Wednesday, September 30, 2009


Investor Feedback: A Wall of Worries to Climb

• Our recent trip to Europe indicates that investors are a bit tentative about India. They worry, among other things, about the rate at which the market has risen since election day, the high correlation with global markets, as well as local issues such as the 10-year bond yield, the rains, the Central Bank’s likely exit policy, the government’s reform agenda or lack thereof, and valuations.

• We think most of these concerns are already in play and in the price. Some of them are events we are unlikely to witness (for example, the rains affecting industrial growth or the 10-year bond yield rising further). Our prognosis is that Indian equities could stay volatile in the near term, since the next six months’ projected growth is already in the price. Indian equities continue to be vulnerable to a sell-off in global equities or a sudden spike up in crude oil prices. However, at the same time, we believe that investors should use such volatility to buy Indian shares, since the growth outlook for the next 12-18 months remains firm and is still not priced into equities. Our favored sectors are Consumer Discretionary, Energy, Financials, and Industrials. The next few pages detail the concerns that were raised on our trip and our responses.

Concern # 1: Is the 10-year Bond Yield Going to Rise Further?
We believe the 10-year bond yields have peaked and the government has taken action by moving to lower tenure bonds to take the pressure off the 10-year bonds. The only technical issue that remains is the exhaustion of HTM limit with banks. There is a major hump in the government borrowing calendar in September. Once that is over, we think the 10-year is likely to stabilize from October (unless there is a very strong recovery in credit growth and/or oil goes to USD95-100/bbl). The incremental credit-deposit ratio is at its 2003 low. Credit growth is at 14.1% as of August 28, and this has created abundant liquidity in the system. Sterilized liquidity (excess liquidity) stock, including reverse repo less repo balances, MSS bonds, and the government's balances with the Reserve Bank of India (RBI), rose to US$35.4 billion as of July 17, from US$20.6 billion at end-March. Thus, we believe that liquidity will not be a problem to fund the deficit.

Concern # 2: Will RBI’s Exit Strategy Derail Growth or the Markets?
Investors worry that rising inflation and excess liquidity will lead to Central Bank tightening. We maintain our view that the RBI will initiate its first policy rate hike in early 2010, as we believe
it will likely wait for a sustained economic recovery and is unlikely to change its path due to food inflation pressure along with the drought. However, if the robust trend of 7%-plus industrial growth is maintained, the RBI could move on CRR in 2009. The market’s response historically to the first rate hike has been mixed. To us, the ensuing flattening of the yield curve would actually be positive for the markets (as it would confirm growth), especially for Financials.

Concern # 3: Will Poor Rains Reduce Growth?
We maintain our view that poor agricultural output due to below-normal rainfall will have limited impact on industry and services growth, for four reasons: 1) The share of farm income in total rural income is now below 50%; 2) the acceleration of the government's rural spending is acting as an offsetting factor (government spending in the form of social welfare schemes will be about USD20 billion compared with USD7 billion in F2007); 3) an increase in minimum support prices for farm produce purchased by the government from farmers is partially offsetting income loss due to lower output volume, and 4) the government's effort on mitigation measures. While we expect non-agriculture GDP growth to decline by 0.5ppt because of poor agricultural growth, we see an offsetting surprise in the current trend for industrial production and the services sector.

Concern # 4: Will the Government Deliver?
We expect the government to deliver steady reforms. The key agenda includes tax reform (both direct and indirect), increased infrastructure investments (watch the data on road contracts in the coming months as indicator for execution), and fiscal consolidation (the 13th Finance Commission report is likely to be published later this year). If the new direct tax code is an indication, the next few reform steps from the government could become important equity market drivers.

Concern # 5: Isn’t the Market Pricing In All the Good News?
For long-term investors, the equity risk premium implied by the market (represented by the BSE Sensex) using our residual income model is currently around 6%. We think this is a fair level of risk premium for investors looking to make a long-term commitment to Indian equities. The short-term call is less clear, with the outlook mired by the excessive volatility the market is going through as it grapples with the pace of growth recovery versus the prospects of Central Bank tightening both at home and abroad. Other factors such as equity supply, monsoons, and crude oil will also influence share prices. Indeed, the market is pricing in almost all the growth recovery that we are forecasting in the coming six months. However, markets are yet to price in the earnings and industrial growth for F2011, which bear upside, according to our view. To that extent, investors with a 12-18 month view are likely to realize positive returns from equities.

To see full report: INDIA STRATEGY & ECONOMICS


Techno-Fundamental Stock Pick

IDBI was incorporated as a Development Financial Institution in 1964 and was a wholly-owned subsidiary of the Reserve Bank of India (RBI). In 1976, the RBI surrendered its 100% stake to the government. In 2005, IDBI transformed itself into a full-service commercial bank after merging its commercial banking arm, IDBI Bank, into itself. More recently, the amalgamation of United Western Bank (UWB) with IDBI Bank gave the latter the much needed branch network to enhance its retail presence.

