Friday, March 27, 2009

>Mahindra & Mahindra(Sharekhan)

Key points
The outlook continues to be challenging for the company’s automobile as well as
farm equipment segment. Apart from the ongoing economic downturn, the
tightening of credit by banks and financial institutions has been negatively affecting
the growth.

has been well received in the market, it clocked sales of about 4,095 vehicles
up till February 2009, while its bookings remaining strong. The roll-out of the
new products from the M&M stable is likely to continue, with the company planning
to launch the successor to Scorpio towards the end of FY2010. This is likely to be
followed by the launch of another global sports utility vehicle (SUV).

In the tractor segment, Punjab Tractor Ltd’s (PTL) volumes have been extremely
good and driven the company’s overall tractor sales in the recent times. The growth
of rural economy and the availability of credit remain the key to the future
performance of the tractor segment. There are already positive feelers from the
credit industry, which is expected to report a growth of about 3-5% in FY2010.

Mahindra and Mahindra (M&M) has slightly reduced its capital expenditure (capex)
plan to be implemented over FY2009-12 to Rs8,500 crore; of this Rs1,500 crore
has already been spent. Also, out of this amount, Rs5,000 crore has been
earmarked for the automobile business while the balance has been set aside for
investments in various other segments. The bulk of the capex (about Rs2,500
crore) earmarked for the automobile business shall be spent on setting up a
facility at Chakan. Further, constant negotiations are taking place with equipment
suppliers in order to further reduce the capex.

In future the company’s margins will depend mainly on the volume behaviour.
Though the company has been able to arrest the steep decline in volumes
witnessed in Q3FY2009, the volumes remain subdued. We believe that
operationally, the Q4FY2009 results will be much better than the Q3FY2009 results,
mainly on account of better volumes. In the automotive segment, we expect the
volumes to decline by 7.3% in Q4FY2009E as against the 24.4% year-on-year (y-o-y)
drop reported in Q3FY2009 that primarily affected the earnings.

Read full report Mahindra & Mahindra


Market this week was dominated by bulls with the BSE Sensex wrapping the week on a cheerful note and registering a gain of 12.1% and Nifty also registered a gain of 10.7%.Foreign Institutional Investors were net buyers to the tune of Rs. 1,520 crore while the Mutual Funds were net buyers to the tune of Rs. 443 crore.

Inflation continued its declining trend inching closer to zero mark. The annual wholesale price index-based inflation fell further to 0.27% for the week ended Mar. 14, 2009 as compared to 0.44% a week ago. It stood at 8.02% during the corresponding week of the previous year.

Six core infrastructure industries comprising of crude oil, petroleum refinery products, coal, electricity, cement and finished carbon steel expanded by 2.2% in the month of February from 1.4% in the previous month. However, the growth was low compared to the year-ago level
of 7%. Growth for the April-February period fell to 3% from 5.8% a year ago.

National Advisory Committee on accounting Standards (NACAS), has favored the suspension of rule that requires firms to mark-to-market foreign exchange assets and liabilities until April 2011 as reported. The Confederation of Indian Industry (CII) had recommended the suspension of this rule known as AS-11, which required firms to mark-to-market foreign exchange assets and liabilities for two years, as it could severely distort earnings of many companies at a time when market conditions are not normal. Indian industry may post better results if the recommendations of are accepted. Many companies would post higher profits, as 27% rupee depreciation against dollar in the past one year, would not be reflected in their results. This would lead to higher tax collections for the government.

Kalpataru Power Transmission Limited (KPTL), has bagged three orders worth Rs 399 crore from Power Grid Corporation of India Limited (PGCIL) for 765 kv and 400 kv transmission line projects. The orders are for supply and construction of transmission lines in Bihar, Chhattisgarh and Assam. The delivery schedule of these projects range between 18 to 24 months. The order book of Kalpataru Power is now in excess of Rs 5000 crores.

On the international front, the number of people collecting U.S. jobless benefits rose to a record 5.56 million, indicating more Americans are spending longer periods out of work. Initial claims topped 600,000 for an eighth straight time. Total benefit rolls jumped by 122,000 in the week ended March 14, from 5.44 million the previous week.

To see full report: WEEKLY REVIEW 270309

>Daily Derivatives (ICICI Direct)

Derivative Comments

• Nifty April series added 5.79 million shares in OI with settling at a minor discount of 0.50 points to spot. Significant long positions have been added in April since past couple of sessions. The rollover in the Nifty was at 69.61% whereas Marketwide rollover stood at 77.04%. This also concludes that rollover in stocks is comparatively higher to Nifty.

