Sunday, October 3, 2010

Weekly Market Update 4th-8th Oct 2010

Strong & Weak Stocks for 4th Oct 2010
This is list of 10 strong stocks: 
Orchid Chem, Jindal SWHL, India Info, KFA, DLF, Triveni, Renuka, IDBI, Tisco & Lic house. 
And this is list of 10 Weak stocks: 
Finan Tech, Tata Comm, Patni, GT Offshore, Asian Paint, Divi'S Lab, United Phosphoro, BGR Energy, GMR Infra & Hind Petro.
The daily trend of nifty is in Uptrend 

  • Supp / Resis SPOT/CASH LEVELS FOR INTRADAY 4th Oct 2010
Indices Supp/Resis1 23
Nifty Resistance 6187.576231.73 6310.37
Support 6064.775986.13 5941.97
Sensex Resistance 20582.31 20719.57 20963.68
Support 20200.94 19956.83 19819.57

TRADING CALLS (3-5 DAYS)
BUY NIFTY SL 6050 T 6250 6350 6450 
BUY ADANI SL 650 T 750 
BUY DLF SL 354 T 390 
BUY MARUTI SL 1420 T 1600 
BUY WIPRO SL 420 T 480 
BUY TCS SL 890 T 975 
BUY IDBI SL 145 T 170 
BUY ZEETV SL 295 T 335 
BUY TATAPOWER SL 1300 T 1440 
BUY ABAN SL 820 T 890 
BUY AGBSHIP SL 226 T 270 
BUY BFUTILITY SL 990 T 1600 
BUY APTECH SL 155 T 195 
BUY HEROHONDA SL 1780 T 2050 
BUY GLAXO SL 1800 T 2500 4000 
BUY GAIL SL 465 T 495 
BUY COLGATE SL 860 T 990 1040 
BUY CIPLA SL 310 T 360 
BUY BRFL SL 255 T 290 
BUY ASHOKLY SL 70 T 79 
BUY AMBUJA SL 137 T 156 
BUY BIOCON SL 340 T 375 
BUY ESSAROIL SL 128 T 148 
BUY GATI SL 70 T 95 
BUY RELCAP SL 780 T 840 
BUY CESC SL 500 T 533 
BUY GESHIP SL 300 T 333 
BUY IGL SL 290 T 380 
BUY IFCI SL 60 T 70 
BUY DCB SL 50 T 65 
BUY MOSEARBEAR SL 68 T 80 
BUY SOBHA SL 370 T 425 
BUY IDFC SL 195 T 225 
BUY JINDALPOLY SL 960 T 1050 
BUY EDUCOM SL 590 T 650 
BUY BOBBANK SL 860 T 910 
BUY FINTECH SL 1160 T 1280 
BUY ICICI SL 1080 T 1160 
BUY SKS SL 1300 T 1400 
BUY RELIANCE SL 980 T 1050

BUY ASAINPAINT SL 2588 T 2930
BUY BHEL SL 2518 T 2854 7 
BUY HUSANSTEEL SL 422 T 478
BUY CADILA SL 678 T 768
BUY GLAMARK SL 302 T 340 
BUY MMTC SL 1308 T 1480
HLL SL 300 T 340
BUY IFCI SL 63 T 74
BUY RURALELE SL 354 T 401
BUY SAIL SL 216 T 246
BUY STERLITE SL 170 T 196
BUY SUNTV SL 514 T 583
BUY TULIP SL 174 T 197
SELL EIH SL 139 T 122
BUY NHPC SL 30 T 38
BUY WHIRLPOOL SL 284 T 350
BUY KSOIL SL 47 T 55

RSI and Stochastic suggesting Nifty is likely to move between 5,990-6,200
On daily chart, Nifty is exhibiting "channel pattern ", suggesting breakout can be either side, currently facing stiff resistance at 6,210-6,230 if this level breached decisively then we could see rally up to 6,260 mark and on the flip side immediate strong support at 5,960 if this level breached then we could see fall up to 5,900 mark. Technical momentum indicator Stochastic is currently moving in neutral zone, on the brink of entering into oversold territory indicating uptrend. RSI is trading in oversold territory at 77 showing positive crossover. Another technical indicator MACD is trading in positive zone, also indicating uptrend. Today Nifty has just managed to close above 8 Day and 34 day EMA and not showing any reversal sign for coming week, expecting small correction in forthcoming session but overall looking positive and is likely to move between 5,990-6,200.

Technical Pick
BPCL: Sell
Bajaj finserv: Sell
MSK Project: Buy
Sujana tower: Buy
Market is overvalued; FIIs inflow is supportting share price appreciation
Foreign funds continue to aggressively mop up Indian shares. 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 theres no liquidity to support share price appreciation. Further, concern is that the IPO of state-run Coal India in mid-October 2010 which plans to raise about Rs 15,000 crore,would suck liquidity from the secondary equity markets. Going ahead, the key risk to flows is valuation risk (overvaluation relative to other Asian peers). Buying could be seen in FMCG and Cement stocks while selling pressure could witness in Banking, Metal and Realty stocks.


Fundamental Pick
Dena Bank: Buy
Madhucon Project: Buy
Global markets cautiously eyeing on policy meeting of Bank of Japan and England
Global equity market managed to give a positive closing during this week amid high volatility. After a subdued start led by financial stocks, as a debt downgrade for an Irish bank reignited fears about Europes banking system, global markets get some strength on the back of some upbeat economic news from US and a strong set of economic numbers from China and Japan. Further, the comments, along with speculation that European central banks will purchase troubled debt, helped relieve worries about sovereign debt. Moreover, the week ahead brings another key round of economic indicators, headlined by the Bank of Japans monetary policy meeting on Oct. 4-5 in which it may ease policy, as worries mount about the fragile economic recovery due to the yens rise, slowing overseas demand and stalling output growth. While recent softening property figures might be enough to prevent the Reserve Bank of Australia raising the official interest rate next week, as it is expected that Australias big banks will raise rates regardless. Further, with expectation of 0.3% fall in US pending home sales markets may turn cautious.
Crude prices expected to continue the rally, gold prices may remain flat
Crude prices may continue with the upward rally in the coming week. The prices are likely to rise on speculation that US inventories will drop as the economic rebound accelerates. The coming week may see the gold prices remaining flat, after touching a record high in this week. The international prices are unlikely to rise as the economy rebounds. Investors might take up profit selling as well. Domestic gold prices may pick up modestly amidst the festivities.
Tight cash condition may prevail till mid october, Bonds may stay flat
Owing to tight cash condition, bond prices are expected to stay flat in the coming week. For the next three weeks, the government has lined up supply of Rs 11,000 crore bond for every week which will check any sharp runaway in bond prices. We expect liquidity to ease only towards the middle of October as government spending picks up.


Index Outlook: Thundering start to October


Sensex (20,445)

Bulls took their foot off the accelerator in the early part of the week allowing stocks to trundle sideways. Expiry of the September derivative series and mounting tension ahead of the Ayodhya judgment helped keep prices in check. There was, however, an unexpected surge in stock prices on Friday; probably a divine pat on the head for all Indians for the dignity and restraint displayed after the verdict.

Turnover was high as is wont in expiry weeks. Surprisingly volume in the derivative segment shot up on Friday to over Rs 2 lakh crore on the first day of the new series. This could mean that traders are finally shedding their bearish bias and are bracing for the surge towards a new all-time high. Index PCR below 1 on Friday also reflects this positive shift in sentiment.

It has been a super September for the Indian bourses with the Sensex soaring 16 per cent in this month. An encore is unlikely in October for three reasons. As the benchmarks near their life-time highs, some pause is expected as investors cash out on recent gains. Secondly, the large Coal India IPO scheduled for the middle of the month could drain liquidity. Lastly, corporate scorecard for the second quarter should help market participants realize that stock prices are galloping away from their fundamental base.