IDBI is one the leading public sector banks of India. At the end of June 2009, IDBI has 566 branches and 972 ATMs and intends to set up more branches over the next year, thus taking its total number of branches to 750 by March 2010. IDBI Bank has four wholly owned
subsidiaries: IDBI Capital Market Services (ICMS), IDBI Home Finance, IDBI Gilts and IDBI Intech. In FY09, IDBI reported a total consolidated income of Rs. 13,346.9 cr, up 34% y-o-y; operating expenses increased 40% y-o-y to Rs. 12,041 cr and PAT for the year
stood at Rs. 766.5 cr, up 2.7% y-o-y. This is lower than the Rs. 859 cr PAT recorded on a standalone basis.

IDBI Capital Market Services Limited offers a full suite of financial products and services to institutional, corporate and retail clients. Its businesses include Stock Broking, Distribution of Financial Products, Merchant Banking, Corporate Advisory Services, Debt Arranging
& Underwriting, Portfolio Management of Pension / PF Funds & Research Services. Next, IDBI Homefinance commenced its business with the acquisition of Tata Homefinance Limited in September 2003. The company, since its inception, initiated series of measures to
expand its retail reach, strengthen its brand image, improve its asset quality and excel its business growth.

IDBI Intech Limited (IDBI Intech) was incorporated in March 2000, as a wholly-owned subsidiary of IDBI Bank to undertake the IT related activities of the Bank. The major business activities of the Company are Information Technology Services, Information Security
Practice, Knowledge Management Services, National Contact Center and Outbound Sales Team (OBST). Moreover, IDBI Gilts Limited (IDBI Gilts) was set up as a wholly owned subsidiary of your Bank to undertake Primary Dealer [PD] Business with paid up capital of Rs.100 crore. IDBI Gilts commenced its operations as Primary Dealer w.e.f. July 24, 2007. The company presently focuses on Bond trading, underwriting in auctions of primary issuance of government dated securities and treasury bills.

IDBI Fortis Life Insurance Company Limited (48% holding) is a joint venture of IDBI Bank Limited, Federal Bank Limited and Fortis Insurance International. The company commenced operations in March 2008 and the current year is the first full year of operations. IDBI Fortis entered the market with several innovative products consisting of WealthsuranceTM - an insured wealth plan, BondsuranceTM - an insurance plan with guaranteed returns, HomesuranceTM - an insurance plan for home loans and RetiresuranceTM - a retirement plan. The performance of all the above mentioned entities has been summarized below.

To see full report: IDBI BANK

>What’s Wrong with the Dollar? (WELLS FARGO)

Executive Summary
The dollar has followed a downward trend over the past six months, weakening against the currencies of other major economies and developing countries alike. Some observers claim that the dollar’s depreciation reflects unease among foreigners about the U.S. fiscal outlook. However, there is very little evidence to support this hypothesis. Purchases of long-term U.S. Treasury securities by private foreign investors and foreign central banks have remained strong during the recent period of dollar weakness.

Rather, the depreciation of the greenback reflects, at least in part, an unwinding of the forces that propelled it higher last autumn. As the global financial system stood on the cusp of collapse, foreign purchases of short-term Treasury bills, considered by many to be the safest asset in the world, surged. In addition, foreign banks had to scramble for dollar liquidity as U.S. banks pared back their credit lines. Now that the global financial system has stabilized, net foreign purchases of low-yielding Treasury bills have weakened considerably as investors have gone in search of higher returns. In addition, American banks have started to reopen some credit lines to their foreign counterparts.

What could cause the dollar to turn around? Another increase in risk aversion likely would cause the greenback to strengthen, but even the most fervent dollar bull probably would blanch at the thought of another financial market meltdown. The dollar’s best, and less psychologically stressful, hope probably lies in a truly self-sustaining U.S. economic recovery. A run of better-than-expected U.S. economic data would lift rates of return in the United States that would attract long-term capital inflows.

Greenback Resumes Its Slide
After rising to a three-year high earlier this year, the trade-weighted value of the dollar has slid over the past few months (Figure 1). Not only has the greenback weakened against most major currencies—it has dropped to a 12-month low vis-à-vis the euro—but the dollar has also depreciated versus the currencies of many developing economies. Predictably, the financial press has been filled with renewed prognostications of the greenback’s ultimate demise. A theory that has gained currency among some observers recently is that the weakness of the dollar since the beginning of the year reflects concerns among foreign central banks and foreign investors about the gaping federal deficit and/or fears of runaway inflation. Does this theory have any merit? If not, why is the dollar weakening again?

To make sense of the dollar’s depreciation over the past few months we examine the U.S. balance of payments data, which measure transactions of U.S. residents with the rest of the world. We begin with the current account, which records transactions of goods and services.1 After narrowing sharply late last year and early this year, the U.S. trade deficit has been essentiallystable since March (Figure 2). Therefore, it is hard to make a convincing case that the dollar’s depreciation over the past few months is linked solely to a renewed deterioration in the U.S. trade position with the rest of the world.

To see full report: DOLLAR


Company Background

Incorporated in 1987, IVRCL is a Hyderabad based construction company, present in most of the verticles of infrastructure space like Water & Irrigation, Transportation, Power T&D and Buildings and Industrial structures. The company is betting big on irrigation and water opportunity in India and has maintained its un-disputed leading position in the segment. Acquisition of Hindustan Dorr Oliver has improved its presence in water and environmental engineering space. Going forward, the management has given indication of tapping upcoming opportunity in power transmission.

