| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
*LTP stands for Last Traded Price as on Friday, September 17, 2010 4:04:40 PM | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#1R1 stands for Resistance level 1 @1S1 stands for Support level 1 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#2R2 stands for Resistance level 2 @2S2 stands for Support level 2 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
#3R3 stands for Resistance level 3 @3S3 stands for Support level 3 | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
The levels given above are with respect to previous closing price on the NSE / BSE. |
A long week-end, a bunch of determined bulls, a dash of short-covering and an unshakeable belief in the 'Indian growth story' in some quarters was all that was needed to take the Sensex past the 19,000 hurdle. The celebratory mood continued over the week and even the policy-rate hike by RBI on Thursday did nothing to dampen it. The Sensex has closed the week on a convincing note, up 4 per cent.
As we have pointed out earlier, Indian equity is benefiting from the surge of inflow in to not just India but into emerging Asia in general. Many of the benchmarks in other emerging Asian countries also recorded stellar moves last week. Indonesia's Jakarta composite is the out-performer, poised 18 per cent above its 2007 peak, Malaysia's KLSE is just 3 per cent short and Philippines composite surpassed this high last week.
The Sensex along with other laggards in the emerging Asia such as Seoul composite index and Straits time index have started following in the footsteps of their more adventurous peers by breaking to new multi-year peaks.
The same cannot be said of the indices in US, Europe and some Asian countries. The Dow, for instance, still trades 26 per cent below its 2007 peak, DJ Euro STOXX 50 (that captures the movement of European indices) has 39 per cent to go to reach its life-time high and the Shanghai composite is a whopping 57 per cent away from its bull-market high. In other words, these indices continue in a long-term downtrend.
Last week's movement has taken the momentum indicators in the daily chart of the Sensex to overbought zone and they are dipping slightly implying caution from short-term perspective. The weekly and monthly oscillators are however just beginning to emerge from a sideways movement. The 14-month relative strength index entering the bullish zone at 66 is a positive from long-term perspective.
Long-term trend
Since the Sensex has recorded a strong move past the upper ceiling of the intermediate term range at 18,600, a look at our long-term counts is warranted at this stage.
In our outlook for 2010 published on January 3 this year, we had said that it was not yet clear if the rally of 2009 was a fresh bull-phase or a bear-market pull-back. While the quandary continues in the indices of developed markets cited above, this question is no more relevant in India and other emerging markets.
We had given the preferred range for the index between 12,000 and 18,500 and the upper and lower limit for the year at 20,772 and 9,800 in our yearly outlook.
At the beginning of this year, we were juggling with the possibility that the rally of 2009 was the B wave of a long-term correction with the C wave downward yet to unfold that could have dragged the index below 10,000. But the extent of retracement of the previous decline after last week's rally has made this a very remote possibility. The last bear phase from January 2008 peak appears to have been a steep and swift one that terminated at the March 2009 low and a fresh bull phase has begun since then.
If we consider the wave counts for the move from 8,047, one wave appears to be complete at October 2009 peak of 17,493.
Following a protracted second wave, if we consider that the third is currently in motion, it has the targets of 21,798 and 25,406. Since the first wave was a very strong one, the third is quite likely to halt around the first target, since it also occurs around the previous life-time high.
Investors however need to be aware that though the long-term trend in our market is up, that some of the leading global benchmarks continue in a bear phase is a seriously constraining factor. There can be prolonged corrective phases in the years ahead within this bull-phase. A halt around the previous peak can be followed by a deep correction of at least 30 per cent that can drag the index lower towards 16,000 or 15,000. The intermediate term range can then shift higher to 15,000 to 21,000.
Medium-term
Medium-term view for the index is upbeat and only factor that can derail it is a crash in global markets. It is obvious that the third leg from the 15960 low is currently unfolding. This wave had the targets of 19,227, 20,097 and 21,504. The index has to sustain above 19,000 in the next couple of weeks to attain the next targets.
Short-term
The Sensex closed near the intra-week high and it can head higher to 19,864, 20,130 or 20,434 in the ensuing sessions. There would be a wobble as the index nears 20,000 leading to a sideways range between 19,000 and 20,000 for few sessions. Supports for the week would be at 19,056 and 18,700.
Nifty (5,884.9)Nifty made our upper target at 5,780 appear conservative by jumping to the intra-week peak of 5,898.4. If we consider the long-term counts of the move from 2,539 low, we get the minimum target of 6,419 if we assume that the third leg is currently in progress.
Long-term target on a full-fledged third wave is 7,405.
However since the first wave was very strong and swift, the third is likely to halt at the first target which is close to the index' life-time high of 6,357.
Investors can however expect a fairly deep or prolonged correction within this bull-phase that has begun from March 2009 low. Such correction can drag the index at least 30 per cent from its peak.
If the rally halts around the previous peak, the range for the Nifty can shift higher to 5,000 to 6,500.
The medium-term view for the index is positive. Since our target at 5,780 is surpassed, the Nifty can now head towards 6,040 or 6,467 in the weeks ahead.
The support at 5,700 however needs to hold to retain the positive medium term view.
Short-term targets for Nifty are 5,958, 6,038 and 6,132. If the index halts around 6,000, it can fluctuate in the range between 5,750 and 6,000 for few sessions.
Subsequent supports are 5,700 and 5,620.
Date : 17 Sep 2010 Nifty formed rising wedge pattern indicating correction if lower trend line breaks On daily chart, Nifty is exhibiting "wedge pattern ", suggesting bearish breakout from existing high. Any decisive breakout below its lower trend line will only confirm bearish pattern otherwise current ongoing rally is likely to continue till the next psychological mark of 6,000. Probability of breaching 6,000 mark is extremely low in the coming week ending 24th September, 2010. Nifty is trading above its 8 days exponential moving average indicating current bull run is likely to remains continue. Its RSI is at 77 levels trading in the overbought zone indicating that there is some more upside potential left for it. Stochastic is currently moving in overbought zone at 88 on the brink of showing positive crossover also indicating upside.
Technical Pick
1) PUNJ LLOYD: BUY
2) FEDERAL BANK: BUY
3) OBC: SELL
4) SIEMENS: SELLMarket is overvalued; Liquidity is supportting share price appreciation The Indian economy has posted yet another quarter of strong growth, with Apr-Jun real GDP rising by 8.8% y-o-y. Looking ahead, growth in 2nd quarter could again be quite encouraging and India could still grow its GDP by close to forecasts of 8.5% y-o-y in FY11 on the back of agriculture sector growth due to good monsoon . However, the Indian markets, like other emerging markets are largely dependent in liquidity flows and good fundamentals may not be a good enough reason for stock prices to move up if there's no liquidity to support share price appreciation. RBI decision to raise the repo rate by 25 basis points and reverse repo rate by 50 basis points as well as large numbers of IPOs are also lined up which will suck the liquidity from market. Going ahead, the key risk to flows is valuation risk (overvaluation relative to other Asian peers). Sensex is Currently, trading at PE of 23.26, premium to its peers and hence above is long term average. Next week, buying is expected in Consumer goods, Healthcare and Power stocks if Nifty sustain 5,750 level while selling pressure could witness in Banking, Metal and Realty stocks.