However, there are some phases in market cycles when rationality is hard to find. Third waves in e-wave cycles are such periods. These waves are spell-binding in their speed and magnitude. The Sensex is currently in the third wave from March 2009 low. What is more, the third minor of this third could be unfolding now. The best course of action in such phases is to hold on to existing positions and stay away from the temptation to buy over-priced stocks in the primary and secondary market.

The sideways move recorded in the last ten days of September has helped momentum oscillators reverse lower from overbought zone. The 10-day rate of change oscillator dipped to 2 before rising slightly. The 14-week relative strength index rising in to overbought territory implies that the index is getting stretched on medium term time-frame as well.

The medium term trend for the Sensex stays positive. As explained last week, targets for the third wave from the low of 15,960 are 20,097 and then 21,504. Since the index is well past the first target, it could attempt to rise to the next. Since the previous high for the index at 21,207 is also in the vicinity some hiccups can be expected in the band between 21,200 and 21,500. Close below 18,600 is needed to roil the medium-term outlook.

The strong close on Friday has resulted in the short-term trend turning up again. Minor counts for the wave from 17,820 trough gives us the short-term targets at 20,403, 20,736 and 21,120 in the days ahead. Short-term supports for the index are at 20,097 and 19,864. Traders can buy in declines as long as the first support holds. The short-term trend will turn down on a close below 19,864.


The strong surge in the Nifty (6,143.4) on Friday helped it close 113 points higher for the week. The short-term trend in the index continues to be up and the index can move higher to 6,226, 6,341 or 6,388 in the near term. Short-term supports are at 6,035 and 5,963. Traders can buy in declines as long as the first support holds. Close below 5,963 will negate the positive short-term outlook.

Medium-term trend in the Nifty continues to be positive and we stay with the view that a close below 5,600 is needed to negate this view. Targets for the third wave from 4,786 low are 6,040 and 6,467. Since the index is past the first target, it can attempt a shy at the second.

Geographical divergence was noticed in weekly returns of equity markets. While American and European markets gave up some ground, Latin American and Asian markets surged higher on growing interest in the emerging markets. CBOE VIX fluctuated between 22 and 25 denoting status quo as far as investment sentiment goes. Mood among investors is bullish but it has not reached a state of frenzy yet. Dow too whipsawed in a narrow band between 10,750 and 10,900 last week.

As explained last week, if a three-wave move is in progress from July low of 9,614, next target for the Dow is at 11,042. Reversal from here will set the stage for October sell-off in equity markets, dragging the index down to 9,600 zone again. But the long-term uptrend from March low will stay in place despite this sideways move between 9,600 and 11,300 in the index.

Weakness in dollar with the dollar index traded on ICE plunging below the medium term support at 80 is conducive for asset classes such as commodities and emerging market equity.

— Lokeshwarri S.K.(businessline)

Pivotals: Reliance Industries(Rs 1006.4)

Reliance Industries moved sideways last week between Rs 980 and Rs 1,020 closing with a marginal gain of Rs 4.7. Taking support around Rs 985, the stock rose 2 per cent on Friday. Traders with a short-term perspective can consider holding their long positions with stop-loss at Rs 990 and exit in rallies at Rs 1,020 or Rs 1,045. However, we re-affirm that a fall below the immediate support will drag the stock further to Rs 960 or Rs 930.

Since April 2010 peak of Rs 1,171, the stock has been on a medium-term downtrend. As long as the stock stays below the key resistance band between Rs 1,040 and Rs 1,050, this downward trend is likely to remain active and the stock could move sideways. Conclusive close above this resistance will diminish the downward trend and take it higher to Rs 1,090 in the forthcoming weeks.

State Bank of India (Rs 3,261.2)


The stock jumped 3.7 per cent during the previous week, recorded a new high at Rs 3,272 and is currently hovering around this level. We observe that the daily and weekly relative strength indices are featuring in the overbought territory signalling cautiousness. Reversal from Rs 3,272 or Rs 3,300 will pull the stock down to Rs 3,200 or Rs 3,175 in the near-term. Therefore, short-term traders can avoid initiating fresh positions in the stock.

The stock continues to be in a medium-term uptrend. An emphatic close above Rs 3,300 will lift the stock ahead to Rs 3,350 or Rs 3,370 in this time horizon. Investors with medium-term perspective investors can consider holding the stock with revised stop-loss of Rs 2,600.

Tata Steel (Rs 667.7)


Tata Steel achieved our price target of Rs 640 and subsequently surpassed the resistance band between Rs 650 and Rs 660 last week by surging 6 per cent. If the stock sustains above Rs 650 in the ensuing sessions there is a possibility of the stock reaching Rs 700. However, a fall below Rs 650 will weaken the stock and pull it to Rs 630 or Rs 610. Next key support is present at Rs 580.

Medium-term trend is up for the stock and investors can remain invested with stop-loss at Rs 580.

Infosys Technologies (Rs 3,103.4)


The stock climbed Rs 62.7 in the previous week and achieved our initial price target of Rs 3,100. It is heading towards our next target of Rs 3,145. Short-term traders can hold their long positions with stop-loss at Rs 3,075. Medium-term trend appears to hold an upward bias. Investors can stay invested with stop-loss at Rs 2,750 levels. Medium-term target for the stock is Rs 3,200. — Yoganand D.(businessline)


Sizzling Stocks: Unitech (Rs 94.4)


This stock moved into the limelight on Friday, surging 7 per cent, accompanied by extra-ordinary volume. It finished the week with 10.6 per cent gains. With this surge, the stock has conclusively broken out of the significant resistance level of Rs 90, which it was unable to break despite multiple attempts since November 2009. From the May 2010 low of Rs 65, the stock has been on a medium-term uptrend. The stock is trading well above its 21- and 50-day moving averages.

Unitech is currently testing minor resistance around Rs 95; a small pause around this resistance is likely before further rally. Next key resistance is pegged at Rs 100. Strong move above this resistance will take the stock higher to Rs 110 or Rs 115 in the medium-term. Inability to surpass Rs 100 will pull the stock lower to Rs 90, a key support. Subsequent support below Rs 90 is at Rs 81.

Motilal Oswal Financial Services (Rs 213.6)

On Friday, the stock zoomed almost 20 per cent with good volume emphatically breaking through a key long-term resistance band between Rs 180 and Rs 185. The stock has climbed 26 per cent over last week. Before this break through, the stock was consolidating sideways between Rs 150 and Rs 185 since September 2009. The daily relative strength index has reached overbought territory signalling cautiousness. Inability to move higher above Rs 220 will result in a pull back. In that case, the stock can correct to its immediate support in the Rs 195-200 range in the short-term.

An emphatic weekly close above Rs 220 can lift the stock ahead to Rs 240 or Rs 250 in the medium term. Key supports for the stock are positioned at Rs 180, Rs 165 and Rs 150. — Yoganand D.(business line)


Stock strategy: Consider going short in Kingfisher

K.S. Badri Narayanan

Kingfisher Airlines (Rs 74.85): After moving in a narrow range during July and August, the stock witnessed a sharp up-move. If the current trend sustains, the stock could move up to Rs 83. The immediate support is at Rs 68.8 and a drop below this could weaken the stock to Rs 63.30. It seems that the stock could lose the momentum as trading volumes are declining.

F&O pointers: Though the KFA futures closed in premium with respect to the spot close of Rs 74.4, it shed close to nine per cent in open interest positions. This indicates unwinding of long positions. Options are not that active. Both 75 and 80 calls shed open interest.