Infrastructure Industry –Opportunities Unlimited
There is a little doubt that the infrastructure industry in India is to play a vital role in nation's progress towards achieving the status of a 'developed nation'. The government has realized that the infrastructure related inadequacies will put a significant constraint in realizing the nation's growth potential. Consequently, the planned investment in the 11th five year plan is 136% higher over the anticipated investment in the 10th five year plan. Irrigation, roads and highways and power have witnessed 129%, 117% and 127% growth in the 11th five year plan and account for almost 60% of the total outlay. With the new government in place, there are strong expectations that going forward these infrastructure initiatives will get a further emphasis in terms of execution and incremental investments.

Healthy Order Book Provides Revenue Visibility
The current order book of the company stands at Rs 13900 Cr with a further Rs 1000 Cr of projects having L1 status. Irrigation projects account for 69% of the total followed by 22% contribution from Buildings and Industrial Structures unit. Going forward we expect the order book to witness robust growth mainly from the order wins in Irrigation, power and road sector.

We believe that IVRCL will continue tapping huge opportunities in irrigation and water related projects. While over the past couple of years the company has strengthened its position in Buildings and Industrial Structures segment, going forward, power transmission and roads related projects will increasingly contribute to the growth.The core construction business of the company is valued at Rs 363 per share by assigning forward multiples to FY11E EPS. The two listed subsidiaries IVR Prime and HDO are valued at CMP and contribute Rs 42.8 and Rs 19.8 per share respectively. The 4 BOT projects are valued at Rs 28.7 per share. We had given OUTPERFORMER rating on the stock in our Q1FY10 Earnings Review report (14th Aug 2009, Price Rs 318). Investors who had already invested in IVRCL Infra can continue holding it while others can look at the stock on declines.

We remain bullish on IVRCL and retain OUTPERFORMER rating with the SOTP based 12 months price target of Rs 465.

To see full report: IVRCL


We present hereunder a table of companies that have announced dividends till FY09, for which dividend yield is 4.5%+ based on dividends for FY09 and those who have maintained or increased their dividend percentage over FY08.

To see full report: DIVIDEND YIELD STOCKS


Sensex above 17K

Markets on Sep 30, 2009: Strong up-move

Nifty continued to move upwards giving close above 5050, which is a good sign for the market going ahead. Today, it gave a breakout from sideways consolidation pattern and is trading in an upward parallel channel; the upperend of the channel is at 5150. It is holding the lower end
of the channel at 4900, which acted as a crucial support twice earlier. It also managed to surpass the swing high of weekly negative close quite comfortably, which added more strength to its up-move.

On daily chart, Nifty is trading above its 20 daily moving average (DMA) and 40DMA at 4858 and 4709 respectively, which are crucial supports going forward. Momentum indicator (KST) has given negative crossover and is above the zero line. Market breadth was positive with 740
advances and 534 declines on NSE and 1,615 advances and 1,252 declines on BSE.

On hourly chart, Nifty is trading below its 20 hourly moving average (HMA) and 40HMA at 5008 and 4995 respectively, which are now resistances in the short run. Momentum indicator (KST) has given positive crossover but trading below the zero line.

Nifty and Sensex closed in green, gaining 77 and 274 points respectively. Of the 30 Sensex stocks, State Bank of India (up 5.01%) and ICICI Bank (up 4.63%) were the top gainers, whereas ONGC (down 1.25%) and ITC (down 1.07%) were the top losers.

To see full report: EAGLE EYE 01/10/09


Key takeaways from the roadshow

BGR Energy roadshow. On 16-17 Sep ’09 we organized a BGR Energy roadshow. During the roadshow management addressed various issues regarding BGR’s competitive strength, growth
sustainability and the dynamics of the power equipment sector.

Competitive advantage in bidding. BGR has enjoyed a 4-5% margin over competitors in bidding due to its in-house design capabilities. It has also negotiated for higher advances and lower retention money (20% and 10% of contract value, respectively), easing working capital and cash-flow concerns.

Capacity addition. Except for L&T-Hazira, which would soon commence production, other ventures (JSW, Thermax, Bharat Forge) are still in initial stages. BGR is planning to invest Rs4bn (Rs1.2bn in equity) for a boiler and Rs30-40bn for a turbinegenerator manufacturing plant. The boiler license agreement is pending GoI approval and the boiler-manufacturing plant would take 18-24 months to roll out after approval.

Management guidance. Management maintained a 50% yoy growth guidance for FY10/FY11 and an 11.5-12% operating margin. The current Rs125bn order backlog comprises EPC and
BoP projects in a 60:40 ratio. The company might look at a 10% equity dilution in FY12/13 for expansion plans.