Fundamental Pick
1) CADILA: BUY
2) SHIV-VANI: BUYGlobal markets to remain firm, eyes on US Federal Reserves monetary policy meeting Global equity extended gains buoyed by positive jobs report from the US and Basel committees favourable decision for banking sector. Further, a successful auction by the Portuguese government eased concerns of Euro-zone sovereign debt. Though, fall in German while in Chinas consumer price index in August rose at its fastest rate in almost two years. Though, fall in German investor confidence and rising inflation figure weighed on markets sentiments, over all mood is optimistic. Next week the key event is US Federal Reserves monetary policy meeting on Tuesday, 21 September where policymakers will access whether the US economy needs reinforced monetary crutches. Moreever, some profit booking could be seen in the coming days after recent rallies in global markets. Further, the economic numbers will play a vital role in deciding markets movement.Crude prices likely to decline, Gold prices may stay flat with a positive bias Crude oil prices are likely to decline in the coming week. Prices may fall on the speculation that US crude supplies will increase after Enbridge Energy Partners LP starts a pipeline. The movement of the crude prices will also depend on the economic data next week. Moreover, the prices may remain shaky as the concerns of global economic recovery still persist. The gold prices may stay flat with a strong positive bias in the coming week. The precious metal may extend its advance on the concerns over global economic recovery. But, in the near past the gold prices have already touched record highs, which is likely to act as a drag on the prices in the coming week.Bond prices may ease further as liquidity tightens Bond prices are likely to remain under pressure on tight liquidity condition. The liquidity in the system has tightened following advance tax payment which is estimate to drain about Rs 60,000 crore. However, the liquidity is expected to improve towards the end of September as government will start spending after monsoon.
Reliance Industries has surged 7 per cent last week. During this rally, the stock had decisively breached its 21-day moving average on Monday and later on breached its 50-day moving average. The near-term trend is up for the stock from its September 6 low of Rs 885. However, the medium-term trend remains down as long as the stock trades below Rs 1050.
The stock is currently facing significant resistance in the range between Rs 1,040 and Rs 1,050. Moreover, 200-day moving average is poised at Rs 1,038. Inability to penetrate this resistance zone will result in the stock moving sideway between Rs 1,000 and Rs 1,050 in the short-term. Short-term trader should tread cautious. Strong move above Rs 1,050 will push the stock higher to Rs 1,090 in the medium-term. Supports below Rs 1,000 are at Rs 980 and Rs 960.
State Bank of India (Rs 3,094)
The stock recorded an all-time high of Rs 3,175 on Monday and gained 5.5 per cent on that session. Subsequently, the counter started to move sideways between Rs 3,050 and Rs 3,170. As long as the stock moves within this range short-term traders can avoid trading. A fall below Rs 3,050 will pull the stock down to Rs 3,000 or Rs 2,900 in the short-term. On the other hand, strong up move beyond Rs 3,175 will lift the stock to Rs 3,250.
After taking support at Rs 2,400 in late July 2010, the stock's medium-term uptrend got accelerated sharply. Medium-term perspective investors can consider staying invested with revised stop-loss of Rs 2,500.
Tata Steel (Rs 605.3)
The stock advanced 10 per cent the week before last, emphatically closing above its medium-term trend-deciding level of Rs 575 and also 200-day moving average at Rs 566. Last week saw the stock climb Rs 12. The medium-term trend is up from its June 2010 trough of Rs 450. Short-term trend is also up. However, the stock is testing key resistance in the band between Rs 600 and Rs 610. Fresh long position is recommended only if the stock surges above Rs 610 conclusively with an initial target of Rs 625 and then Rs 640 and the stop-loss can be maintained at Rs 596.
As long as the stock trades above Rs 530, the medium-term outlook stays positive and investors can hold the stock with stop at Rs 530.
Infosys Technologies (Rs 2,974.1)
The stock gained 2.8 per cent in the previous week and it also marked new life-time high of Rs 3,059. Immediate key resistances are at Rs 3,010 and Rs 3,060. Immediate support is at Rs 2,950. Short-term uptrend will hold as long as the stock trades above Rs 2,900. A tumble below this level will drag the stock lower to Rs 2,850 in the short-term.
Medium-term trend is up for the stock and investors can prolong their holdings with revised stop-loss at Rs 2,650 levels. —
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Nifty formed rising wedge pattern indicating correction if lower trend line breaks Nifty started the week on upbeat note and able to manage its strength during the whole week. During the week (13-17 September), Nifty marched nonstop from 5,640 to 5,900. After marking high of 5,900 it paused for a short lived break on Thursday of week and continued with its upward journey on Friday. Though Nifty managed to breach the mark of 5,900 in current 'Bull Run' it couldn't able to sustain. During the week it gained about 4.34% (240 points) from the last week close. For the week opening Monday Sep 13, 2010 Nifty low and open prices are same and it rose continuously, day-on-day, restricted it going below. Volatility over the past few sessions and global cues playing a major role now. Uptrend is expected to continue and volatility may be the order of the day for some more time and hence the investors are suggested to trade cautiously. Technically, last six day's chart of Nifty has formed rising 'wedge pattern' which is bearish breakout, only if, lower trend line break. Otherwise we can see rally up to 6,000. Technical momentum indicator, which is suggesting uptrend, could test its next major resistances around 5,920 and if Nifty crosses this level, it can go further up, to test 6,000 level. On the downside, the levels of 5,840 will play major supports and any decisive fall below that could drag Nifty to its next strong support of 5,780. It is still trading above its 8 days exponential moving average and its RSI is at 77 levels moving in the overbought zone, indicating that there is some more upside potential left for it. Stochastic is currently moving in overbought zone at 88 on the brink of showing positive crossover indicating upside. MACD is trading in positive zone showing positive divergence also suggesting uptrend. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Comment
Comment
ORIENTAL BANK OF COMMERCE (SELL)
Comment
SIEMENS (SELL)
Comment
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Looking Forward The Indian economy has posted yet another quarter of strong growth, with Apr-Jun real GDP rising by 8.8% y-o-y. Looking ahead, growth in 2nd quarter could again be quite encouraging and India could still grow its GDP by close to forecasts of 8.5% y-o-y in FY11 on the back of agriculture sector growth due to good monsoon. However, the Indian markets, like other emerging markets are largely dependent in liquidity flows and good fundamentals may not be a good enough reason for stock prices to move up if there's no liquidity to support share price appreciation. RBI decision to raise the repo rate by 25 basis points and reverse repo rate by 50 basis points as well as 'n' numbers of IPO's are also lined up which will suck the liquidity from market. Going ahead, the key risk to flows is valuation risk (overvaluation relative to other Asian peers). Sensex is Currently, trading at PE of 23.26, premium to its peers and hence above is long term average. Next week, buying is expected in Consumer goods, Healthcare and Power stocks if Nifty sustain 5,750 level while selling pressure could witness in Banking, Metal and Realty stocks.