Strategy: Traders could consider selling KFA futures (4,000 market lot) with a stop-loss at Rs 75.8 (the peak registered on Friday). Since it is a high-beta stock, only traders with penchant of risk can pursue this strategy. Adjust the stop-loss, if Kingfisher opens on negative note, so as to reduce the losses. On the other hand, if it opens above Rs 75.8, traders could stay away from the counter.

CNX-IT (6,778.85): The immediate outlook for CNX-IT index futures remains positive as it was able to break the narrow band and registered a fresh peak on Friday. The immediate support appears around 6,548 while sustaining of current trend could lift the index to 7,352, according to Fibonacci projections. A close below support level could take the index to 6,440. Considering the result season ahead, the index could swing wildly.

F&O pointers: The CNX IT futures accumulated fresh long position on Friday. The index futures closed a good 20 points premium over the spot close of 6,759.15. Options are not active for CNX-IT.

Strategy: Consider entering long on CNX-IT futures (market lot 50) with a stop at 6,670 (Friday's low value).

Technical Analysis

RSI and Stochastic suggesting Nifty is likely to move between 5,990-6,200

Nifty witnessed a high volatility this week. It initially moved higher, even above the 6,050 level but could not sustain it and moved lower to test 6,000 levels after breaching 6,050 level again, It started upward journey and ended the week well above the crucial 6,100 mark. It gained about 2.08% (125 points) from the last week close. Technically, last six day's chart of Nifty is moving under channel pattern and breakout can be either side. Nifty breached the psychological mark of 6,100 decisively on the very last day of week and managed to sustain above that, currently facing stiff resistance at 6,210-6,230 if this level breached decisively then we could see rally upto 6,260 mark and on the flip side immediate strong support at 5,960 if this level breached then we could see fall upto 5,920 mark. Technical momentum indicator Stochastic is currently moving in neutral zone, on the brink of entering into oversold territory indicating uptrend. RSI is trading in oversold territory at 77 showing positive crossover. While MACD is on the verge of giving negative breakout and currently showing maximum divergence. Last day of the week nifty has just managed to close above 8 Day and 34 day EMA and not showing any reversal sign for coming week, expecting small correction in forthcoming session but overall looking positive and is likely to move between 5,990-6,200.

Technical Picks

 
BPCL (SELL)

Particulars Rs.
CMP

755.60

Target Price

748/735/720

Stop Loss

770

Support-Resistance

709/821

Comment

  • RSI is at 49 neutral territory showing negative crossover indicating downtrend.
  • Stochastic is oversold territory showing negative crossover also indicating downside.
  • Stock next support level seems at 709 if its break then stock could fall up to 690
  • Wide correction is expected.




BAJAJ FINSERV (SELL)

Particulars Rs.
CMP

526.80

Target Price

520/510/500

Stop Loss

535

Support-Resistance

490/550



Comment
  • RSI is at 64 neutral territory showing negative crossover indicating downtrend.
  • Stochastic is moving in oversold territory showing negative crossover also indicating downside.
  • Stock is also on the verge of crossing 34 Day EWMA.
  • MACD is also showing downtrend and crossing mean line from above.


MSK PROJECTS (BUY)

Particulars Rs.
CMP

156.10

Target Price

159/165/170

Stop Loss

150

Support-Resistance

132/164



Comment
  • RSI is in the oversold zone at 37 levels, likely to show an uptrend.
  • Stochastic is moving in oversold territory on the verge of showing positive crossover also indicating upside.
  • MACD is likely to cross its signal line from below.
  • The stock has rebounded after undergoing a deep correction and has breached its resistance at 155 levels with good volumes indicating that it will move upwards from here.

 


SUJANA TOWER (BUY)

Particulars Rs.
CMP

101.95

Target Price

104/107/110

Stop Loss

96

Support-Resistance

96/115



Comment
  • RSI is at 85 level, indicating more buying.
  • Stochastic has also just entered into oversold territory moving upward suggesting further upside.
  • MACD has given a crossover indicating an uptrend.
  • Today stock has also broken its 52 week high supported with volume indicating further upside.

 

  

 

















 

Indian Equity Market


The Week Gone By

Indian markets wrapped the week on a positive note and attained 32-1/2 month highs as strong global cues, a good monsoon and sustained buying by foreign funds, boosted domestic investor sentiment. Further, China's manufacturing expanded at the fastest pace in four months in September, added to signs that economic growth is stabilizing. Metal, Realty and Consumer goods share were among top gainers.

Looking Forward

Foreign funds continue to aggressively mop up Indian shares. Net equity inflows in 2010 now stands at a record USD19.43 billion, above last year's USD17.45 billion. 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. Further, concern is that the IPO of state-run Coal India in mid-October 2010 would soak liquidity from the secondary equity markets. Going ahead, the key risk to flows is valuation risk (overvaluation relative to other Asian peers). In addition the growth of core infrastructure industries slowed to 3.7% in August 2010, as compared to 6.4% in the same month last year could also weigh on sentiments as it account for 26.7% of the country's total industrial output. Next week, Buying could be seen in FMCG and Cement stocks while selling pressure could witness in Banking, Metal and Realty stocks.


Nifty Top Gainers

Company % Weekly Return

Unitech

10.23

SAIL

8.55

Ranbaxy Hindalco

6.91


Nifty Top Loser

Company % Weekly Return

Idea

(4.91)

BPCL

(4.27)

Ambuja Cement

(2.87)

 

 

 

 


Daily Movement of Nifty 


Daily Movement of Sensex, Net FIIs & MF investment


Source for FII & MF: Sebi

Weekly return on BSE Sectoral Indices


Fundamental Picks

 
Madhucon Projects (Buy)

Particulars Rs.
CMP

148.70

Target Price

165

Upside (%)

11

52 Week H/L

197.55/105.50

Market Cap

1,085



Dena Bank (Buy)

Particulars Rs.
CMP

109.10

Target Price

120.55

Upside (%)

10.50%

52 Week H/L

116.50/54.70

Market Cap

3,129


Weekly Price Movement of GDR

Security Name

Price (USD)
as on 30-09-10

% change
from 23-09-10

L&T

45.53

4.19

RIL

44.60

1.94

SBI

143.30

3.84



Madhucon Projects is a mid-sized domestic construction company, engaged in execution of projects in roads and expressways, water and property development. MPL's order book stood at ~ Rs 4900 crore in Q1FY11, which is 3.7 times of FY10 sales. It has aggressively entered into expansion plans having BOT portfolio of five projects worth Rs 2,741 crore (including the share of JV partners). Out of these, four are toll based projects (two are operational while two are expected to begin in FY11E). Once operational, these projects are expected to provide revenues of Rs 50 lakh per day. MPL has also foray into power and mining business by setting up a 1,920 MW thermal power plant at Nellore.

 


High concentration on western India coupled with strong presence in rural and semi urban area, Dena bank is structurally placed to have access to low cost funds. The bank enjoys a CASA deposit ratio 36% which is amongst the best in the Industry and will enable the bank to protect its NIMs compared to the peers in this rising interest rate scenario. The bank is planning to add 100 more branches by next year to its existing network of 1,250 branches and will also open 3 branches oversees. Further, the management is expecting to bring down its Gross NPA to Rs 750 crore by end of September 2010 and targeting an Gross NPA level of Rs 700 crore by March 2011.