To see full report: BGR ENERGY



The Indian Transformer Industry – presently valued at around Rs 60 Billion, has been in the forefront, not only in terms of cost-effectiveness and technology, but also in terms of quality and design. It has grown to become a leading manufacturer of all types of transformers – distribution, power and other special types used for welding, traction, furnace and other applications. Owing to its ability of keeping pace with new developments, India exports almost 10-15% of its overall transformer production. About 60-70% of the production is absorbed by SEBs (State Electricity Boards) and the balance is bought by private sector companies. ECE Industries Ltd is a North based company engaged in manufacture of power transformers. The company is also engaged in manufacturing of switch gears and Elevators under technical collaboration with companies like Toshiba and Mitsubishi. It also has a Projects Division which is engaged in undertaking turnkey projects.

Looming power shortages have forced the government to focus very intently on power generation. Thus about 58,000 MW (megawatt) of fresh capacity (revised from 78,000 MW original target) is targeted by 2012.. Additionally, around 16,000 MW is expected to be added by ultra mega power projects. As a thumb rule, for every 1 MW of capacity added, 7 MVA (megavolt ampere) of transformers are required across the entire power system. Further the government through APD & RP (Accelerated Power Development & Reforms Program) scheme aims to make the power generation profitable to them through reduction of losses through transmission & distribution by up-gradation of the existing network. With the estimated life of a transformer at about 20-25 years, demand is also expected to come from the replacement market which could be in the region of 20000-30000 MVA p.a. ECE is engaged in manufacture of transformers upto 220KV class and upto 100MVA capacity. The company has taken steps to create facilities to manufacture higher range of transformers.

According to industry sources, the demand-supply scenario for transformers is expected to remain favorable for the next few years and this demand is expected to come more from SEBs as one expects a slowdown from private sector in the immediate future. ECE stands to benefit in this as its focus has always been towards SEBs which accounts for major of its production. ECE was also engaged in manufacture of Industrial meters however due to continuous bleeding and the activity becoming unprofitable it has suspended this activity and stopped production from the second half of FY ‘09.There has been a decline in revenues from the contracts business during the year as ECE intentionally did not take the new contracts for railway electrification, as they had pending orders. The company is reported to have taken a decision to discontinue this line of business after completion of pending orders. The switch gear business of the company is expected to have good growth in the near future primarily because of the major growth seen in the power sector.

The Elevator business of the company saw a good growth in the year under review with turnover registering a growth of 88% from Rs 76 Mn (Fy‘08) to Rs 144 Mn in the current year and this higher turnover enabled it to reduce the losses that this division was incurring earlier. The company has plans to spruce up and strengthen its marketing infrastructure seeing the increasing customer base and market for elevators. This division is expected to further improve its performance and thus contribute both to the turnover and profits of the company.

To see full report: ECE INDUSTRIES



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To see full report: TOP 40 SERIES

Tuesday, September 29, 2009


Taking the Bait…S&P 500

We still think that equities will trade in a broad range for an extended period. The current rally is typical of what follows major bear markets and is not, in our view, the start of a new multi-year bull market. However, we now think it can run on for longer than we previously
expected, so we are upgrading our year-end S&P 500 target.

We previously expected the S&P to end the year at 900, with a near term stretch target of 1100 (14x two-year forward earnings). We think equities will now trade above this, in large part because earnings will be higher than we previously anticipated. We now expect 2009 and 2010 earnings to be $55 and $70, respectively. This implies a year-end 2009 fair value of 1050 ($70 EPS on 15x). A higher multiple would justify a higher target, but we don’t see a compelling reason why equities should trade significantly richer in the current environment, despite low official interest rates.

With risk assets in a sweet spot (growth momentum improving, rates are on hold, and liquidity measures plentiful) for at least the next 2 quarters, we think the market will trade away from our fundamental valuation before growth and earnings concerns resurface and potentially disappoint expectations built in equities. At 1200, however, we would turn cautious unless there has been a material change in the fundamentals.

What worries us? 1) There is now a strong consensus view that equities will trade higher into year-end, yet few clients hold this view with high conviction; 2) the simultaneous rally in both bonds and equities highlights a strong divergence in views on growth, which will at some stage need aligning; 3) earnings/margin expectations are following the normal pattern of cyclical
cost underestimation; and 4) all asset views are highly aligned to a depreciating US dollar.

To see full report: EQUITY STRATEGY


Mgt meeting induces confidence
We hosted MphasiS management at our DSP ML Corporate day at Mumbai. Management vision of achieving US$2bn revenues over next 2-3 years including inorganic initiatives and confidence in maintaining ~22% EBIT margins during FY10 which is inline with BAS-MLe reinforces our long term bullish stance on the stock. We also raise earnings estimate by 3% for FY10e and FY11e to factor AIG captive unit acquisition and raise PO to Rs750 at PEG of 1x in line with 2 yr EPS CAGR of 15% vs. 14% earlier. Our revised PO implies target P/E of 15x FY10E (Oct. yr end).

Expect margins to sustain at current levels
Expect EBIT margins to maintain at current levels of ~22% for FY10, in line with BAS-MLe. Increase in seat utilization, consolidation of facilities and increasing share of high margin ITO business to help sustain margins. Besides we see minimal risk to margins from rupee appreciation as ~70% of its 12 months US$ revs are hedged at favorable USD/INR rate of Rs47-48.