| Daily Movement of Nifty Daily Movement of Sensex, Net FIIs & MF investment Weekly return on BSE Sectoral Indices | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
The company's export formulations is currently contributing 40% of sales and it is likely to increase more as it signed an agreement with Abbott to license 24 branded generics in 15 key emerging markets. Cadila is a strong player in domestic formulations having strong brands like EverYuth, SugarFree, Nutralite. Net sales of Cadila Healthcare on consolidated basis rose by 20% to Rs 1,055.09 crore for the quarter ended June 2010 on the back of increase revenues from US market by 51% to Rs 222.70 crore and rise in the domestic formulation business revenues by 17% to Rs 436.10 crore. We believe that the company has done the groundwork and has made investments in right direction like acquisitions done to enter new regions and business segments and now it is the right time to enjoy the fruits of all those efforts. Onshore petroleum exploration service provider, Shiv-Vani Oil and Gas Exploration Services presently hold an order book of Rs 3,200 crore, which 2.5x its consolidated revenue for FY10. The company's fat order book is expected to swell further, as news order will be awarded post monsoon. Looking at the quarterly numbers, the company has posted stellar 41% jump in consolidated revenue to Rs 396.9 crore led by improved revenue from new rig contracts and higher utilization of seismic crew. Company's bottomline swelled 52.3% to Rs 46.97 crore. At the CMP of Rs. 453.25 the company is trading at 7.5x its FY11E EPS of Rs 60.4. We recommend a buy on the stock with a target price of Rs 500, indicating an upside of 10.3%. Weekly Price Movement of ADR
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
US indices higher during the week (till Thursday) following new banking rules stronger than expected retail sales growth in August. . The banking sector was in focus as new requirements for bank capital reserves were revealed to be tamer than anticipated, despite a tripling of reserve requirements.The impact of the new Basel regulations is also projected to have a lessened effect on the banking industry, as most financial firms have already raised substantial reserves in the wake of the global economic crisis. Retail sales jumped 0.4% in August compared to a revised 0.3% increase in July. Further, merger & acquisition front prompted significant buying interest. Technology giant Hewlett Packard signed a deal to buy digital security firm ArcSight for USD 1.5 billion. Car rental company Hertz Global Holdings also raised its takeover offer for rival Dollar Thrifty Automotive Group to about USD 50 per share. On economic front, investors were presented with another mixed batch of economic data, which was unsuccessful in indicating a clear direction for the US economy. Looking ahead, market focus is likely to turn to data on consumer prices and sentiment. Asian markets gained during the week. Markets belled the week on a buoyant note led by strong set of economic numbers from China. China's consumer price index in August rose at its fastest rate in almost two years. Further, market remained mixed in most trading session as weakness in yen seen against the US dollar on suspected intervention by the government while some profit booking came into act after recent gains. Though, rising houses prices in China remained concern for the banking sector. At the fag end, firm cues from the US markets lifted sentiments while weakness in dollar pushed commodity stocks higher. European markets continued to edge higher this week also. Markets made a cheerful start of the week hitting their highest close since April after Basel committee made favourable rules for bank capital. Though, some mixed economic numbers weighed on markets sentiments as German investor confidence fell more than expected while UK inflation unexpectedly exceeded the government's limit to 3.1%. However, sentiments from US were positive with sales at US retailers rising in August. Further, European markets likely to face some profit booking after recent advances while investors are still unconvinced about shifting into further riskier asset classes. Moreover, next weeks Monetary policy meeting of US Fed Reserve will give more clear picture for markets further movement. | Weekly return on major Global Indices Data of US and European markets taken from Sept 09 to Sept 16, 2010 Data of Asian markets taken from Sept 10 to Sept 17, 2010 Weekly Change in the Composites of S&P 500
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Global Key Events
| Domestic Key Events
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Open Interest in Nifty Future vis-Ã -vis Nifty Most Active Contracts Put-Call Ratio Volatility Index FIIs Cumulative trailing 5 day's data
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Call Rates
FIIs & MFs investment in Debt Market
(Source: SEBI) Bond Yield (7.80% CG 2020)
Spread Liquidity Adjustment Facility
GoI borrowing Program - 2010-11
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Top | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Weekly change in Crude prices per Barrel
Inventories(Weekly Change)
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Top | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Rupee ended the week mostly higher on continued foreign funds inflow into the domestic stock market. Risk appetite has increased as Rupee gained despite another weaker than expected trade deficit figure. Greenback fell 1.27% against domestic currency on sustained selling by banks and exporters. Further, rate hike by RBI to keep inflation under control also boosted Rupee. INR was also firm against Yen as the Japanese currency fell sharply against world currencies after government's surprised innervation in the forex market.
| INR vs. USD and Euro | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Top |
Godrej Consumer became much-sought after in the middle of last week and finished with a 15 per cent weekly gain. There also has been an increase in volume over the past two trading sessions. The stock has been on a long-term uptrend since October 2008 low of Rs 94. The intermediate and short-term trend too is up for the stock. Inability to move above its life-time high of Rs 479, marked on Friday or the psychological resistance at Rs 500 would signal short-term weakness. In that case, the stock can witness short-term correction to Rs 425 or Rs 400. Key support below Rs 400 is at Rs 350.
The long-term trend remains positive as long as the stock trades above Rs 280. Emphatic move above Rs 500 will lift the stock to Rs 550 in the long-term.
Ispat Industries (Rs 23.7)
The stock sky-rocketed on Friday by gaining 17 per cent, but ended the week with 10.7 per cent gain. It took support around Rs 17, a significant longer-term support level in June 2010 and has since been on a medium-term uptrend. We observe that there is an increase in weekly volumes over the past four weeks. The stock is currently facing key intermediate-term resistance in the zone between Rs 24.5 and Rs 25. Failure to exceed this resistance in the near-term will pull the stock lower to Rs 23 or Rs 22.5. Next support for the stock is pegged at Rs 21.
The medium-term outlook stays bullish as long as the stock hovers above Rs 20. Conclusive weekly close above Rs 25 will take the stock higher to Rs 28 and then to Rs 30 in the intermediate-term. —
52-WEEK BLOCKBUSTER: VIP INDUSTRIES
VIP Industries, has had a spectacular rally in the stock market over the last one year. The company holds a large share of the organised segment of the luggage market and owns the brands — VIP, Aristocrat, Alfa, Skybags and Delsey. Revival in the travel industry, higher demand during the festive and wedding season last year and a cool-off in plastic prices saw the company report after tax profit of Rs 50 crore in 2009-10, over five times the profitsin the previous year.