• The PCR-OI has jumped to 1.96 on account of stupendous rise in OI of put options. The 3000 put added the maximum OI with 35326 contracts followed by 2800 put adding 13321 contracts. The IV of 3000 put has risen from 33.41 to 36.18 while that of 2800 has increased from 37.65 to 40.33. Also the 2900 put have added 11778 contracts accompanied with a rise in IV from 35.70 to 38.08. On the flip side, the 3200 call added 12717 contracts in OI followed by 9052 in 3100 call. Due to significant long positions formed in Index futures, we feel market participants could be hedging their positions by buying OTM puts. We advise participants to form similar kind of strategy and not go for naked put, even though markets trading near resistance levels.

To see full report: DERIVATIVES 270309

>Daily Calls (ICICI Direct)

Sensex: We said, "looks positive above 9706 ... Things can turn volatile on settlement day, though trend remains positive within rising channel." Index opened above 9706 with a gap. Initial volatility held the level, after which it surged further to upper channel, to end 3.8% higher. A/D ratio improved to 4:1.

The action formed a strong bull candle with a gap-up area, at 9706-9740, below its low. It was a strong action which closed at the psychological mark of 10K. Day's high at 10061 could be crucial today. Failure to trade above it could see lackluster trading, though trend remains positive as long as the gap-up area holds.

To see full report: CALLS 270309

>Daily Market & Technical Outlook (ICICI Direct)

Key points

■ Market outlook — Open positive on strong global cues
■ Positive — FIIs buying, Rupee expected to gain
■ Negative – MFs Selling

Market outlook

■ Indian markets are likely to open positive on strong global cues. Asian markets were trading higher in the morning, as hopes rise that the global recession is abating. US stocks rose for the second day as investors saw signs of increasing consumer demand, pushing retailers and technology stocks higher. Rupee is expected to gain today on the back of positive trading Asian markets

■ The annual inflation rate fell to 0.27 % for the week ended March 14, compared with 8.02 % in the corresponding week last year and 0.44 % in the previous week

■ The Sensex has supports at 9900 and 9740 and resistances at 10188 and 10470. The Nifty has supports at 3025 and 2980 and resistances at 3110 and 3140

■ Asian stocks climbed as higher commodity prices and better-thanestimated earnings at US companies boosted optimism the global recession is abating. Nikkei advanced 83.2 points, or 1.0%, to trade at 8,719.6. Hang Seng gained 46.8 points, to trade at 14,106.3

■ US stocks rallied for a second straight day on Thursday, taking the Nasdaq back into positive territory for the year-to-date, on increasing optimism that the economy's worst days are behind after the government reported data that was less dire than expected. The Dow Jones jumped 174.75 points, or 2.25 %, to 7,924.56. The S&P 500 spiked 18.98 points, or 2.33 %, to 832.86. The Nasdaq surged 58.05 points, or 3.80 %, to 1,587.00

■ Stocks in news: Shipping Corporation, Tata Tea, Sasken communication, Reliance Capital, HCL Tech, TVS Motors, DLF

Technical Outlook

Sensex: We said, "looks positive above 9706 ... Things can turn volatile on settlement day, though trend remains positive within rising channel." Index opened above 9706 with a gap. Initial volatility held the level, after which it surged further to upper channel, to end 3.8% higher. A/D ratio improved to 4:1.

The action formed a strong bull candle with a gap-up area, at 9706-9740, below its low. It was a strong action which closed at the psychological mark of 10K. Day's high at 10061 could be crucial today. Failure to trade above it could see lackluster trading, though trend remains positive as long as the gap-up area holds.

To see full report: OPENING BELL 270309


Biocon starts commercial operations under BMS pact
Biocon has commenced a fully dedicated research and development facility for Bristol- Myers Squibb (BMS), one of the leading global innovator in Biocon Park, Bangalore. This which was in line with Biocon’s collaborative research pact with BMS during March 2007. In fact, Syngene – the CRO arm of Biocon, entered into an R&D partnership with Bristol Myers Squibb (BMS) for providing services for discovery and NCE development.

The initiation of the research and development activity will expand the span of the drug discovery and development process. Syngene would facilitate contract research services right from the initial stage of lead optimization to early stages of clinical studies to Phase I and Phase II trials.

The 200,000 square-foot facility at Biocon Park is dedicated to helping advance Bristol-Myers Squibb’s work in discovery and early drug development, and is currently occupied by 270 researchers. The facility will house 360 researchers by the end of the year and could accommodate as many as 450 employees in the future.