Pricing cuts with HP factored in 3Q results
While MphasiS continues to see pricing pressure in sectors such as telecom & manufacturing, pricing pressure in Banking, finl services & insurance (~40% revs) has subsided as per management. Even with HP, management indicated that pricing is market driven and its recent master service agreement with HP factors low single digit pricing cuts, in line with market. We believe 3Q results factors recent pricing agreements and margins unlikely to surprise on the downside

Share of ITO to increase
Expect revenues to cross US$1bn by FY10E (BAS-MLe at US$1.05bn) and highlighted vision of reaching US$2bn revenues over next 2-3 year; including inorganic initiatives. Share of ITO revs to grow from 19% (FY09) to ~ 30% (FY12e).

To see full report: MPHASIS LTD


Steady Progress: Execution Is Key

Steady progress — Both Apollo and Fortis reported strong results for the first three quarters of FY09, with positive trends on occupancy and pricing. Although Apollo’s pharmacy operations remained a drag on overall profitability, the hospitals division continued to excel. Fortis, on the other hand, was buoyed by an impressive turnaround at Escorts, removing a key overhang for the stock.

Expansion plans — Despite tighter availability of capital, Apollo and Fortis maintain aggressive expansion plans. While Fortis intends to add c.4,000 beds by 2012 (organic and inorganic), Apollo plans to add c.3,000 beds over the same period. We see these as additions as exceptions, rather than the rule, for the sector, as smaller players adopt a more cautious stance. Inability to grow, due to scarcity of capital, may also trigger consolidation, which should favour larger players.

Low leverage offers comfort — The sector is largely under leveraged (net D/E of 0.33x in FY10E), especially given it is still in an investment phase. Both Apollo and Fortis appear comfortable on the funding side, at least with respect to the next 1-2 years, in our view. Beyond that, however, efficient execution and ability to generate cash from the existing set of hospitals will be critical.

Risks to growth — While we remain positive on the long term prospects for the sector, the current macro environment, especially falling income levels, could pose some risk to demand and impair the ability to take price hikes. At the same time, capital constraints could hinder expansion plans at the aggregate level, although Apollo and Fortis appear comfortable on this front.

Apollo is our preferred play — We expect hospital stock valuations to be subdued over the near-term as execution risks, low capital efficiency, and lack of sufficient liquidity (due to low market cap), continue to weigh on multiples. Apollo Hospitals (1M) remains our preferred play in this space at these levels, based primarily on its attractive valuation, while we retain our Sell (3H) rating on Fortis Healthcare.

To see full report: INDIAN HOSPITALS


Still very long and now less defensive

  • Aggregate longs remain near a record level
  • Investors report a significant reduction in the defensive sector bias
  • HY exposure has also increased, though investors remain less long than in high grade
  • However, cash inflows also remain near a record level, mitigating the warning signals coming from positions for now
To see full report: GLOBAL CREDIT SURVEY


Investment Rationale:
• The Company will invest Rs 2.1 billion to double the production of poly film by 2011-12, which will be funded through a mix of debt and equity , due to which its annual EPS to climb to Rs 10 for 2011-12

• The Company will increase the current capacity of PET thin film from 30000 TPA to 57000 TPA by the last quarter of calendar year 2010

• The Company expects to earn about Rs 10 million a year by selling the carbon credits

• It has been saving on power cost by switching to different fuels from time to time• The Company has forward as well as backward integrated manufacturing facilities

• The Company has sales tax exemption till 2012 on its second film line of 12,000 TPA capacity

• Despite its strong financial performance and good client base, the Company is trading at a PE(x) of only 2.94 against the industry average of 27.20

• In 2009, the Company has a low debt to equity ratio of 0.40 and a high interest coverage ratio of 6.98 thus signifying a low financial leverage

• The Company is a low cost producer of Engineering Plastics compounds and blends which provides it a major edge vis a vis competition.

• Many of the raw material manufacturing companies are present in the organized sector on account of high capital costs required for setting up a unit

• Technological developments play a very important role in this industry. In India there has been a slow progress in the technology adoption and up gradation

• Trade barriers in US, EU and Brazil continue. Turkey has also imposed an antisubsidy & anti-dumping duty on Indian PET Film producers

• The major raw material supplies are expected to remain stable barring the price fluctuations attributable to volatility in Crude Oil prices and the resultant effect on the petrochemical value chain.

To see full report: ESTER INDUSTRIES

>EAGLE EYE ON 30/09/09

Momentum slowing down

Markets on Sep 29, 2009: Range-bound day

After opening positive the market consolidated in a very narrow range of 5020-4990 throughout the day. Nifty is trading in an upward parallel channel and taken support from the middle line of the channel i.e. 4900. The upper end resistance of the channel is 5100-5151, which is also our short-term target. Nifty is trading above 4750 level, which acted as strong resistance earlier and has now become an important support going forward. Sensex is trading above the bullish island reversal pattern i.e. 15275, which will act as a very strong support in short run. Nifty is currently trading above 20 daily moving average (DMA) and 40DMA i.e. 4837 and 4728 respectively,
which are crucial support levels going forward. The momentum indicator (KST) has given a negative crossover and trading above zero line.

