>EAGLE EYE ON 05/10/09 (SHAREKHAN)

DOJI FORMATION

Markets on Oct 01, 2009: Indecisive close

Today Nifty moved in a very narrow range of 5040-5090 and closed with a Doji candlestick formation, which points towards indecisiveness. Nifty has been trading in an upward parallel channel, where the upper-end is at 5150 and the lower-end is at 4900. It is now important for the index to surpass 5150-level to gain further momentum, however there are quite a lot crucial supports at lower levels. Nifty is also trading above averages, which increases its probability to move upwards. So, till these supports are held we maintain our positive bias.

On the daily chart, Nifty is trading above its 20 daily moving average (DMA) and 40DMA i.e. 4880 and 4719 respectively, which are crucial supports going forward. The momentum indicator (KST) has given negative crossover and is above the zero line. Market breadth was negative with 445 advances and 834 declines on the NSE and 1,163 advances and 1,718 declines on the BSE. On the hourly chart, Nifty is trading above its 20 hourly moving average (HMA) and 40HMA i.e. 5039 and 5011 respectively, which are crucial supports in short term. The momentum indicator (KST) has given positive crossover and trading above the zero line.

Nifty and Sensex closed almost flat. Of the 30 Stocks of the Sensex, Bharti Airtel ( up 4.01%) and Reliance Communications (up 3.25%) were the top gainers while Dr Reddy’s Laboratories ( down 3.63) and Maruti Suzuki India ( down 2.82%) were the top losers.

To see full report: EAGLE EYE 05/10/09

INDIA: TWENTY TWENTY FIVE (UBS)

We believe India is about to resume an extended period of high economic growth. This article summarises the determinant factors over a 10-15yr timeframe, then illustrates what this implies for investment and consumer spending. Just two factors tell us India could be waking up to an extended period of high trend growth, we believe, of 8-9%pa: high savings and rising industrialisation. Government intervention matters, but ultimately more intervention just reduces economic efficiency and thereby the step-up in real growth. The basic question is: will real growth centre around 10% pa or sink nearer 5%? The difference between these two boundary rates is the difference between doubling or more than trebling of per capita GDP over a 10-15yr timeframe. As per capita GDP rises from c.$3k today, within the next 1-2years the intensity of spending on investment goods, materials & energy rises almost vertically; then on approach to $10k per head ten years hence consumption spending follows suit. Successive industrialising nations reach these points earlier and India’s no exception. Finally, on structure, whether India continues to run current account deficits or swings to surplus ought not to matter for growth per se. But a deficit path makes growth more volatile because it is vulnerable to: (i) twin external shocks (trade & capital) and (ii) the 'grow-inflate-devalue' pattern due to overemphasis on pro-growth demand stimulation.


Miracles explained

Common factors
What are the common factors that drive a sustainable step-up in economic growth rate? The main one turns out to be the savings rate (or economic surpluses) (Chart 1). What helps generate this at a very basic level is things like: technology and the cost and availability of labour; demographics. But irrespective of whether economic surpluses come from agriculture, services or manufacturing they also need to be retained. Here, secondary factors like inflation play a role. For some economies in their high-growth phase they attain a ‘low’ (0-5%) long term inflation rate; for others inflation’s closer to 10% or even higher. Long run inflation rate matters because, if relatively high, it pushes savings overseas and keeps local cost of capital higher than that abroad. This typically corresponds to a savings-investment gap (current a/c deficit) funded by overseas borrowing (Chart 2). Unsurprisingly economies with higher inflation and persistent current a/c deficits have ingrained expectations of currency depreciation.

Another common factor is export and trade share of GDP. In East Asia a very common pattern is export-led industrialisation. Exporting manufactured goods to the rest of the world is a common contributory factor to rapid economic growth. This requires (i) relatively open global markets - ie access to new export markets and technologies, (ii) an abundant and therefore relatively cheap pool of labour (shown by falling dependency ratios) and; (iii) heavy investment in export industries. Mature Asian economies have already passed this phase and we can track their paths in Charts 3-6. The question is: is India in this picture and can we look forward to a similar pattern over the next 10-15 years.

To see full report: INDIA 2025

>INDIA TRANSPORT INFRASTRUCTURE (BNP PARIBAS)

The world's largest PPP playground

■ The Minister for Road Transport and Highways, Mr Kamal Nath, is spearheading the effort to revamp the lacklustre performance of the National Highways Authority of India (NHAI). Although NHAI has a project pipeline of 135 projects valued at approximately INR1t, we believe approximately INR400b- 500b will be bid out during FY10.

■ The ticket size of metro projects (approximately INR3.0b) has been too low to evoke interest among the larger developers. However, the three-fold approach comprising increasing complexity (and subsequent bigger tickets), the PPP route for development and the passing of the Metro Act should provide an impetus to the sector. The projects pipeline, worth INR1,010b for five metropolitan cities, will lead the development in the sector.

■ The game plan, according to the Minister for Shipping, Mr Thiru G K Vasan, involves the award of 22 projects during fiscal year 2010. However, the ministry has missed its first milestone: during the first 100 days of the new government, only three of the six scheduled projects were awarded.

■ We profile IRB Infrastructure Developers Limited, a pure-play highway developer, as an opportunity in the highway sector. Acceleration in highway project awards should also benefit other major infrastructure companies such as L&T, GMR Infra, and Reliance Infra; however, highways would contribute less than 10% of their revenue.

To see full report: INDIA TRANSPORT INFRASTRUCTURE

>HINDUSTAN ZINC (JM FINANCIAL)

Missing the zing thing…

■ Largest integrated zinc producer globally by FY11 - Hindustan zinc with ~5.9% (CY2008) share in total global production is currently the fourth largest zinc producing company globally. Expansion of lead-zinc metal capacity from the current 762ktpa to ~1mtpa by June 2010 will
catapult it to the top position globally.

■ Low cost producer with captive mines & captive power - Its high grade captive mines (Zn 11.4%; Pb 1.9%) with a mine life of over 20 years, represent 25m ton of equivalent zinc metal and 6.1m ton of lead metal. Captive power plants (437 MW) meet ~80% of its requirements placing it in the lowest deciles of global cost curve. Decline in international coal prices and sourcing from domestic linkages will reduce power costs further.

■ Zinc medium term price outlook to remain subdued- We believe that the recent run-up in zinc prices (55% YTD returns) would be capped due to slowing imports from China, high inventory levels and incremental supplies of ~1.1m ton of Chinese smelting capacities waiting on the sidelines. ILZSG expects a surplus of ~ 299k tons in 2009 and ~ 397k tons in 2010. Zinc is trading at ~US$1,900/ton on LME which is 47% higher than the 90th percentile cash cost of US$1,296/ton.

■ Valuations – Presence in the lowest deciles of global cost curve, aggressive capacity ramp up to 1mtpa (June 2010) and strong balance sheet with net cash of Rs228/ share, positions the company to benefit the most in case of demand and price recovery. However, a subdued price
outlook for zinc coupled with a sharp run up in stock price (~144% YTD) caps further upside. We value the stock at Rs 787/ share based on 5x FY11E EV/EBITDA. We initiate coverage with a HOLD rating.

To see full report: HINDUSTAN ZINC