This initiative is to add incremental revenues of about Rs 800mn in FY10
With the commissioning of the new research facility and anticipated ramp up in researchers count to about 360 (since most of the revenues for Biocon are on Full Time Equivalent (FTE) basis), we estimate Biocon’s BMS pact would add incremental revenue of Rs 800mn during FY10E. We expect the peak revenue potential from the pact will be materialised during FY11E with 450 FTEs and revenue worth Rs 1200mn. Initially the core research activity would earn revenue for Biocon but subsequently the additional support activities and possible supply opportunities (like supply of sample batches during the advance development of molecule) would further boost the earning potential of the BMS pact FY11 onwards.

Hold with a target price of Rs 139
Certainly going ahead, the commercial commencement of long awaited BMS research contract would emerge as a money spinner for Biocon, it also projects the research capabilities of the company in Global pharma industry. Apart from this, Biocon has few more medium-term revenue triggers that would maintain growth momentum. In fact, the commencement of Tacrolimus and mycophenolate mofetil (patent expires in May 2009) API supply to US during Q1FY10 and launching of Glargine (a basal insulin having market potential of Rs 400mn and only cometitor Sanofi-Aventis) in domestic market Q1FY10 onwards would power the earnings growth of the company. Biocon has already got the Drug Controller General of India (DGCI) approval for Glargine.

To see full report: BIOCON

>JSW Steel (KARVY)

Higher sales volume, but lower price realization likely in Q4FY2009

JSW Steel, India's third- biggest producer, is on target to achieve robust sales volume growth during Q4FY2009. It is likely to sell 1.2 mn tonnes of steel as against 0.7 mn tonnes during Q3FY2009. However, it is to be noted that the YoY sales volume is likely to be flat. We believe that the sales volume growth could help the company in posting EBIDTA growth on QoQ in absolute terms, but the EBIDTA margin of 15% is expected to be under pressure due to the lower price realization.

Average steel price realization for the company was Rs 39,000 in Q3FY2009. The price realization for Q4FY2009 is expected to be lower by nearly 5% QoQ as the international prices have declined to US$450 per tonne. Though the global steel prices have fallen by 10% QoQ, then domestic prices have got some cushion due to the 5% depreciation in rupee against dollar to Rs 52.

On the raw material front, JSW Steel renegotiated coking coal rate downward by 43% to US$175 per tonne with Rio Tinto. Though the move should ensure lower raw material costs, the depreciation of rupee would work to the company's disadvantage to some extent.

In our opinion, the current rally in JSW Steel and other steel stocks is driven by the strong sales volume growth during Q4FY2009. We maintain our BUY rating on the stock with target price of Rs 334.

To see full report: JSW STEEL

>Crompton Greaves Limited (JP MORGAN)

Using the cash cow for group needs?

Bad news outweighs good: Crompton Greaves made two announcements yesterday: (1) A buyback of Rs.2.24B up to a price of Rs.170/share - EPS accretive to the tune of ~3.6%, (2) Acquisition of 41% stake in a promoter group company Avantha Power at Rs.2.27B, valuing the latter at Rs.5.5B. Avantha Power has 95MW of captive operating capacity, 60MW in expansion stage and 1200MW of projects in pipeline.

Prima-facie, acquisition appears expensive. We value 1) 95MW of existing captive capacity at Rs25MM/MW (2.5x book) and 2) 60MW in expansion stage at Rs10MM/MW (1x book). Based on this, it is difficult to attribute more than ~Rs.2.5-3B fair value to Avantha Power. We do not value 1200MW in the pipeline, as we await clarity of progress in settling land acquisition issues, securing clearances and achieving financial closure. Based on financials of another group company (BILT) which owns 26% stake in Avantha, we deduce Avantha Power's annual profit to be ~Rs51MM.

CG may have to raise debt to fund acquisition: As of Dec-08 CG had ~Rs3.5B gross cash on its books, but may need to borrow ~1.5B to fund the acquisition + buyback. The Thapar group harboured grand ambitions for Avantha, but CG management had consistently denied any intention to play a role in funding this. The sudden move to partner Avantha is negative in our view, as: a) it exposes a low capex, low net DER (0.33x) business to funding and project execution risks accompanied with prospects of back ended cashflows, and b) The acquisition in generation is broadly unrelated to Crompton’s T&D product profile, in our view.

We retain Neutral and Mar-10 DCF-based PT of Rs150 (WACC: 15.8%, g: 5%, Terminal year: FY18): YTD CRG has consistently shown strong execution and margin stability; however market fears regarding acquisition related uncertainties could be a near-term overhang on the stock (already down 10% today). We expect to seek clarity from management on debt levels in Avantha and timelines for capex and commissioning of 1200MW capacity. Key risk to our PT stems from weak order flows in overseas power segment and potential funding/ project execution risks.