On hourly chart, Nifty is trading above 20 hourly moving average (HMA) and 40HMA i.e. 4986 and 4966 respectively, which are crucial support levels in immediate run.

Momentum indicator (KST) has given positive crossover and trading above zero line. Market breadth was positive with 734 advances and 537 declines on the NSE. Nifty ended positive with 48 points and Sensex with 160 points. Of the 30 stocks of the Sensex, Sun Pharmaceutical
Industries (up 5.5%) and Tata Consultancy Services (up 4%) were top gainers, while State Bank of India (down 2%) and Ranbaxy Laboratories (down 2%) were in red. Information technology sector stocks were trading with positive momentum and expected to move up.

To see the full report: EAGLE EYE 300909

>FOMC statement seen as neutral to supportive for gold

Analysts described the post-meeting statement from the Federal Open Market Committee Wednesday as neutral to supportive for gold futures.

Some suggested the ongoing low-interest-rate environment will mean further pressure on the dollar and eventually lead to inflation, both of which tend to lead to the buying of gold.

Yet, some also said the Fed's lack of fear over inflation may also cool market sentiment, perhaps meaning sideways trading for a while.

The FOMC left the federal-funds target at zero to 0.25%, as expected.

The Fed officials said economic activity picked up but will remain weak for a while yet. They also said inflation is likely to remain subdued "for some time," meaning interest rates can remain low for an "extended time." The statement indicated the Fed will extend mortgage-security purchases into 2010 but complete Treasury purchases in October.

In the aftermath of the FOMC statement, December gold on the Comex division of the New York Mercantile Exchange ticked up from around $1,012 an ounce a few minutes ahead of time to $1,019.70 five minutes later, before gradually backing off.

"I think you could probably see higher prices for the medium term on the basis that low interest rates are going to help stimulate what the stimulus spending was trying to do," said George Gero, vice president with RBC Capital Markets Global Futures.

For starters, eventual economic recovery may mean eventual inflation, observers said.

"The Fed made the statement that things are improving, although there are some problems with employment that are going to limit the rate of recovery," said Bart Melek, global commodity strategist with BMO Capital Markets. "But at the same time, they have said they will continue to provide liquidity in the system broadly."

Even though the Fed doesn't see inflation on the horizon, gold investors may see an increased chance of rising price pressures farther down the road, he continued.

Even if inflation does not kick in, "the concerns will mount, especially from those looking for that and who participate aggressively in the gold market," Melek added.

Adam Klopfenstein, senior market strategist with Lind-Waldock, said he doesn't anticipate inflation becoming an issue before late 2010 or early 2011. Still, he said, the Fed intentions could mean further pressure on the dollar that helps gold.

Furthermore, some market participants may not want to pile all of their money into foreign currencies such as the euro, he said.

"Gold is the most advantageous play if you don't want to be involved with any type of currencies," he said. "Even though the euro has had a nice rally, people are questioning whether they want to have all of their money in euros at this point. So people are saying, 'get me in the real reserve currency in the world, which is gold.'"

Gero said that whenever there are pullbacks due to profit-taking, or selling by those who have already bought at lower prices, fund buying often emerges on a scaled-down basis.

"If it does trigger inflation and rates continue to stay low, that is a formula that helps gold maintain purchasing power," Gero said. "And it continues to put pressure on the dollar."

Dan Cook, senior market analyst with IG Markets, doubts the FOMC statement will have a major impact on gold either way. In particular, he cited the portion in which policy-setters expressed doubts about inflation for the foreseeable future.

"They are still saying inflation is not going to be an issue for some time, and that might kind of stifle the run we've seen in gold," Cook said. "We might hover around this $1,000 level for a little while here. I wouldn't be surprised to see us move sideways for a little bit."

Klopfenstein said he anticipates increasing volatility with two forces at work in the market.

Selling on one level will come from those with profitable long positions who want to book profits, as well as others concerned about the strength of physical demand from India, he said. Support will come, however, from those concerned about more dollar weakness.

"I think it's going to be continually going up over the long term," Klopfenstein said. "But I think in the short term, it's susceptible to a sell-off."


Monday, September 28, 2009

>India's ETF investors make up for missing gold buyers

Mumbai - Record prices have forced many of India's traditional gold buyers out of the market in recent months with jewelry demand remaining largely lethargic, but the recent rally in prices is creating a new source of demand - investors who are looking for the safety, convenience and steady returns of exchange-traded funds or ETFs, backed by gold.

Even among investment products, ETFs are gaining an upper hand over gold bars and coins because of the easy liquidity and lower costs associated with ETFs, analysts say. India has for long been the biggest market for gold, but much of that demand has traditionally been from rural households which buy gold in the form of jewelry.

While India continues to be a price-sensitive market with every rally hitting demand for the yellow metal, the rising popularity of ETFs indicate that going forward, the Indian market could see less of an impact from rising prices at a time when gold is again in the limelight because of a falling dollar and increasing fears about the return of high inflation.