Weekly Price Movement of ADR


Security Name Price (USD)
as on 30-09-10
% change
from 23-09-10
ICICI bank

49.85

4.55

Infosys

67.31

2.90

MTNL

2.80

2.94

Rediff

5.43

-3.89

Sify

2.96

33.33


Economy

Indicators Latest Previous Change
Investment Deposit Ratio (%)

31.10 (Sep 10)

31.61 (Aug 27)

Credit Deposit Ratio (%)

72.12 (Sep 10)

71.76 (Aug 27)

Money Supply (%)

15.20 (Sep 10)

15.10 (Aug 27)

Bank Credit (%)

19.80 (Sep 10)

19.40 (Aug 27)

Aggregate Deposits (%)

14.80 (Sep 10)

14.40 (Aug 27)

Forex Reserves USD bn

291.59 (Sep 24)

287.73 (Sep 17)


Global Equity Markets

US stocks higher during the week (till Thursday) after encouraging economic data and the activity of merger and acquisition boosted investors confidence. With the series of deals worth almost USD 10 billion, indicating the fact that the companies are seeing value in the market. Unilever offered to buy the maker of consumer products, Alberto Culver worth USD 3.7 billion. The retailer Wall Mart offered to buy Massamart for an amount exceeding USD 4 billion and Southwest Airlines firm also has full plans to buy Air Tran for USD 1.4 billion. Also, the nation's egg seller and distributor, Cal-Maine Foods reported the first quarter earnings worth USD 4.8 million as against a loss of USD 3.8 million in the previous year. Endo Pharmaceuticals Holdings Inc is planning to buy private generics maker Qualitest Pharmaceuticals for about USD 1.2 billion. Also, AOL Inc is planning to acquire technology blog Tech Crunch. On economic front, investors were presented with positive economic data, which was further boosted the market sentiments. Looking ahead to next week, investors are likely to focus on the Institute for Supply Management's report on national manufacturing activity, while reports on personal income and spending and consumer sentiment could also impact trading.

Asian market were mixed during the week. Markets in the Asian region belled the week on a cheerful note rising in tandem with the gush of liquidity in the global markets amid signs that the world's major central banks would keep their interest rates at historic lows for a considerable period of time. Fresh buying activity was seen in some of the markets after coming back from holidays. Though, worries over the Eurozone credit troubles and about the local property markets in China dampened investors sentiments, a strong set of economic numbers from China and Japan provided some support. Further, a persistent drop in US dollar and positive growth forecasts about Chinese economy by the Asian Development Bank supported. Next week, investors will eye on Bank of Japan and Reserve Bank of Australia's monthly policy meeting where it will make its decision on the official cash rate for October. Any bad decision could weigh on markets sentiments. 

European markets were marginally up as compared to last week despite consistent selling pressure. Markets started the week on a downbeat note tracking weak cues from the US markets while weakness in biotech Actelion after a key drug failed a late-stage trial weighed on pharma space. Further, concerns about rating downgrades in peripheral euro zone countries weighed on the market. Also, profit taking after the best quarterly gains in a year pulled the markets lower. Further looking forward, the Bank of England is scheduled to makes its interest rate decision in the upcoming week, along with the European Central Bank, while EU gross domestic gross domestic product (GDP) figures are also expected. Investors will also watch for the global cues in order to decide the markets movement as interest rate decision is also due from US, Japan and Australia next week.

Weekly return on major Global Indices

Data of US and European markets taken from Sept 23 to Sept 30, 2010
Data of Asian markets taken from Sept 24 to Oct 01, 2010 

Weekly Change in the Composites of S&P 500
Industry

Adj. Mkt. Cap 
as on

30-09-10

Adj. Mkt. Cap as on
23-09-10


Change

Energy

11,30,849 

10,94,110 

3.36 

Materials

3,74,163 

3,72,126 

0.55 

Industrials

11,15,473 

10,92,773 

2.08 

Cons Disc

10,77,417 

1,058,537 

1.78 

Cons Staples

11,66,335 

11,58,630 

0.67 

Health Care

12,03,633 

11,93,780 

0.83 

Financials

16,09,457 

15,94,914 

0.91 

Info Tech

19,46,892 

1917,917 

1.51 

Telecom Services

3,35,084 

3,31,869 

0.97 

Utilities

3,76,986 

3,72,577 

1.18 


Key Events

Global Key Events

  • US real gross domestic product increased at an annual rate of 1.7% in the second quarter, up from 1.6% in the previous year.

  • US initial jobless claims declined to 4,53,000 for the week ended September 25th, down 16,000 from an upwardly revised 4,69,000 the previous week.

  • Eurozone annual inflation rose to 1.8% in September from 1.6% in August. The annual rate matched economists expectations.

  • European confidence in the economic outlook unexpectedly improved in September as executives and consumers weathered tougher government budget cuts by countries struggling to convince investors that they won't need external aid. An index of executive and consumer sentiment in the 16 euro nations rose to 103.2, the highest since January 2008, from a revised 102.3 in August

  • UK house prices rose slightly in September after easing for two consecutive months. Housing market activity still remain constrained amid tight credit conditions and weak economic fundamentals. Monthly comparison showed an unexpected increase of 0.1% in house prices in September, following a 0.8% drop in August.

  • Japan's jobless rate improved in August and fell by 5.1% in comparison to a 5.2% reading in July.

  • Japan's household spending rose 1.7% in August, being above expectations after government subsidies increased the consumption, in comparison with a rise of 1.10% previously.

  • Japan's Manufacturing Purchasing Managers Index fell to an unexpected level by 49.5 in September from 50.1 in August. The Monthly Production Index also dropped by 0.3% from a previous decline of 0.2%.

  • China's Purchasing Manufacturers Index climbed up to 52.9 from 51.9 in August.

  • Spain's top credit rating was cut one level by Moody's Investors Service, which cited a "weak" economic outlook and doubts that the nation will reach deficit- reduction targets. The ratings company lowered Spain to Aa1 from Aaa with a stable outlook.

Domestic Key Events

  • The Centre's fiscal deficit fell by 16.93% to Rs 1,51,425 crore during April-August, 2010, year-on-year, on increased revenues from the auction of 3G spectrum, or radio waves, for mobile telephony. Towards the end of the first quarter this fiscal, the government had collected over Rs 1.06 lakh crore through the sale of spectrum for both 3G and Broadband Wireless Access (BWA) services against the Budget target of Rs 35,000 crore. 

  • Food inflation rose to 16.44% in the week ended September 18 as the cost of cereals, fruits, select vegetables and milk rose on account of supply disruptions due to heavy rains and floods. The week-on-week, food inflation climbed 0.98 percentage points from 15.46% in the week ended September 11.

  • In a move seen as benefitting wholesalers such as Bharti Wal-Mart, the government allowed retailers to sell goods sourced from their foreign investment-funded wholesale ventures by removing the stipulation that such sales should be for internal use. However, the 25% limit on such sales remains, implying that bulk of the goods will have to be sourced from outside the group. The revised guidelines allowed the use of internal funds for investment in downstream ventures but made things difficult for the construction sector. The consolidated policy that is being released will be effective from October 1.

  • Tata Steel, which early this month announced plans to refinance up to USD 5.4 billion of its outstanding loans, said it would finalise fresh loans for its British unit, Tata Steel Europe (earlier Corus).

  • Reliance Capital Ltd. is evaluating options to enter the banking sector and is also planning to list its life insurance unit. The company seeks to expand its financial services business in the world's second-fastest-growing major economy.

  • India Inc. raised nearly USD 1.09 billion overseas during August, 2010 via ECBs and Foreign Currency Convertible Bonds (FCCBs), according to the Reserve Bank data. Around 50 companies raised USD 87,44,95,019 through the automatic route for various projects, while USD 21,49,12,149 was raised by five companies under the approval route. Corporates, registered under the Companies Act, 1956, can access ECBs, up to USD 500 million in a financial year, under the automatic route.


Derivatives

 

  • Nifty ended the week on a positive note at 6,143.40 mark, gaining 2.08%. The Nifty October futures ended at 6,176 with premium of 32.60 points. If we look at the derivatives data we can see that Nifty future prices ended in the positive territory along with rise in open interest, with incline in cost of carry this is an indication of continiously long position is being built up . For the coming week Nifty may continue to face resistance at higher levels of 6,180-6,250 whereas on the downside support is seen at 5,880-5,950 levels. 