To see full report: CROMPTON GREAVES

>IVRCL Infrastructure (MOTILAL OSWAL)

Healthy book to bill ratio of 3x FY09E, Andhra Pradesh accounts for ~38% of backlog: Current order book of IVRCL stands at Rs143b (+30%YoY, end Dec-08) implying a book to bill ratio of 3x FY09 revenues. IVRCL has one of the best pre-qualifications in the water and Irrigation segment evident from the fact that it bagged Rs16b projects from Rs40b project awards by Narmada Valley (Madhya Pradesh). But higher Andhra Pradesh exposure at ~38% of order backlog (and 60%+ of order intake during FY09) exposes IVRCL to possible execution/ project delay risks given elections in the state in April 2009. To mitigate higher receivable risk from Andhra Pradesh projects, it has increased sub-contracting (60% of projects).

No incremental equity funding requirement during FY09-FY11: For IVRCL, we expect revenue CAGR in FY09- 11 at 22%, vs 45% CAGR in FY06-09. This moderation, we believe would shorten the working capital cycle in turn improving the operating cash flows. Current (FY09E) net debt to equity ratio at 0.8x is comfortable, vs. peers. Outstanding equity contribution towards BOT projects is limited to Rs300m. Given that all BOT projects will be commissioned in FY10, possible monetization through stake sale / securitization could improve the cash flows. IVR Prime (62% subsidiary) is largely debt free, limiting further commitments by IVRCL.

Expect working capital improvement driven by lower inventory, improved terms with creditors: For IVRCL, working capital increased from 122 days in June 07 to 150 days in Dec 08, largely driven by increase in inventory (9 days) and decline in current liabilities (19 days). Going forward, we expect reduction in working capital to 130 days by FY11, driven by lower inventory and improved terms with creditors. Average borrowing cost currently stands at 11.75%, vs. peak rates of 12.5%. We expect interest costs as a percentage of revenues to decline from 2.8% in FY09 to 2.2% in FY11, leading to improvement in net profit margins.

Valuation and view: We have downgraded our earnings for FY09 and FY10 by 8% and 12.3% to factor in execution challenges, and lower margins due to increased sub-contracting and higher competitive intensity. We estimate earnings CAGR of 17.2%. Maintain Buy with a price target of Rs154/sh.

To see full report: IVRCL


How deep does this rabbit hole go?

We foresee a turnaround in the second half of 2009
Covering the property sector makes us feel like Alice tumbling down the rabbit hole, not really sure when, where and how it will end. More importantly, is there really a ‘wonderland’ of multi-baggers at the bottom and is it time to start chipping away? We think so. We believe the Indian real estate stocks will bottom out in 6–9 months’ time. The key reasons for the sell-off in the property names were the unprecedented tightness in liquidity and demand destruction. We expect to see some capital flow back (selectively). We foresee physical market prices staging a recovery in late 2010 but do not expect stocks to wait that long.

Capital scenario likely to get better – at the margin
The four primary sources of capital for developers have dried up. Debt is very expensive (if available at all), while the equity markets have no appetite for new paper. Residential volumes are down by over 25% YoY. Availability of capital has remained completely frozen since it reached its worst point in 4Q 2008 (even while the situation in most of Asia is slowly improving). Having said that, we believe all trend reversals start with anecdotal evidence. We spent a few days in February
visiting property companies, brokers, banks and private equity players. Our conversations suggest that there is likely to be some relief for individual developers and projects in the next six months as lenders take on more risk. This should partially be driven by policy initiatives. We are already seeing some asset sales and instances of banks willing to refinance obligations.

Stocks won’t wait for physical market to bottom

Analysing past cycles in India is very tough, as most developers have been listed for less than three years. We try and draw parallels from past cycles in Hong Kong. While the physical market dynamics in the two locations are clearly very different, we can derive some striking and relevant conclusions. In every one of the past four cycles, stocks recovered 6–9 months before GDP growth. This (in turn) preceded a recovery in rents by another 6–9 months. A late-2009 recovery in property stocks should therefore not surprise us. News flow should improve due to the low base effect in volume and price growth, but we do not foresee a smart recovery. We continue to expect that prices and rents in India will bottom in late 2010, 6–9 months after Macquarie’s forecast of a recovery in GDP growth.