Sales for the above year grew 23 per cent helped mainly by growth in the value segment (below Rs 3,000) which recorded a growth of 23 per cent in revenues, following strong demand in tier II/II cities. The company however pushed sales in its premium category too, by launching new light-weight products; the segment managed a 14 per cent growth. VIP's soft luggage category that includes backpacks and business satchels has also seen good demand.
VIP Industries intends to meet the stiff competition from the unorganised players by widening its distribution network and by also launching more product varieties. With raw material prices (of plastic and aluminium) having inched up significantly over the last six months and cost of imported products from China (that VIP sells) too rising, there may be some pressure on the margins this year for the company.
52-WEEK LOSER: PUNJ LLOYD
The stock of Punj Lloyd slid 57 per cent to Rs 118 over the last one year. Hit by cost overruns in projects of its overseas subsidiaries as well as its own projects resulted in earnings slippage over the last two fiscal years.
The company in fact ended FY-09 and FY-10 with losses. Punj Lloyd's woes began in December 2008, when the company's auditors qualified their statements regarding non-provision of certain costs in its overseas subsidiary's projects. This cost ballooned in subsequent quarters and resulted in dragging the company's net profits. And, even as the overseas subsidiaries slowly stabilised in FY-10, Punj Lloyd's tryst with project costs continued as its own projects for ONGC and more recently a major Libyan project witnessed cost overruns/delayed execution. Delays in execution in places such as Libya can be attributed to the economic slowdown in the region.
There, however, appears measured sign of a revival in the company's growth. For the quarter ended June 2010 the subsidiaries witnessed a 29 per cent growth in their revenues sequentially. Order inflows in June quarter however, was 67 per cent lower than a year ago. But, given the huge backlog in projects and delays in their execution, it appears a prudent strategy to take on fewer orders and focus on execution.
Going forward, pick-up in activity in the Libyan projects would be key to a revival in growth for Punj Lloyd. The Libyan order alone accounts for over 30 per cent of the company's Rs 25,600-crore order book
Retail investors exit too early, miss peaks of current rally
Parvatha Vardhini C BL Research Bureau The Sensex has gained nearly 140 per cent in the past year and a half, and many Sensex stocks are at new lifetime highs. However, haunted perhaps by the losses they suffered in the 2008 slump, retail investors may have quit rather too early in this rally. A study of the shareholding pattern for nine Sensex stocks that hit their all-time highs this week shows that there has been a steady drop in the number of retail investors holding them, from about 39.45 lakh in the quarter ended December 2008 to about 34.69 lakh in the latest, June 2010, quarter. While this represents a 12 per cent fall, the decline has been greater for specific stocks such as of Infosys and HDFC Bank where the number of retail shareholders has dropped by about 28 per cent and 22 per cent respectively since December 2008. This suggests that retail investors may have been steadily exiting shares as they rose, reducing their participation in the uptrend. Periodic sell-out Besides Infosys and HDFC Bank, which witnessed steady selling, investors in M&M and Tata Motors also seem to have cashed in on their gains periodically, unmindful of the rising fortunes of the auto industry. From April to December 2009, the number of retail shareholders of M&M and Tata Motors has shrunk steadily by about 11 per cent and 15 per cent respectively. The lesson of 2008 — a bird in hand is worth two in a bush — seems to have got hardwired into investors. Among the other stocks to see early exits was ITC where retail investors adopted a wait-and-watch approach in the April-June 2009 period before beginning to sell, by the September 2009 quarter. During this three-month period, the company's retail base eroded by 5 per cent. Shareholders of SBI were also quick to book profits in the June and September quarters of 2009. TCS too saw regular selling throughout. Did anyone hold on? While a small set of HDFC investors did quit last year, an increase in retail shareholding was witnessed in the first six months of 2010 in this stock. HDFC is one stock that has shown considerable stability in the sense that it has seen only a 4 per cent erosion overall in its retail shareholder base during the October 2008-June 2010 period, implying that retail investors of HDFC have indeed benefited from the rally. M&M has also witnessed fresh buying since this January. Aided by this, it is the only company showing an 11 per cent growth in the number of its retail shareholders in the June 2010 quarter over the October 2008 quarter. At 19k, market looks riskier than at 2008 peak With FII holdings forming almost 14 per cent of the total market cap of the BSE-500 Index, it is best investors exercise caution on stocks with high FII interest. With the BSE Sensex breaking past 19000 after a long spell, the market 'targets' are being busily upgraded to levels of 21000 plus, the previous market high. But did you know that the rally this time round has been underpinned by much lower earnings growth than in 2007-08? The Sensex companies reported 10 per cent growth (all references to profits exclude the loss-making oil refiners, given that their size may skew the picture) in earnings in FY10, no better than the slowdown-impacted FY09 and far lower than the levels of FY07 and FY08. However, that is not the only thing that was different in this rally. Here we go: Slower growth in earnings In the last bull market between June 2006 and January 2008, the BSE Sensex rose by 131 per cent and in the current rally too, the Sensex has made a similar 139 per cent return. The Sensex PE moved up from 18 times to 28 during the previous rally and from 14 times to 23 this time round. However, the PE re-rating in 2007-08 was underpinned by companies delivering strong profit growth even as the rally was on. Sample this: In 2005-06, companies in the Sensex registered a 21 per cent earnings growth and followed this up with a 29 per cent growth in 2006-07 and 27 per cent in 2007-08. In the current rally, the numbers aren't as encouraging, despite support from a low base. The rally that started in March-09 was on the backdrop of the Sensex companies reporting a 10 per cent growth in earnings for 2008-09. But, with rosy expectations of 'forward earnings', the market had a breathtaking run. In 2009-10, the Sensex companies delivered the same 10 per cent growth even as the market PE had already run up to 20 times by end-March-10. The companies in the BSE Smallcap basket, however, recorded a 73 per cent growth in earnings, rising from the low base of the previous year where their earnings fell by 40-odd per cent. The BSE Smallcap index's PE stands at 18 times now. The first quarter of fiscal 2010-11 too has brought no reprieve from the rather moderate growth. The Sensex companies notched up just 4 per cent growth while the BSE-500 constituents grew 10 per cent. Unmindful of these, the market continues to head north, with the PE multiple of the Sensex rising from 20 times in March 2010 to 23 times now. If earnings continue to disappoint, investors will eventually have to adjust their expectations downward, warranting a correction. Smallcaps lead gains Another differing feature of the recent rally is that the small-cap stocks beat the Sensex by a bigger margin than they did in 2007-08. Though the Sensex was up by 139 per cent, the BSE Smallcap index has had a dream run over the last one-and-a-half years, appreciating 256 per cent. In the previous bull market, Smallcap performance was actually much more muted, with a gain of 186 per cent higher than the Sensex return of 131 per cent. A probable correction at this point may dampen the premium valuations stocks in this space enjoy. In end-January 2008, when the BSE Smallcap index was almost at the current level of 10300, it traded at a PEM of 16 times; the index's price-earning multiple currently is 18 times. The BSE Smallcap index's peak valuation in the last rally was 22 times. But do note that 95 of the 531 companies that constitute the BSE Smallcap index are at a valuation of above 30 times now. Investors may, however, breathe easier if they have mid-cap stocks in their portfolio. At 21 times, the BSE Midcap index is far from its peak valuation of 27 times in December 2007. Different sectors lead The sectors that led this rally have differed too. Realty, infrastructure and power, the three sectors that were multi-baggers in the rally that ended in January '08, turned underperformers in the ensuing correction and fell to less than half their peak levels. Going by this logic, consumer durables (up 385 per cent), fertilisers (up 383 per cent) and banks (up 272 per cent), the top