  • During the week, there was significant short accumulation of open interest in OTM Put options. most of the open interest accretion witnessed in the range of 5,800 to 6,100 put, while, on the flip side, highest open interest was build up in the range of 6,100 and 6,300 Calls. 


  • The Volatility Index (VIX) declined marginally and closed to 21.43%. Market participants should be watchful at current levels as any up move in volatility may trigger downsides in the markets. Volatility has a strong inverse correlation with markets.


  • The PCR-OI declined from 1.28 to 1.05. 


  • The CNX IT index ended the week at 6,759.15 marks gaining 1.88%. The CNX IT Futures prices inclined along with decline in the open interest with decline in cost of carry this is an indication of closure of long position. For the coming week, immediate support for the Index is seen in the range of 6,350-6,400 mark, whereas on the upside resistance is seen at 6,850- 6,900 levels.


  • During the week the Bank Nifty Index ended on a positive note and rose by 2.39% to 12,556.75. If we look at the derivatives desk we can see that the Bank Nifty futures prices increased along with incline in cost of carry, this is an indication of continuously long position is being built up . For the coming week Bank Nifty support is seen in the range of 10,750-10,800 levels whereas on the upside stiff resistance would be faced at 12,500-13,000 levels.


  • FIIs were net seller in index futures to the tune of Rs. 869.65 crore while in stock future they were net seller of 2,626.82 crore, indicating down trend in markets . Further, in the index options FII were net seller of 1,312.45 crore. 


  • Overall next week, Nifty is expected to show a positive trend and light selloffs is likely at every resistance level. Nifty is likely to trade in a range of 5,950-6,250. Any instability on the global front is likely to result in selling pressure from current levels. The trading strategy would be to go long if the Nifty sustains above 6,150 levels for targets of 6,250 on the other hand, one can also initiate shorts if the Nifty resists at 6,150 levels with a target of 5,980. A breach of 5,950 levels will take the Nifty down towards 5,750 levels.
 Open Interest in Nifty Future vis-à-vis Nifty 



Most Active Contracts


Put-Call Ratio


Volatility Index

FIIs Cumulative trailing 5 day's data
Particulars Buy Sell Net
Index Futures
27,926.61 
28,796.27 
(869.65)
Index Options
29,095.22 
30,407.66 
(1,312.45)
Stock Futures
36,218.54 
38,845.36 
(2,626.82)
Stock Options
2,310.83 
2,398.39 
(87.56)
*From September24 to till September 30 (Source: NSE)

Debt
  • Indian overnight cash rates surged and touched 7% mark due to heavy demand from banks ahead of the half yearly closing. Usually, the lender are less on the last working day of the quarter and as demand remains high, call rates goes up. Even on the repo front the transaction surged sharply during the week.






  • FIIs once again invested in the Indian debt market with Rs 1,752.9 crore buying compared to 3,443.5 crore buying in the previous week. Meanwhile, MFs continued to be net buyer in the debt market, with Rs 1,560.4 crore buying compared to Rs 7,089.9 crore of buying in the previous week.









  • Bond prices rose sharply early in the week as market cheered marginal reduction in in the government's October-March borrowing amount and the hike in the limit of investment by foreign institutional investors (FIIs) in the debt market by USD 5 billion. Further, the smooth sailing for government's Rs 11,000 crore bond sale also which was in line with market expectations and fall in US treasury yields also lifted the bond prices. However, after a sharp initial upmove bond prices took a breather and consolidated the earlier gains in the absence of any fresh trigger. The liquidity in the system tightened as banks demand for fund was high ahead of quarter ending. Liquidity in the system was already tight after a cash outflow of about Rs 60,000 crore towards advance tax payments.



  • Owing to tight cash condition, bond prices are expected to stay flat in the coming week. For the next three weeks, the government has lined up supply of Rs 11,000 crore bond for every week which will check any sharp runaway in bond prices. We expect liquidity to ease only towards the middle of October as government spending picks up.







  • During the week, reverse repo transaction under RBI's Liquidity Adjustment Facility (LAF) stood Rs 6,980 crore while Repo transaction stood at Rs 2,65,600 crore. On September 24, 2010, Government of India auctioned 7.99% CG2017 worth Rs 5,000 crore, 7.80% CG2020 worth Rs 4,000 crore and 8.30% CG2040 worth Rs 2,000 crore. On September 27, 2010, Government of India announced the sale of 7.17% CG2015 worth Rs 4,000 crore, 8.08% CG2022 worth Rs 4,000 crore and 8.26% CG2027 worth Rs 3,000 crore to be held on October 01, 2010. On September 29, 2010, RBI auctioned 91-day Treasury Bills worth Rs 2,000 crore and 182-day Treasury Bills worth Rs 1,500 crore. On September 30, 2010, four State Governments announced the sale of their 10-year State Development Loans (SDLs) for an aggregate amount of Rs 2,100 to be held on October 05, 2010.




  • In the financial year 2010-11, Government of India (GOI) has planned to borrow as much as Rs. 4,57,143 crore. Till September 24, 2010, the government has completed 65.94% of the gross borrowing target for the current year. The government has scheduled Rs 33,000 crore borrowing for the next 3 weeks.

 

 Call Rates
Date Rate (%)

24-Sep

5.59

27-Sep

6.18

28-Sep

6.26

29-Sep

7.04

30-Sep

-


FIIs & MFs investment in Debt Market

Period
FIIs
Net Investment
(Rs. Crore)
MFs
Net Investment
(Rs. Crore)

24-Sep

773.2 

(107.9)

27-Sep

1,519.0 

7.8 

28-Sep

434.5 

1,660.5 

29-Sep

(973.8)

-

30-Sep

-

-

This week

1,752.9 

1,560.4 

This Month

7,690.0 

18,107.6 

 (Source: SEBI)

Bond Yield (7.80% CG 2020)
Date LTP (Rs.) YTM (%)

24-Sep

99.65

7.8527

27-Sep

99.51

7.8697

28-Sep

99.68

7.8482

29-Sep

99.65

7.8363

30-Sep

-

-

 
Spread


Liquidity Adjustment Facility
Date Reverse Repo
(Rs. Crore)
Repo
(Rs. Crore)

24-Sep

6,980 

37,230 

27-Sep

68,135 

28-Sep

70,310 

29-Sep

89,925 

30-Sep

-

-

This week

6,980 

2,65,600 

This Month

1,03,350 

6,04,905 


 GoI borrowing Program - 2010-11
Particulars
(Rs. Cr.)

Budgeted Borrowings 

457,143 

Gross Borrowing Completed

301,439 

Dated Securities 

284,000 

364 Day T-Bills 

17,439 

% Completed

65.94 

Net Borrowing till date

199,334 

Government borrowing calender (Next four auctions)
Period Maturity 5-9 yrs Maturity 10-14 yrs Maturity 15-19 yrs 20 yrs and  above Total
Oct. 4-Oct. 8Rs 40-50 bn Rs 40-50 bn- Rs 20-30 bnRs 110 bn
Oct. 11-Oct. 15 Rs 40-50 bnRs 40-50 bn Rs 20-30 bn- Rs 110 bn
Oct. 18-Oct. 22Rs 40-50 bn Rs 40-50 bn- Rs 20-30 bnRs 110 bn
Nov. 1-Nov. 5 Rs 40-50 bnRs 40-50 bn Rs 20-30 bn- Rs 110 bn

Commodity
Crude oil prices started the week on a marginally higher note. The prices rose on the account of a weaker dollar. But, a fall in the equity markets could not sustain the gain in prices and they began to fall. Moreover, the weak consumer confidence data led the prices into red. The prices picked up substantially after the release of crude inventory data which reported a decline of 0.4 million barrels in the crude inventory. This data coupled with a weak dollar helped the prices to rally up. Further, US government data showed a bigger-than-projected drop in weekly jobless claims and second-quarter economic growth was also faster than previously estimated, which helped the crude prices to rise. Crude oil prices also headed for a gain after the purchasing managers' index in China, the world's top energy consumer, rose in September at the fastest pace in four months. Finally, the crude prices saw a substantial rise of 5.37% in the international markets, and the domestic markets saw a rise of 2.86% on w-o-w basis. Crude prices may continue with the upward rally in the coming week. The prices are likely to rise on speculation that US inventories will drop as the economic rebound accelerates.