Lesson from the tech bust – stock picking is essential
The last three years saw property stocks form a bubble very similar to that seen by internet stocks early in this decade. The bubble burst was as stark. Having said that, we point to an important lesson. While some internet companies (such as Excite @ Home) went under, companies that we believe to have a ‘real’ business model and balance sheet became multi-baggers. For eg, Yahoo delivered 11x returns in the next four years (but was still down 63% from its peak). Similarly, we do not expect cap rates of 13–14% and cost of capital of 16% to persist in a mid-cycle scenario in

To see full report: INDIA PROPERTY

>Gold outperforms other commodities due to haven role (GOLD)

New York - A disconnect is occurring between gold and other commodities as investors keep piling into the precious metal as a safe haven but are cool toward industrial commodities that are bogged down by the soft economy and a strengthening U.S. dollar.

Most commodities haven't been able to grab onto the coattails of gold, with the exception of some such as silver and platinum that have roles as both precious and industrial metals.

"Precious metals are not only the best performing commodity sector by a substantial margin, but also the best performing asset overall, with stocks and property down sharply year-to-date and government bonds and hedge funds making only marginal gains," a Barclays Capital research report says.

The Continuous Commodity Index is currently at 345.52, up from the December bottom of 322.53 but well below the July peak of 615.04. Meanwhile, most-active April gold futures have risen more than $200 this year to touch $1,007.70 Friday, within striking distance of the front-month $1,014.60 record high set in March 2008. Prior to that, gold's 1980 record was $875, which tops $2,200 when adjusted for inflation.

"Gold right now is not a commodity," said Frank Lesh, broker and futures analyst with FuturePath Trading. "It's the international currency."

Gold has often traded inversely to the U.S. dollar because the metal is seen as an inflation hedge and alternative currency. At the moment, however, both gold and the dollar are seen as safe-haven plays, benefitting along with Treasurys from the pummeling equities are taking.

But the stronger dollar, in turn, is pressuring industrial commodities because it makes dollar-denominated products more expensive for those using other currencies, dampening demand.

"We're having a battle of the safe havens between the buck and gold right now," said Ralph Preston, senior market analyst with Heritage West Financial.

The ICE Futures U.S. dollar index has risen more than 9% from this year's low of 80.854 points during the first days of January to its 2009 high of 88.254.

Another shift underlying the strength of investment demand for gold lies in the relationship of the metal with oil.

Often in years past, gold tended to track oil, as rises in crude were seen as a potential sign of inflation and because funds often moved into other commodities at the same time they were buying oil.

But front-month crude oil, currently below $40 a barrel, is a shadow of its former self, after it had peaked at $147.27 on the New York Mercantile Exchange last summer.

Leonard Kaplan, president of Prospector Asset Management, also noted that fundamental demand for gold, in the form of jewelry, is poor.

The focus in the gold market at the moment is clearly the strong investment demand rather than any other factors such as jewelry, Brian Hicks, co-manager of U.S. Global Investors' Global Resources Fund.

This is especially the case as tons of gold keep pouring into exchange-traded funds, he continued. As of the end of business Friday, gold holdings backing the world's largest such ETF, SPDR Gold Shares, stood at a record 1,028.98 metric tons, up 32% from 780.23 as of the end of last year.

"This is the primary distinction between now and in prior rallies over the past eight-year bull market for gold," Hicks said. "This is underlined by very strong physical demand for gold and coins. We see very high premiums for physical gold and hoarding of gold taking place."

But lacking the investment interest, other commodities have been hurt by the weaker-demand implications of a softer economy.

"For oil, copper and other base metals, with industrial production coming down, there is simply not as much demand for those commodities because they are economically sensitive," Hicks said.

Some of the pressure on other commodities even stems from the high prices that occurred in 2008, and producers responded to those high prices by increasing production, said Stephen Platt, analyst with Archer Financial Services.

Other commodities are coming off due to the economy, and gold is going up on fears about the economy, Lesh said. Investors are hoping gold is "somewhere you can go and you won't lose money," he said.

Under normal conditions, gold and other commodities are highly correlated, Hicks said.

But "there is a definitely some disconnect right now," said Zachary Oxman, senior trader with Wisdom Financial.

While other commodities are in the thrall of a deflationary trade, gold is benefiting from a longer-term view that expensive government economic rescue measures will lead to inflation down the road, Oxman said.

"People are finding gold to be a safe haven," Platt said. "There's no place else to hide."

Market participants are leery of stocks and other financial assets, particularly amid general fears of potential bankruptcies.

"Folks are scratching their heads," said Sterling Smith, vice president with FuturesOne. "They don't know where to put money. People seem to feel safe right now buying gold."