performing sectors in this rally, may be most exposed to correction. Infrastructure companies have been among the front-runners this time too, making a return of close to 270 per cent. Investors, nevertheless, need to tread with caution — Unity Infra, the stock which rose close to 770 per cent in this rally, was the one that had corrected by 92 per cent in the fall of 2008-09. It is FIIs all the way! The 2006-08 rally was driven by a steady stream of inflows by domestic institutions in the stock market, but this time around they were not that active. This rally was wholly fuelled by the money the foreign institutional investors poured in. Between March '09 and now, the stock exchanges show that a total of Rs 55,000 crore has been the net purchases in the cash market by foreign institutional investors. As a percentage of the BSE-500 index's total market-cap, FIIs hold 13.9 per cent now — higher than the December '08 level of 12.9 per cent. That is a signal that any global 'event' a la Lehman may have very dramatic consequences for the Indian markets, as foreign investors wind up positions here to setoff their losses in other markets. For investors, this means that it is best to exercise caution on stocks with high FII interest. Some stocks where there has been a sharp increase in FII holdings between March '09 and now are: Apollo Tyres, Dewan Housing, Unitech, HDIL, Sobha Developers, Indiabulls Real Estate, Hindustan Construction and Hindalco Industries. Stock strategy: Ranbaxy rules at critical level Ranbaxy (Rs 536.8): The stock witnessed a sharp rise last week especially on Friday it surged 6 percent accompanied with extra-ordinary volume, and closed a shade above its key resistance level of Rs 534. The stock is trading well above its 21 and 50-da moving averages. It is has been on a medium-term uptrend from May low of 402. Moreover, short-term trend is also up since mid of August. The daily and weekly indicators of the stock are featuring in the bullish zone implying upward momentum. Another conclusive close above Rs 534 could take the stock to Rs 585 initially and then to Rs 660. But if it fails to sustain the current level and closes below Rs 522, Ranbaxy could touch Rs 464 initially and then Rs 416. F&O pointers: Derivative trading presents a positive outlook for Ranbaxy (market lot is 500), as the stock witnessed fresh accumulation of long positions. Option trading indicates that Rs 540 could be a major resistance, as calls at that strike witnessed higher accumulation. However, unwinding of long position in calls and heavy accumulation in puts at 520 strike suggest that it could act as a strong support level. Strategy: Traders can consider going long on Ranbaxy futures with a stop-loss at Rs 520 for an initial target of Rs 560 and then at Rs 585. Move the stop-loss to higher levels if the stock opens on a positive note. Wipro (Rs 423): The stock has been moving in a band of Rs 375-455 in the last few months. It is likely to maintain the trend. The long-term outlook appears positive for the stock as long as it rules above Rs 336. The short-term resistance and support are perched at Rs 438 and Rs 372 respectively. The possibility of Wipro heading towards its support appears bright in the immediate term. F&O pointers: Derivative trading suggests a bearish outlook for Wipro (market lot: 833), as the counter accumulated fresh short positions. While options are not that active, the little cues that can be deciphered from it indicate a negative bias. Strategy: Traders can consider going short on Wipro (October) series. The recommendation is for a slightly longer period. Keep the stop loss at Rs 438 for an initial target of Rs 372. Follow-up Last week, we had advised shorting Bank Nifty futures. Contrary to our expectation, the index surged upwards. Orient Green Power — IPO: Invest Strong revenue growth, coupled with tax benefits, preferential tariffs, incentives and carbon credit will aid margin expansion for the company. The biomass segment holds immense potential… The company's 7.5MW biomass facility at Pattukotai, Tamil Nadu. Investors with a stomach for risk can consider the initial public offer of Orient Green Power (OGPL), a pure play on the renewable energy segment. The company a leading renewable energy developer, plans to scale up its capacity from 209 MW to 1013 MW by end-FY-2013. Strong revenue growth coupled with tax benefits, preferential tariffs, incentives and carbon credit will aid margin expansion for OGPL. The execution time for renewable energy projects is lower than that for conventional ones. Given that its parent/associate companies will supply and execute the major portion of the project, the risk of equipment delays is somewhat mitigated. The regulated tariff for renewable energy projects is pegged in such a way that Return on Equity (ROE) would work out to an attractive 19 per cent pre-tax. However, these returns are lower compared with that generated by merchant power producers as the generation cost per unit is high in the case of renewable energy. At the upper end of the price band (Rs 47-55), the offer price would discount the estimated FY-12 book by 1.72 times, after the IPO funds infusion of Rs 900 crore. The price discounts the estimated FY-12 earnings 21 times. In terms of P/BV, other private power utilities enjoy valuations of over three times. Some discount is justified for OGPL due to the lower load factors likely for renewable energy, feedstock risks and the untested nature of the business. As their current portfolio of projects is small, investors need to hold on to the stock for a two-three year period to take advantage of the high earnings growth. Risks to the offer include limited operational history, seasonal nature of the operations in case of wind energy and constraints in the availability of feedstock in the case of biomass projects. Business By end of FY-13, OGPL's energy mix may be as follows: 77 per cent wind energy, 21 per cent biomass and 1.4 per cent small hydro projects. The current tariffs for the wind projects range between Rs 2.7 and Rs 5 per unit while the upcoming capacities have better rates and may range anywhere between Rs 4.17 and Rs 5.63 per unit. The management expects tariffs on overseas projects to be Rs 5.5 per unit in Europe and Rs 8 in Sri Lanka . These tariffs are attractive and will help the project-specific ROEs to translate into overall ROEs. Wind energy holds huge untapped potential, what with only 22 per cent of the estimated potential said to be utilised. OGPL, which now is the largest wind energy player is all set to take advantage of this opportunity. Wind energy, while devoid of fuel risk, is exposed to seasonality. The company plans to foray into international markets (especially Eastern Europe) which have better incentive system for renewable energy. The upcoming wind projects use superior technology as compared with existing ones which will improve the overall wind PLF. Possibilities of brownfield expansions also emerge as some of the wind projects are nearing the end of their expected life span. In biomass, decentralised nature of the feedstock availability increases the cost of procurement for biomass; costs may be pass-through but constraints in availability of feedstock are a bigger concern. The company holds average inventory of 45-60 days of feedstock to mitigate this threat. Currently, some of the projects are operating at lower than their projected load factors which would mean lower profitability as the tariffs are derived based on normative load factors. Regulatory incentives To encourage renewable energy participation by private players in India, the government has come up with several incentives and sops for such projects. Accelerated depreciation methodology is allowed for the renewable projects which would reduce the tax incidence in the initial years. In terms of tax incentives, these projects enjoy tax holidays for 10 years and also get Customs duty exemption on import of capital goods. In addition, wind power is given incentive of Rs 0.50 per unit generated and connected to the grid. The companies can also sell carbon credits amounting to Rs 0.6-0.7 per unit for every unit of power sold. The units generated from renewable energy have assured offtake, thanks to the renewable purchase obligation. State electricity boards are required to buy 5 per cent of their power requirements from renewable sources. Funding The total fund requirement to set up 800 MW of capacity stands at Rs 5,092 crore, of which some of the capex has been already incurred. At a 70:30 debt-equity, the company may require more than Rs 1,500 crore of equity funding. However, of the Rs 900 crore funds raised, only Rs 590 crore will be utilised towards project development and the rest towards repaying part-debt. As the company turns profitable and pays down debt, funds may be freed up to be ploughed back into the capex. Yet, a gap in equity financing is likely to remain. While the company has not turned profitable, the projects' efficiencies may improve, making OGPL profitable this year.