Gold prices started the week's trade on a higher note. The precious metal continued to glitter and went above USD 1,300 mark for the first time ever. The upward rally in the gold prices was on the account of poor economic data and the weakening equity markets. A lower than expected consumer confidence reading boosted the metal's safe haven appeal and sent the precious metal to new highs. Gold prices continued to advance as the dollar dropped to the lowest level in more than seven months on speculation the Federal Reserve will add to monetary easing, therefore boosting gold demand. Prices turned a little pale towards the end of the week as the improved economic data damped the speculation that Federal Reserve will need to buy more debt to safeguard the recovery. The domestic gold prices also followed the trends in the international gold markets and went on to near its all time high. But, the domestic demand for yellow metal retreated towards the end of the week as the Indian banks, the primary dealers of bullion, were shut for the half-yearly closing of accounts. The overall demand for metal remained high as the nation is in the middle of the festival season, with Dussera in October and Diwali in November, when jewellers register highest sales every year but soaring prices overseas triggered some caution. The international gold prices were 1.26% up on w-o-w basis but the domestic gold prices fell modestly by 0.14% on w-o-w basis. The coming week may see the gold prices remaining flat, after touching a record high in this week. The international prices are unlikely to rise as the economy rebounds. Investors might take up profit selling as well. Domestic gold prices may pick up modestly amidst the festivities.

 
Weekly change in Crude prices per Barrel
  30-Sep 23-Sep Change (%)
Intl Crude Oil Prices (USD)

82.31

78.11

5.37

Domestic Price (Rs)

3,662.31

3,560.56

2.86



Inventories(Weekly Change)
Week ended Change Total Inventory

24-Sep-10

(0.4) mn barrels

357.9 mn barrels





Weekly change in Gold prices in Rs/10gms

  30-Sep 23-Sep Change (%)
London pm fix(USD/troyoz)

1,307.00

1,290.75

1.26

Mumbai (Rs/10gms)

19,185.00

19,212.50

(0.14)


Forex

Rupee rose to a fresh 5 month high on the back of robust foreign funds flow into the Indian stock market. Chasing potentially higher returns in the world's second fast growing economy, FIIs have invested more than USD 5.3 billion. The flow of funds continued after an Indian court ruled that the site of a demolished mosque would be split between Hindus and Muslims, easing the immediate fears of a violent riots in the country. However, INR weakned against the European currency as Euro hit a five month high against USD due to increased risk appetite on optimism of global economic recovery.

INR/ 01-Oct 24-Sep %Change
USD

44.68

45.54

1.89 

EURO

60.96

60.75

(0.35)

YEN

53.53

53.79

0.48 

 

INR vs. USD and Euro



SUPPORT & RESISTANCE LEVELS IN CASH /SPOT MARKET FOR 4TH OCT

Company Name  Exchange LTP* R1 #1 S1 @1 R2 #2 S2 @2 R3 #3 S3 @3
Asian Electronics Ltd. NSE 24.25 24.53 23.98 24.82 23.72 25.08 23.43
Asian Paints Ltd. NSE 2664.50 2703.33 2640.33 2742.17 2616.17 2766.33 2577.33
Bank of India NSE 525.10 529.37 519.42 533.63 513.73 539.32 509.47
Banking Index Benchmark Exchange Traded Scheme (Bank BeES) NSE 1260.35 1274.23 1241.23 1288.12 1222.12 1307.23 1208.23
BGR Energy Systems Ltd. NSE 773.40 782.93 764.43 792.47 755.47 801.43 745.93
Divi's Laboratories Ltd. NSE 702.65 708.65 695.90 714.65 689.15 721.40 683.15
DLF Ltd. NSE 388.10 394.67 380.27 401.23 372.43 409.07 365.87
Financial Technologies (India) Ltd. NSE 1187.75 1203.83 1166.83 1219.92 1145.92 1240.83 1129.83
GMR Infrastructure Ltd. NSE 57.25 57.62 56.82 57.98 56.38 58.42 56.02
Great Eastern Shipping Company Ltd. NSE 320.05 323.68 315.23 327.32 310.42 332.13 306.78
Great Offshore Ltd. NSE 374.90 377.90 370.45 380.90 366.00 385.35 363.00
Hindalco Industries Ltd. NSE 204.35 207.90 198.30 211.45 192.25 217.50 188.70
Hindustan Construction Company Ltd. NSE 60.80 61.58 59.68 62.37 58.57 63.48 57.78
Hindustan Motors Ltd. NSE 25.05 25.60 24.60 26.15 24.15 26.60 23.60
Hindustan Oil Exploration Company Ltd. NSE 239.70 242.20 237.45 244.70 235.20 246.95 232.70
Hindustan Petroleum Corporation Ltd. NSE 514.25 552.17 442.62 590.08 370.98 661.72 333.07
Hindustan Unilever Ltd. NSE 309.70 313.10 306.70 316.50 303.70 319.50 300.30
Hindustan Zinc Ltd. NSE 1108.65 1126.43 1090.43 1144.22 1072.22 1162.43 1054.43
IDBI Bank Ltd. NSE 158.45 161.43 154.48 164.42 150.52 168.38 147.53
India Cements Ltd. NSE 118.45 119.40 117.35 120.35 116.25 121.45 115.30
India Infoline Ltd. NSE 121.20 123.70 116.85 126.20 112.50 130.55 110.00
Indiabulls Financial Services Ltd. NSE 144.70 146.47 142.47 148.23 140.23 150.47 138.47
Indiabulls Power Ltd. NSE 29.05 29.30 28.85 29.55 28.65 29.75 28.40
Indiabulls Real Estate Ltd. NSE 176.75 179.17 172.82 181.58 168.88 185.52 166.47
Indiabulls Securities Ltd. NSE 28.25 28.82 27.42 29.38 26.58 30.22 26.02
Indian Bank NSE 282.30 284.13 279.63 285.97 276.97 288.63 275.13
Indian Hotels Company Ltd. NSE 102.05 103.23 99.98 104.42 97.92 106.48 96.73
Indian Oil Corporation Ltd. NSE 418.10 423.78 414.73 429.47 411.37 432.83 405.68
Indian Overseas Bank NSE 136.20 138.55 133.10 140.90 130.00 144.00 127.65
Jindal Drilling & Industries Ltd. NSE 555.05 562.42 550.27 569.78 545.48 574.57 538.12
Jindal Photo Ltd. NSE 239.95 243.17 237.42 246.38 234.88 248.92 231.67
Jindal Poly Films Ltd. NSE 1004.80 1019.98 992.93 1035.17 981.07 1047.03 965.88
Jindal Saw Ltd. NSE 217.55 221.02 214.87 224.48 212.18 227.17 208.72
Jindal South West Holdings Ltd. NSE 2189.60 2236.38 2139.43 2283.17 2089.27 2333.33 2042.48
Jindal Steel & Power Ltd. NSE 731.85 742.70 714.95 753.55 698.05 770.45 687.20
Kingfisher Airlines Ltd. NSE 74.40 75.67 73.27 76.93 72.13 78.07 70.87
LIC Housing Finance Ltd. NSE 1447.60 1473.93 1410.63 1500.27 1373.67 1537.23 1347.33
NSE Index NSE 6143.40 6187.57 6064.77 6231.73 5986.13 6310.37 5941.97
Orchid Chemicals & Pharmaceuticals Ltd. NSE 267.30 283.53 241.53 299.77 215.77 325.53 199.53
Patni Computer Systems Ltd. NSE 426.00 431.10 418.50 436.20 411.00 443.70 405.90
Tata Chemicals Ltd. NSE 401.75 405.10 399.25 408.45 396.75 410.95 393.40
Tata Coffee Ltd. NSE 606.30 613.07 601.27 619.83 596.23 624.87 589.47
Tata Communications Ltd. NSE 308.20 311.43 305.98 314.67 303.77 316.88 300.53
Tata Consultancy Services Ltd. NSE 961.60 977.73 933.73 993.87 905.87 1021.73 889.73
Tata Motors Ltd. NSE 1114.15 1145.77 1091.77 1177.38 1069.38 1199.77 1037.77
Tata Power Company Ltd. NSE 1391.05 1409.67 1358.77 1428.28 1326.48 1460.57 1307.87
Tata Steel Ltd. NSE 667.80 676.87 656.12 685.93 644.43 697.62 635.37
Tech Mahindra Ltd. NSE 767.50 773.93 757.03 780.37 746.57 790.83 740.13
Triveni Engineering & Industries Ltd. NSE 123.55 125.58 121.33 127.62 119.12 129.83 117.08
United Breweries Ltd. NSE 418.70 425.68 410.13 432.67 401.57 441.23 394.58
United Phosphorus Ltd. NSE 182.10 183.75 180.25 185.40 178.40 187.25 176.75
United Spirits Ltd. NSE 1599.30 1612.08 1584.43 1624.87 1569.57 1639.73 1556.78
   *LTP stands for Last Traded Price as on Friday, October 01, 2010 4:04:51 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. 