"In the last 10 days, our daily volumes have more than doubled to 70-80 kilograms. This is despite it being an inauspicious period to buy gold in the country," said Sanjiv Shah, executive director of Benchmark Mutual Fund, which has the largest volumes and assets under gold ETFs in India.

Domestic spot gold prices rose above INR16,000 for 10 grams for the first time Wednesday after international prices convincingly moved above the key $1,000-per-troy-once level earlier this week.

The rally has come at time when Indian consumer demand has already been at multi-year lows since the start of the year. According to the World Gold Council, India's gold consumption fell 38% on year in the April-June quarter to just 109 tons. During the previous quarter, gold sales were only 17.7 tons, down 83% on year.

Those numbers, however, are not deterring fund houses from launching even more instruments for investors looking at gold as an option.

New Funds To Tap Gold ETF Market Soon

According to market participants, a number of Indian fund houses are planning to launch gold ETFs in the next few months.

Religare Mutual Fund and HDFC Mutual Fund have submitted proposals to the Securities and Exchange Board of India - the industry regulator - to launch new ETFs.

Six fund houses - Benchmark Asset Management Co., Kotak Mahindra Mutual Fund, UTI Asset Management Co., Reliance Capital Asset Management Ltd., Quantum Mutual Fund and SBI Mutual Fund - already offer gold ETFs in India.

Separately, UTI Mutual Fund, Reliance Mutual Fund, and IDFC Mutual Fund have submitted proposals to launch funds that invest in gold ETFs.

"In the last one year, Indian gold ETFs have given excellent returns, prompting major fund players to plan more launches to tap this market," said Kapil Gandhi, a trader with STCI Commodities.

According to data from exchanges and the Association of Mutual Funds in India, gold ETFs have given returns of about 35% in the year ended Sept. 15, while gains from gold futures were around 25% for the same period. The stock market, as measured by the benchmark Bombay Stock Exchange Sensitive Index, or Sensex, returned an even lower 23%, making gold ETFs one of the best investment choices last year.

With some analysts expecting domestic gold prices to hit INR18,000/10 grams soon, more investors are expected to go in for asset re-allocation and increase their investment in gold ETFs.

"Investors who had been waiting on the sidelines are now coming in and volumes have been above average in the last few days," said Arvind Chary, fund manager for Quantum Mutual Fund's gold ETF.

"Out of the total consumption of 800 tons of gold (annually), anecdotal evidence suggests that 200 tons were in coins and bars. Over a period of time, this demand will shift to gold ETFs," said Shah of Benchmark Mutual Fund.

This is expected to result in more gold buying by these fund houses. Currently, gold holdings by the six listed ETFs in India are estimated around 6 tons.

But some industry officials warn fund houses may be getting overly excited about the scope of the market.

"Indians still prefer to hold gold in their hands, (and that is) proving to be a deterrent to the growth of ETFs in India," said Ashok Minawala, former chairman of the All India Gems and Jewellery Trade Federation. "People have started accepting the current high (prices)" as expectations are for prices to rise further. That is helping revive consumer demand, he said.



Balance sheet leverage to drive future growth; initiate with a Buy

Source of opportunity
We initiate coverage on Reliance Infrastructure (RELI) with a Buy rating and a 12- m TP of Rs1,404, or 20% upside potential. The Indian government’s focus to attract investment of c. US$500bn for the 11th plan (FY08-FY12E) to build infrastructure through the public-private partnership route will augur well for the private sector, in our view. We believe that RELI, with 1) its in-house EPC arm & 2) strong balance sheet strength (capacity to build infrastructure order book up to US$8bn) is well placed to benefit from emerging opportunities in the infra segment. Moreover, our scenario analysis on the RIL-RNRL court case suggests that resolution of the dispute would offer RELI asymmetric risk to the upside.

(1) News flow on RELI being awarded infrastructure projects currently in the pipeline, particularly in relation to the road segment; (2) visibility of gas supplies upon the resolution of a court dispute leading to the commencement of work on gas-based plants in Dadri and Shahapur; and (3) completion of financial closure of the Krishnapatnam power project.

We value RELI using SOTP methodology (DCF for its power/infrastructure segments, EV/EBITDA for its EPC business). We value RELI’s 45% stake in Reliance Power using DCF and factoring in a holding company discount of 20% and remove it from the Conviction Sell List. Our bear/bull-case scenario analysis on RELI indicates potential down/upside of 15%/70%. Although the stock is trading close to its mid-cycle multiples, we believe these do not capture the earnings potential of RELI’s infrastructure business which we estimate will constitute about 20% of operating profit by FY12E.

Key risks
(1) Deployment of cash in unprofitable infrastructure projects; (2) delays in commissioning of projects under construction; (3) lower-than-expected EPC margins; and (4) court case outcome in favor of Reliance Industries.



Likely implementation of CAS in remaining parts of three metros & 55 cities by 2009 to be next big positive trigger…

Increase in viewership of business and general news channels to drive advertisement revenues higher…

The Story....