The company's concentrated regional exposure, high competition in each of its business verticals and risks pertaining to execution of its expansion plans pose uncertainties. Worrisome prospects. Investors with a low-to-medium risk appetite can give the initial public offering of Microsec Financial Services a miss. Concentrated regional exposure, high competition in each of its business verticals and risks pertaining to execution of its expansion plans underscore our recommendation. At the price band of Rs 113- Rs 118, the offer is priced at about 12-13 times its likely FY-11 per share earnings on a post-offer equity base. While this is lower than Sensex valuations, it compares poorly with that of well-established peers such as Motilal Oswal Financial Services and India Infoline. With markets and with it the business prospects of brokerages beginning to look up now, investors may be better off considering secondary market options in this space. Business verticals Microsec Financial Services, the group holding company of Microsec Group, has business operations straddling financing, investments and advisory services. Through its many subsidiaries, Microsec has presence in equity broking, investment banking, wealth management and financial planning and distribution too. The group has a network of 239 branches in all, with about 26,000 registered clients in the equity broking business. It also has about 460 clients registered for its loan against shares service. The company has also filed applications for empanelment to several institutions for its institutional broking business. Of the nine that have been granted empanelment so far, operations have commenced in five. regional exposure Microsec caters to a clientele with a strong regional concentration in eastern India. Of a total of 239 branches, 178 are in West Bengal (of which 99 are in Kolkata) alone. The company has only 26 branches in other regions. While such a dominant regional presence affords it a position of strength in East India, growth opportunities may tend to be limited to that extent. Microsec plans to increase the network of its branches to other regions, with a focus on Tier-II cities for growth. While the growth strategy is in the right direction, it may be a while before it begins to pay. Most other regions are already crowded with regional, national and even MNC players offering similar services. Besides, procuring new business and establishing a brand presence usually takes time in the financial services space. But to the company's credit, it is only new to the regions and not to the business. That it has managed to grow its revenues and profits at a compounded rate of about 69 per cent and 60 per cent in the last four years are factors in its favour. Nonetheless, it remains to be seen how Microsec plays its cards to gain a pan-India foothold. Loan against shares Microsec has earmarked a substantial portion of the IPO proceeds (about Rs 113 crore) for its loan against shares business (LAS). This is expected to help the company extend the service to more clients. However, of the 460 clients registered for this service, only 72 had availed of such loans as on March end this year. Their outstanding loan amount was pegged at Rs 40.5 crore. Moreover, the growth of the LAS business largely depends on the market conditions is, therefore, highly cyclical. To that extent, the segment income could be very lumpy. The company has, however, managed to grow its interest income on loans at 26 per cent CAGR in the last two years despite the inherent volatility, and without adding to non-performing assets. This does reflect positively on the efficacy of the company's risk management techniques. While broking business (equity, commodity and currency), which made up about 37 per cent of the consolidated FY10 revenues, is likely to be its key growth driver, Microsec does not enjoy a significant volume share in both the cash and derivatives segment. Competition The company's revenues from its investment banking operations have grown at a compounded 25 per cent rate over the last three years, albeit on a low base. It has managed equity offerings aggregating Rs 39 crore, undertaken two rights issues, four delisting and ten takeover assignments (as on June 30, 2010). While the potential for growth in this business is high, prospects are largely pegged to the group's ability to bag new mandates. Considering the high competition in this space and the constant churn of talent, pressure on margins cannot be ruled out. The company nonetheless has sufficient cushion to handle such pressure. It reported an operating profit margin of about 59 per cent last fiscal. |
A strong enrolled student base, and a business that may be sustainable given India's competitive entrance exam dynamics, are key positives.
Mr Pramod Maheshwari,Managing Director.
Investors can consider taking exposure to the initial public offering by Career Point Infosystems, a tutorial services provider, given the encouraging prospects for its business with sustainability and visibility over the long-term.
At the upper end of the price band (Rs 295-315), the offer discounts the company's estimated FY-11 per share earnings by about 25 times on a fully diluted equity base. This makes the offer expensive and investors may have to hold on to the shares for a two-three year period for reasonable capital gains. Although there are no comparable peers, companies that broadly come under the 'education' category have enjoyed superior valuations.
Career Point saw its revenues grow at a compounded annual rate of 31.2 per cent over a three-year period to Rs 67.8 crore in 2009-10, while net profits expanded at the rate of 18.4 per cent during the same period to Rs 19.9 crore.
These figures may have been better but for FY-09, when the profits grew a mere 4.5 per cent due to a spike in manpower costs.
In FY-10, profits have grown by 22.8 per cent over the previous fiscal, which is more in line with the rates at which Career Point has historically grown its profits. A strong enrolled student base, a business that may be sustainable given India's competitive entrance-exams' dynamics and the ability to innovate with the latest audio-visual technologies in its pedagogy, are key positives for the company.
Besides, a strong presence in Kota, the hub for ITT JEE coaching, and a near debt-free balance-sheet are added attractions.
competitive exams
Career Point provides coaching classes for students appearing for engineering/medical college entrance exams such as the IIT JEE, AIEEE and AIPMT. These are done mostly through its own 17 centres across the country with Kota (58.8 per cent of revenues) being the main contributor. There are also 16 franchisee centres, accounting though for only a fraction of the revenues.
The tutorial services business for engineering/medical entrance is a highly fragmented one with no clear dominant players. There are those who come under formal brands such as Bansal Classes, Brilliant Tutorials, FIIT JEE, Akash Institute and the like. In addition, there are several individual teachers and professors who coach students for these exams. The success rate for each of these institutes remains a function of the vagaries of student performance, which in turn is largely driven by 'star' faculty for a subject or a group of subjects. These teachers are also susceptible to poaching from rival institutes, a key risk.