Why IPOs make for a risky bet


Public offers often help unearth value that was hidden from the public eye. But there is no easy route to picking out the quality ones from the rest.



 
There is no sacrosanct rule to pick out offers that may yield good listing gains.

Vidya Bala

The rush for initial public offerings is back! After a brief period of caution, retail interest in IPOs has picked up again. Some of the recent offers, such as that of Career Point, which saw retail oversubscription by 32 times and Eros Entertainment, which was oversubscribed by 12 times, being cases in point. So, is the increasing subscription in the retail category giving you a sense of déjà vu? The IPO frenzy during the later part of 2007 and early 2008 that came to an abrupt climax with Reliance Power, were not any different either. And if the lessons learnt then are anything to go by, it may not be wise for investors to throw caution to the winds now.

No easy way

Agreed, IPOs often help unearth value that was hitherto hidden from the public eye. But there is no easy route to pick out the quality ones from the rest, given that the bulky offer documents more often than not are the only source of information on the companies. But even if you do manage to sift through the offer documents, pricing of these IPOs do not fall in your ambit, especially those that are book-built. The increasing instances of IPOs being the exit route for private equity players also adds to the investment risk, as such offers are largely timed and priced for a comfortable way out for PE investors only. In fact, the SEBI Chairman, Mr C. B. Bhave,recently criticised investment bankers for pricing the offers stiffly.

Higher risk element

Here are some reasons why IPOs make for a riskier investment option compared with companies that are already listed.

Note that SEBI has a list of norms that companies have to satisfy to enter the primary market. Called the profitability route, the norm requires companies to have net tangible assets of at least Rs 3 crore in each of the three years preceding the IPO. They also need to have a net worth of at least Rs 1 crore in that period. It also mandates that companies should have distributable profits in at least three of the five preceding years. For that matter, even the issue size was restricted to five times the pre-issue net worth. While such norms are in place to ensure investor interest, how does one account for the recent offers from companies such as Gallantt Ispat and Electrosteel Steels? These companies, which neither had distributable profits nor even commenced operations managed to tap the market.

While these offers do not conform to the rules laid out by SEBI, they have not flouted it either, as the regulator also allows companies that do not satisfy these criteria to use few other routes to access the capital market. One such popular option, called the QIB route (qualified institutional buyers), requires a minimum of 50 per cent or 60 per cent (based on the dilution of equity) of the offer to be allotted to QIBs.

Small companies or those in the inception stages can therefore tap primary markets even if they do not satisfy the stringent norms on profits or net worth. They however are required to compulsorily use the book-building method to issue the IPO. The intent of the regulator was to ensure that companies do not suffer on account of stiff parameters and allow well-informed institutions to participate more in the offers of such nascent companies.

However, such offers carry higher risks for retail investors. For one, quite a few companies that use the QIB route to IPO do not have a long-term track record to rely upon. Two, a good number of them, especially in sectors such as power or steel, rely on the offer proceeds to even build capacities and commence operations.

The much-hyped Reliance Power IPO, for instance, had raised money for building capacities that were to come on stream only by mid-2013. Absence of cash profits or sound net worth makes it an arduous task for individuals to forecast the prospects of such companies.

Invest and Flip

So, if that was the business risk in IPOs, that many retail investors participate in these offers to flip them — hoping to sell the stocks at a premium on listing — only adds to the market risk. Buying into IPOs purely to sell them on listing is a risky gamble and doesn't always pay. For instance, while much-hyped about IPOs such as that of Reliance Power and Future Capital failed to deliver short-term gains, others such as Jubilant Foodworks and Cox & Kings returned impressively.

There is no sacrosanct rule to pick out offers that may yield good listing gains before hand. For that matter, even if we extend the investment period post listing, it doesn't put investing in IPOs in any better light. According to a study by Care Ratings, about 62 per cent of the 116 IPOs between August 2007 and August 2010 are still trading below their offer price. This means that you would have made losses in three out of five IPOs had you invested in the offers in the said period.

Pricing key

So, why do IPOs fail to generate returns despite putting in a decent financial performance? The answer lies in pricing of the IPOs. Fancied sectors of 2006 and 2007 — media and real-estate for instance — were accorded high valuations simply because their business models were complex enough to confuse investors on their real worth. Aside of this, investment bankers and companies find it easier to sell loftily priced IPOs when the secondary market is doing well. Be it the promoters looking for an opportunity to sell some shares or private equity investors making a part exit, a good price to exit remains a constant lure.

So how do investors circumvent the IPO minefield safely? Look for unique business models or attractive pricing. Only when convinced that the IPO scores on either or both these counts, should one go for the offer. Else you can always shop for it later in the secondary market.


Hindalco: Buy


Growing domestic demand, improving profitability of its overseas subsidiary and upcoming capacity expansion are strong points.



 
Aluminium pricesare on the uptrend.

Adarsh Gopalakrishnan

Investors may consider buying shares in metals major Hindalco as upcoming greenfield capacity in an expanding domestic market and improving profitability at its overseas subsidiary Novelis provide good potential for growth. Hindalco trades at Rs 204 (P/E 9.2 FY10) which is at a discount to peers such as Sterlite Industries (P/E 14.2 ) and NALCO (P/E 27 ).

Domestic expansion

With aluminium consumption in India expected to grow at 9 per cent per annum over the next four years, thanks to increased demand from power, automotive and infrastructure segments, Hindalco's expansion plans are expected to boost its growth prospects. The segment accounted for 11.7 per cent of the group's consolidated sales in FY10, has operating margins of 25 per cent and contributed to 25 per cent of consolidated operating profits.