New Delhi Television Ltd. (NDTV) [NDTV.IN/NDTV.BO] is on the transformation path to become a full media conglomerate with interests in television, Internet, radio, mobile content and allied businesses. NDTV is India's first and largest private producer of news, current affairs and entertainment television and is well diversified in different genres of media like general news, business news, General Entertainment Channels (GEC), lifestyle and infotainment. The company has a track record of successfully launching three news channels - NDTV 24x7, a clear leader in the English news segment, NDTV Profit, a 24-hour business plus channel, and NDTV India, which is among the country's leading Hindi news channels. However, NDTV’s financial performance has failed to match its strong business performance. Over the last four years, NDTV’s standalone revenues have grown at a CAGR of 19.3% from Rs.1.5 bn in FY05 to Rs.3.1 bn in FY09, though the company reported a standalone proforma net loss of Rs.732 mn in FY09, as against a standalone proforma net profit of Rs.292 mn in FY05. The decline in the company’s profitability was primarily due to start up costs incurred towards NDTV Profit in FY05-07, as well as weak revenue growth and higher operational cost in FY09, on account of the economic downturn. In FY09, the company posted a consolidated proforma net loss of Rs.5.0 bn, mainly due to launching of five broadcasting properties, including NDTV Imagine, which entails heavy investment in the initial years in the form of operating cost.

Going forward, we expect NDTV to create significant shareholder value, as it has decided to
restructure the company by de-merging its news-related businesses, which is its core strength, into a separate entity. The implementation of CAS in the remaining parts of the three metros and 55 other cities, which is likely by 2009, will be the next big positive trigger for the company as well as the stock, as there will be a decline in under reporting of subscribers, which will lead to an increase in the subscriber base and, consequently revenues. Also, the current uptrend in the stock market, post the elections, coupled with continuous monitoring of the new government’s policy initiatives, will generate significant news content. This will result in viewers returning to the company’s business and general news channels, thereby attracting advertisers, which will lead to higher advertisement revenues. However, in order to fund its mounting accumulated losses, NDTV could resort to equity dilution, thus impacting its return on equity, or take up debt financing, thereby further affecting the company’s profitability, which is a cause for concern to us. On the valuation front, the stock currently trades at an EV/EBIDTA of 43.0x our FY10 estimates. While the stock valuation is expensive, we believe that the company’s success in delivering a strong business performance will help strengthen its financial position significantly over the longer term, apart from being an acquisition candidate. Moreover, our estimate of sum of the parts valuation for the stock is Rs.175. We initiate coverage on NDTV with a rating of
‘Market Perform with Outperform Bias’.

To see full report: NDTV


The Global Financial Crisis: One Year On…

Presentation Path

One Year On…

  • G3 Recession – Worst is behind Us
  • Asia – Sweet Spot in the Inflation and Growth Cycle
  • Welcome the Green Shoots…But there are Challenges
  • Indian Economy – Drought Dampens Outlook
  • Rest of South Asia – External Environment sees an Improvement
  • Appendix – Macroeconomic Forecasts


Rallied hard – What next?

Strong re-rating and further upgrades: Strong demand growth from China and now the restocking cycle gaining momentum in the developed world have provided visibility on the sustainability of metal prices; thus, our commodities team has upgraded its metal price forecasts. However, none of our forecasts is above current metal prices, as we expect a supply response to kick in. The key themes to play are restructuring and domestic growth, in our view.

Our preferred metals: Based on supply-demand fundamentals, we prefer exposure to copper, iron ore, coking coal and zinc. Aluminium remains our least preferred metal.

Themes to play: While we believe that most of the commodity price increases have been factored into stock prices, we focus on the following

  • Restructuring: It is a new world order, and many companies are restructuring to emerge as lean and mean. Tata Steel is our top pick, and we stand 19% ahead of consensus on FY11.
  • Domestic growth: India is one of the fastest-growing economies and is supply-constrained. Sterlite is our top pick, followed by Jindal and Grasim.

Consensus earnings estimates – Earnings upgrades to continue: After our upgrades, our FY10 estimates for most companies are now 7–29% ahead of consensus, except for Nalco and Sail, where we lag by 8–10%. We expect maximum earnings upgrades for Hindalco, Sterlite and Hindustan Zinc, and we expect Jindal to have the maximum upside risk even on our estimates.

Valuations – Looking beyond FY10: The market is already looking at FY11 earnings as companies move towards sustainable operations and the predictability of earnings improves. In addition, the preferred valuation metric is moving from defensive PBV to earnings multiples such as PER.

Steel – Selective Outperforms: With our expectation of a cap on steel prices, we believe that the focus is back to basics. Tata Steel is restructuring to emerge better, while JSW is growing fast; they remain our top picks. Sail remains Underperform, due to its high cost structure and possible negative surprises.

Base metals – Looking for better entry: Our top pick here is Sterlite Industries, as we expect its numerous catalysts to play out. Hindalco is the most improved company; however, given our negative stance on aluminium and the lack of growth in the next two years, we await a better entry point.

Diversified – Maintain Outperform: JSP and Grasim are our top picks in this space. Both are benefiting from domestic growth and their leadership positions in their space.

Top picks: Sterlite, Tata Steel, JSP and Grasim remain our top picks.

To see full report: INDIA BASIC MATERIALS