected that Samruddhi Cement will carry on with the capital outlay plans. Grasim had outlined Rs 2,105 crore over the next two years for completion of existing projects, adding captive thermal power plants and waste heat recovery systems.
When Samruddhi Cement merges with UltraTech Cement in its “next natural step” as the company calls, shareholders would gain from higher earnings that follow from higher volumes and higher market spread.
However, the price at which Samruddhi lists in the market and the swap ratio that UltraTech offers Grasim’s investors will be key factors that would determine investors’ loss/gain.
Despite the 2.72 per cent-correction last week, the Nifty managed to close above its trendline support on Friday. The index ended the week with a loss of 138 points at 4,945. Although, the Nifty has ended marginally below its short-term (20-day) Daily Moving Average (DMA)of 4,957, the index ended above its trendline support around 4,920.
Going forward, the index may seek support around 4,900-4,920, below which the index may slide all the way to 4,740, which is the medium-term (50-day) DMA. Caution is the buzzword, as a number of oscillators — Moving Average Convergence/ Divergence (MACD), Relative Strength Index (RSI) and Stochastic Slow — are showing negative divergence. Any move from the current levels, could see the index face resistance around 5,120.
However, the medium-term picture remains positive as long as the index remained above 4,740. The upside targets mentioned last week of 5,350 and 5,500 remain valid with a timeframe of year-end, till violation of the above mentioned support level.
The BSE Sensex, moved in a range of 492 points. The index touched a high of 17,121 and a low of 16,607, before settling with a loss of 2.87 per cent at 16,643.
Among the index stocks — Reliance Communications and Bharti Airtel tumbled over 21 per cent each. Grasim, TCS, Maruti, Wipro, SBI and Infosys declined 6-11 per cent each. On the other hand, Hindustan Unilever surged over 8 per cent. Reliance Infrastructure, ITC, Tata Steel, BHEL and ONGC gained 3-7 per cent each.
The BSE index is now closer to the support zone of 16,400-16,450. Below 16,400, the index also has some support around 16,260.
A break below 16,260 could result in a larger correction all the way to around 14,800. The upmove will regain momentum only after the Sensex crosses this week’s high.
Next week, the Sensex may face resistance around 16,840-16,900-16,960, while support on the downside could be around 16,445-16,385-16,325.
The Indiabulls Power initial public offer carries too high a risk profile for the average retail investor. The company is two years away from commissioning its first project in Nashik.
Other listed companies with operational plants may offer a superior investment option. The discounted pricing of the offer may allow scope for short-term gains on the stock, but long-term investors should put off their exposures until the projects make progress.At the higher end of the offer price of Rs 40-45, Indiabulls Power’s Market cap per Megawatt (taking into account only projects of 2,655 MW which have attained financial closure) is Rs.3.4 crore, which is similar to listed peers. On Price-Book Value terms, the offer is at a steep discount to NTPC, Tata Power, Reliance Power and Adani Power.
However, this discount is justified as Indiabulls Power will not enjoy any income from operations over the next few years.
The company plans to set up 6,615 MW of thermal power generation capacity over the next four years at a cost of Rs 31,052 crore. Most of the projects are being developed through subsidiaries. Through this IPO, Indiabulls Power expects to raise around Rs 1,758 crore (at the higher end of the price band), including the green shoe option.
A part of the funds raised (Rs 1,435 crore) are to be deployed as equity in two projects — Amravati Phase 1 and Nashik — with capacity of 1,320 MW and 1,335 MW, respectively. Additionally, the company has signed MoU for projects adding up to 3,960 MW. The company also plans to set up a 167 MW hydro power plant in Arunachal Pradesh.
While two of the five projects — Amravati and Nashik — are close to attaining financial closure, the company, according to the offer document, is yet to raise funds for the other projects. Amravati Phase 1, to come up by June-September 2012, is the only project that has been fully tied up having secured fuel linkages, funding and placed EPC contracts. Equipment is to be sourced from SEPCO, China.
The Nashik project, due to change in its configuration, is yet to place equipment orders and is waiting for renewed approvals. The company’s hope of commissioning at least half of this plant’s capacity by September 2011 appears a challenging schedule to meet. Fuel linkages for both projects have already been approved. The third project in Bhaiyathan, Chhattisgarh, has been allotted a captive mine and is expected to be commissioned by 2013. The bulk of Indiabulls’ projects are scheduled for commissioning between 2011 and 2014. The bunching up of the completion dates may pose challenges on securing equity funding and execution.
The Indian power sector has historically been subject to high execution risks arising out of delays in equipment, funding, approvals and also laying of transmission lines. This pegs up the risk profile on this offer given that the company has no execution track record. Inconsistencies in supply of fuel by Coal India, on which Indiabulls Power plans to rely, is also a risk.
Funding is another concern as Indiabulls has opted for a debt:equity mix of 75:25. The current issue (Rs 1,758 crore) plus cash and investments of Rs 1,154 crore on its books as of June 30, 2009, as of now, fall short of equity requirement for the projects (around Rs 7,750 crore for all the projects).
In the regulated tariff scenario, debt raised over and above the norms may strain margins. Higher refinancing terms once the debt gets matured at higher rate of interest may also create problems for the company. In case of levelised tariffs, interest costs at a fixed rate are factored into tariffs. Indiabulls Power, like many other private players, is relying on Chinese equipment for timely delivery, which may reduce execution time but could lead to operational risk.
Indiabulls Power’s current projects rely only on relatively cheaper domestic coal, which is a big advantage when the company offers its power on competitive bidding terms. Of course, this will benefit only the power sold on a merchant basis. The company wants to have a 75:25 mix between revenues through power purchase agreements and merchant power. If this materialises, the company can get the right mix of returns once operational.
Demand or offtake is the least of concerns for power generators, given the huge demand and supply gap that is likely to remain over the next few years. Revenue visibility is enhanced by Indiabulls Power signing long-term power purchase agreements for 858 MW with the Chattisgarh SEB for the power generated from Bhaiyathan project and 1,000 MW PPA with Tata Power Trading Company for the Amravati Phase I.
The company also signed MoU with Maharashtra State Electricity Distribution Company for off-take of 1,000 MW from its Amravati plant. It is yet to finalise buyers for the Nashik project. With the company planning to use super-critical technology for most of its capacity, additional revenues may also flow in through carbon credit.