Despite this, the business remains lucrative thanks to the many entrance exams, and limited seats in premier institutes such as the IITs, NITs and AIIMS. Matrix Partners' recent stake buy in FIIT JEE by investing Rs 100 crore reinforces this point. In fact, there have been several other deals by private equity players with coaching institutes providing training for post-graduate entrance exams.
To ensure high success rates, Career Point conducts an entrance test for students applying to its courses. Enrolments have remained steady over the years and for this fiscal it had 28,626 students across competitive exams as of July, with more expected in August and September. The first two quarters typically account for a bulk of all enrolments.
The number of students appearing for IIT JEE and AIEEE has been increasing over the years, which translates into good growth potential for tutorial service providers such as Career Point. Even if measures such as reducing the number of entrance tests is taken by the HRD Ministry, entrance exams in one form or the other are expected to continue, given that students passing out from different state boards, CBSE and ICSE compete for selection and admission to elite institutes.
The issue
Career Point is looking to raise Rs 115 crore from this issue, of which Rs 68.2 crore is for development of an integrated campus in Kota, which would help it mine further into its chief geography in terms of offering as well as ensuring higher realisations. The rest is for augmenting infrastructure of its classrooms across the country and potential acquisitions.
The IPO is open from September 16-21. Centrum Capital and JM Financial are book running lead managers to the issue.
Strong revenue and profit growth even during the slowdown, increasing size of orders secured, and presence across segments bode well.
.
The company has expertise in water and waste management that form a chunk of the order book.
Investors with a high risk appetite and a two-to-three year perspective can subscribe to the Initial Public Offer of Ramky Infra, a construction contractor in the infrastructure space. The offer is priced at Rs 405 to Rs 468, resulting in a valuation of 21 times the FY-10 per share earnings and 14 times the estimated FY-11 earnings on post-issue equity. Valuations of nearest comparables, Nagarjuna Constructions, IVRCL and CCCL, are at a par or a slight discount.
What lends strength to the company are the strong revenue and profit growth even during the slowdown witnessed in FY-09, large order book, increasing size of orders secured, widespread presence in terms of geography and segments, and expertise in the irrigation, and water and waste management divisions. The company aims to raise Rs 530 crore from this offer, of which Rs 350 crore is a fresh issue and the balance an offer for sale.
Wide presence
Ramky's primary strength is its capacity as an Engineering Procurement and Construction and lump-sum contractor in a variety of segments. The order book stands at Rs 7,432 crore as of March 2010, with a further Rs 3,147 crore secured in the June quarter. e The order book is at five times the revenues for FY-10, providing near-term earnings visibility. Ramky has considerable expertise in the key divisions of water and waste water management, and irrigation. These segments together contribute more than half the order book and offer higher margins, and hold sizeable potential under government development schemes. About 80 per cent of the order book comes from various State governments.
The road segment contributes 21 per cent of the order book, followed by construction of buildings such as hospitals and residential buildings (14 per cent). Industrial and power projects make up the rest.
Such a diverse order book provides the flexibility to change exposure to segments according to the opportunities that present themselves, build on expertise to bid for a wider variety and higher-value projects, and partner other infrastructure players to increase order inflow.
The average size of orders secured has also improved from Rs 22 crore in FY-07 to Rs 93 crore in FY-10, signalling its ability to secure and execute bigger projects, boding well for future prospects.
Development projects
Ramky turned developer in 2007, , and has recently completed two road projects, a pharmaceutical SEZ and a bus terminus, including a commercial area It has three industrial parks, an SEZ, two residential and two road projects, in the pipeline.
That said, risks stem from projects as a developer. Its newly operational SEZ is still not fully occupied.
Construction of its industrial and two new road projects is yet to take off, calling for near-term investments while revenues from these are unlikely to accrue in the next few quarters. The SEZ is for gems and jewellery, a rather risky bet with the ongoing constrained retail consumption in overseas markets.
A degree of comfort comes from its residential projects, which are on schedule, and where a good portion has already been sold.
Strong financials
Ramky has clocked a compounded annual three-year consolidated sales growth of 43 per cent, and net profit growth of 49 per . Operating margins have held steady at 10 per cent for the past three years, even as the order book doubled.
About Rs 80 crore of issue proceeds will fund acquisition of construction equipment, further boosting operating margins. Working capital turnover has held at about 4 months, while collection periods shrunk by about a month. About Rs 175 crore from the issue will fund working capital. Return on equity held above 20 per cent for the past three years.
Even so, a higher debt intake (pre-issue debt-equity at 1.8) led to interest costs eating into margins; net margins fell to 2 per cent in FY-10 from 4 per cent in FY-08. However, Rs 25 crore of issue funds will be used to payoff debt, helping to improve margins. The debt-equity ratio, post-issue, is at 1.1 times, which will allow the company raise further debt to fund its development projects.
Given the diversified revenue stream from its business and the strong growth trajectory it has managed over the years, investors can consider subscribing to the offer.
A pretty picture.
Investors with a high risk appetite can subscribe to the initial public offering of Eros International Media, a company that sources and distributes Indian films, given the diversified revenue stream from its business and the strong growth trajectory it has managed over the years.
At the upper end of the price band (Rs 158-175), the offer demands a value of 19 times its FY-10 per share earnings on a post-offer equity base. The offer could, perhaps, be priced at the lower end of the price band for a more desirable price earning multiple of about 17.
A library of film content monetised through multiple media, a de-risked business model in its lucrative overseas distribution business and a pipeline of big-star-cast movies in the pipeline, which Eros is co-producing, are key positives. For a three-year period leading to 2009-10, Eros' revenues grew at a compounded annual rate of 42.5 per cent to Rs 655.5 crore in FY-10, while net profits grew at 83.7 per cent over the same time-frame to Rs 82.3 crore.
Given the inherent risks in the entire value-chain of the movies business, susceptible as it is to viewer reception to films , this track record appears reasonably sound.
Monetising content
Eros is predominantly a film distributor, though there are films that it has co-produced as well, with many more in the pipeline.
Over the last few years, the revenues earned from sale for overseas theatrical viewership has accounted for 59-61 per cent of the company's overall revenues.
Given the trend of releasing Hindi films early in the lucrative overseas market (countries with significant Indian expatriate presence such as the US, Canada, the UK and the UAE), this proportion bodes well.
Here, Eros has sought to de-risk its business by pre-selling the overseas rights to related companies, Eros PLC and Eros Worldwide, given their significant presence overseas.
Through this, Eros has generally been able to recover nearly 40 per cent of its cost for acquiring the film, thus significantly reducing the risk associated with a film's offtake as well as ensuring cash flows.
The company also distributes Tamil films through Ayangran International, where it holds a 51 percent stake.
Apart from overseas theatrical distribution, Eros also has other revenue streams such as Indian theatrical distribution and sale of satellite television and music rights to various channels.
Besides, the company has a digital film library of over 1,000 films, mainly Hindi and Tamil. Its portfolio includes popular and successful movies such as Love Aaj Kal, Om Shanthi Om and Namastey London.
With the penetration of DTH expanding rapidly and GEC channels seeking to garner top TRPs by screening popular movies, the market is ripe for distributors such as Eros.
The company sells the movies in its portfolioto several channels to be screened in a specific order, thus providing a sustainable revenue stream. This arrangement helps, especially when films don't do well at the box-office.
In co-production, Eros has de-risked its business model to some extent by not having any revenue-sharing arrangement with the other co-producer(s) till it recovers a significant portion of its investment.
That said, this segment has still been a mixed-bag for the company with some hits such as Love Aaj Kal, but many misses such as Veer, Kambakkht Ishq and Housefull. Also, its only fully-owned production movie Aa Dekhen Zara was not received well at the box-office.
Though such negatives are to an extent set off by revenues from the sale of satellite television rights, it may not be enough, especially for big-budget movies.
The company is seeking to raise Rs 350 crore from the offer, of which Rs 280 crore is to be allocated towards co-production and acquisition of films with big star casts (the likes of Shahrukh Khan, etc) which are at various stages of production and are to be released over the next couple of years.
In exchange, Eros would get the rights to these movies typically for a period of five years.
Any weakness in realisations could throw the company's bottomline into disarray, given the high debt servicing involved.
Investors could skip the initial public offering of Electrosteel Integrated, which is priced at Rs 10 to Rs 11 per share. Based on the final expected borrowing to become operational, the company's enterprise value per tonne stands at Rs.33,000/tonne with 75 per cent of this accounted for by debt.
Much larger and integrated players such as SAIL and Tata Steel trade at Rs 60000/tonne and Rs 36000/tonne respectively. Even after the fresh equity issue, Electrosteel Integrated will remain highly leveraged (around 2.8 times debt-to-equity). Any weakness in realisations or expected volumes could throw the company's bottomline into disarray, given the high debt servicing involved.
Electrosteel Integrated plans to raise between Rs.225 crore and Rs.248 crore through this offer.
If the greenshoe option (15%) is exercised, the amount raised will be between Rs. 259 crore to Rs. 285 crore.
Production Plans
Electrosteel Integrated plans to produce 1.2 million tonnes of long products (TMT Bars and wire rods), 3.3 lakh tonnes of ductile iron pipe plant and 2.7 lakh tonnes of billets annually, in addition to 4 lakh tonnes of pig iron at a plant in Jharkhand where it has acquired 1,800 acres of land.
It expects to operationalise a blast furnace (for making liquid steel) by October 2010, and a majority of its capacity is expected to come on stream by June 2011.
Estimated capex for setting up the plant is around Rs 7,360 crore which will be funded mostly through debt (Rs 5,440 crore of which Rs 2,700 crore has been raised so far) and the balance through equity (Rs 1,920 crore).
The company has a marketing and technical tie-up with UK steel trading firm Stemcor, which will hold just under 20 per cent in the company, post-listing.
Modus Operandi
The company is aiming to be a partially integrated steel producer procuring iron ore on a cost plus basis (fixed costs plus 20 per cent) from its parent Electrosteel Castings with which it has a 20-year agreement.
Similar arrangement is in place for 30 per cent of its coking coal requirements. Electrosteel Integrated will source 120 MW of power from its captive power plant. All three sources are within a 230-km radius which should help keep freight charges low. The rest of the coal and power, and its limestone requirements are expected to be sourced from domestic or international sources at market prices.
The coking coal mines of its parent have been operationalised and the iron ore mines are awaiting clearance from the Environment Ministry following which the mines are expected to come on stream by April 2011.
Potential demand
While the first complete year of production for Electrosteel Integrated will be FY2012-13, the company could operate at 30-40 per cent utilisation levels in FY2011-12.
Demand for steel in India is slated to grow at over 9 per cent every year for the next five years. The robust demand is expected to come from a variety of sectors such as infrastructure, real-estate, automobiles, consumer durables and capital goods.
For Electrosteel Integrated which plans a sizable ductile iron pipe capacity, demand is expected to be strong, thanks to the government's plans to spend Rs 80,000 crore over the next five years to improve waste management and water lines.
However, long products such as rebars and wire rods, when commissioned in late-2011, are likely to enter a competitive and well supplied market, which may result in pricing pressures.
Risks
A lot of new steel capacity is expected to come on-stream in the next few two-to-three years. For instance, SAIL is expected to add capacity of over 10 million tonnes per annum, Tata Steel over 3 million tonnes, and JSW 3 million tonnes, taking total capacity in India to an estimated 100-110 million tonnes from the current 70 million tonnes.
Failure by the parent Electrosteel Castings to obtain necessary environment clearance for its iron ore mines could result in Electrosteel Castings having to procure all of its the raw material at market prices, and a consequent high cost structure.
Other risks include pledge of almost 71 percent of the parent company's 34 per cent stake (post-dilution), and insurgency in the areas of the company's operations.
Sensex outperforms global peers again
While the accompanying article highlights the many points of difference between the previous rally and this one, here is one thing that has not changed — India's tendency to outperform other global markets in a rally.
Over the last one and a half years, the Indian stock market has had a spectacular rally, surpassing most of its global peers.
The MSCI-EM pack has managed a return of 114 per cent in the current rally; lower, however, than the BSE Sensex's return of 139 per cent.
China's Shanghai Composite (up 25 per cent), Brazil's Bovespa (up 85 per cent), Taiwan's Taiex (up 76 per cent) and Korea's KOSPI (up 70 per cent) have all delivered a far lower return compared to the Sensex in this period. In the previous market rally between June '06 and January '08, if you recollect, Sensex gained 131 per cent against the MSCI EM index's 81 per cent (MSCI World index up 22 per cent). But one needs to note that the Indian stock market also falls more than other global markets during a correction. In the global meltdown between January '08 and March '09, the BSE Sensex shed 60 per cent of its value while its counterparts in Asia (but for China) registered a 40 per cent loss.
With a steeper rally than others, the Sensex has also seen its valuations climb higher than its peers — a risk one has to factor in while making investment decisions.
The BSE Sensex's PE is at 23 times (trailing 12 month earnings), higher than even the Shanghai Composite that trades at 18 times its historical earnings. Asia's Bovespa, Taiex, KOSPI and Europe's CAC 40, DAX (Germany) and FTSE (London), all trade at valuations of around 14-18 times only.
Buy / Sell (Sep 16, 2010) | |||||||
Buy | Sell | Net | |||||
FII | 3487.32 | 2367.29 | +1120.03 | ||||
DII | 1028.74 | 2133.99 | -1105.25 |
Arvind Parekh
+ 91 98432 32381