Currently, the company's fully integrated domestic operations have the capacity to produce 1.5 million tonnes of alumina, smelt 500,000 tonnes of aluminium, and process 236,000 tonnes of value-add products.

The company is expected to add significant greenfield as well as brownfield capacity, which by late FY12 will double the company's alumina output and take smelting capacity to 1.28 million tonnes per annum.


These additions are expected to boost the group's consolidated profit margins, thanks to the increased volumes of the more profitable domestic operations. The increased volumes of aluminium metal will also act as a hedge to possible high raw material costs in Novelis which are linked to volatile London Metal Exchange aluminium prices.

Novelis' comeback

The last three quarters have seen improving performance at the company's Novelis operations, thanks to the expiry of a largely loss-making fixed-price contract in December 2009. Operational measures such as improved product mix, better inventory management (enabling pass-through of material cost increases) and use of cheaper recycled aluminium have resulted in improving profitability.

Operating profits have more than doubled in the first quarter of the current fiscal to $263 million and Novelis has paid back debt of $50 million.

With around 50 per cent of Novelis' consumers coming from defensive sectors such as food and beverage, volume-led demand is likely to remain steady. North European markets (lead by Germany, thanks to growing exports) have shown signs of a recovery.

This could help counter to a limited extent, weakness in Southern Europe and a stagnant US market. A positive for the company is the strong presence in robust Asian and South American markets lead by Brazil (where Novelis is doubling its rolling capacity at a cost of $300 million).

Novelis currently has 29 rolling plants in North and South America, Europe and Asia which processed 2.7 million tonnes of aluminium products in FY10. The segment accounted for 67.5 per cent of the group's consolidated sales and 60 per cent of the operating profits during the same period. Operating margins at Novelis stood at 10.2 per cent during FY10.

Pricing pressure

At current price of around $2300 per tonne, aluminium prices are up around 15 per cent in the last three months but still remain 30 per cent off their FY08 peaks. The sector is undergoing a 'consolidation' phase with several inefficient old smelters shutting down across the globe and new capacity coming up in India, Middle East and China.

With smelter capacity exceeding demand, prices are expected to see limited upside from the current levels for the next two years.

On the downside, prices may find some support at $1850-1950 per tonne as these levels may see several high-cost Chinese smelters cutting production to stem loses. With a cost structure that places it in the lowest quartile among global smelters, Hindalco has a lot more 'staying' power compared to more cost ineffective, less integrated global smelters.

Copper blues

Although copper prices have recovered to within 9 per cent of their FY08 peak, copper smelters such as Hindalco may not benefit much. Hindalco derives its profits in the copper business from concentrate treatment and refining charges (CTRC) — on fixed charge basis — which have been low for the last six months.

Copper concentrate producers are expected to have an upper-hand over smelters in pricing until new mine capacity comes on-stream in 2014 and 2015.

Demand for copper in India is expected to grow at 7-8 per cent per annum for the next five years, which might result in higher capacity utilisation levels.

The company currently has 500,000 tpa of copper smelting capacity and 142,000 tpa casting facility. This segment accounted for 20.6 per cent of consolidated group sales and 9.4 per cent of operating profits in FY10. Segment operating margins stood at 5.2 per cent.

Improving Financials

Hindalco has seen consolidated sales rise in FY09 before dipping in FY10(Rs 60,562 crore), mainly due to highly volatile LME aluminium prices and a protracted period of sub-par demand in developed markets. Profits (Rs 4,349 crore) have rebounded strongly in FY10 helped by a turnaround in Novelis, after taking a sizeable hit in FY09 on account of losses and write offs at Novelis and slipping Aluminium realisations.

The first quarter of this fiscal was good as standalone sales and profits were up 33 per cent and 11.2 per cent respectively with EBIDTA margins of 17.5 per cent compared to the same quarter last year because of improved aluminium realisations.

Novelis reported that its EBIDTA and shipments were up almost 10 per cent each owing to higher realisations and off-take for the latest June quarter.

The company's gross debt as on March 2010 was around Rs 24,000 crore with a debt equity ratio of 1.2. However, the company's consolidated FY10 EBIT covered interest 6.6 times over. The company's greenfield plans are expected to cost Rs 40,000 crore, of which, an estimated Rs 20,000 crore has been committed to ongoing projects.

Buy / Sell (Oct 01, 2010)
 BuySell Net
FII4563.502738.30 +1825.20
DII1594.872265.95 -671.08


Where are the opportunities?

Non-banking finance companies.


 

M.V.S. Santosh Kumar

Stocks of non-banking finance companies (NBFC), which took a massive hit during the credit crisis, have rebounded smartly from their lows in March 2009. Taking stock today, which segments of the business appear overheated and which offer further investment opportunities? Our analysis suggests that while infrastructure financing NBFCs offer growth opportunities and their housing finance counterparts may deliver stable growth, investors should also book profits in some of the segments that have run up too far.

Benign liquidity conditions, regulatory support by RBI , revival in the economic activity boosting credit demand and improving asset quality benefited NBFCs immensely. Additionally, the capital raised over the last year and a half also helped some of them reduce leverage .

Apart from rising economic activity, banks' wariness to lend to some segments of borrowers worked in favour of these NBFCs. Securitisation also revived, augmenting their fund raising base.

Our analysis showed that 24 NBFCs with a market capitalisation of more than Rs 1,000 crore, gained between 123 to 1400 per cent from the March 2009 lows, with the majority of stocks trebling in value and almost the entire universe outperforming the broader market.

However, investment companies such as Tata Investment Corp, JSW Holdings and Network 18 Media, given the underlying stocks' under- performance, continue to trade below their January peaks. Here, we review NBFCs spread across three major segments (infrastructure, mortgageand asset financing) and take a look at their stock performance vis-a-vis business growth, current valuations and growth prospects.

Infrastructure financing

Power Finance Corporation (PFC), REC and IDFC are the largest listed players in the infrastructure financing space and are among the better performing stocks as the demand for credit from infrastructure did not cool off over the last two years despite overall slowdown in capex activities. The stock of IDFC, however, hasn't gone back to its January 2008 peak levels, as its loan book grew the slowest and has very high business linkages with equity markets which hasn't entirely revived.

The loan books of IDFC, PFC and REC grew at annual rate of 10 per cent, 24 per cent and 30 per cent respectively over the two-year period ended March 2010, leading to an annual net profit growth of 22 per cent, 39 per cent, and 52 per cent respectively. Apart from rising loan book, fall in interest rates, shrinking corporate spreads and high liquidity also led to cost declines and consequent improvement in margins for these NBFCs.

As of June 2010, cumulatively, these three NBFCs' loan books grew at 7.5 per cent sequentially, indicative of the high demand for infra-loans. The current price-to-book value of PFC, REC and IDFC are close to three times, re-rated from the March 2009 lows of 1.1-1.5.

During this period, IDFC and REC raised capital, despite which they are trading at such a high price-book value. Going forward, with a major chunk of Rs 20,00,000 crore of funding requirements yet to be met in the 11th Five Year Plan (2007-12) and another Rs 41,00,000 crore projected to be spent in the 12th Plan , the loan book growth may continue to be spectacular. The asset-liability management of these NBFCs will also be better in future as they are allowed to raise long-term resources at lower costs thanks to their infrastructure financing status. In our view, investors can hold on to these stocks with a two-three year horizon for good returns.

Mortgage financing

Among the housing finance company stocks, HDFC, LIC Housing Finance, Dewan Housing and Gruh Finance have all climbed above their January 2008 peaks. To revive the housing loan segment, regulations such as re-financing and interest subvention were introduced and, as the economy revived, housing demand improved steadily, especially as property prices and rates of interest were low.

Housing finance companies maintained their market share over the last two years despite stiff competition from banks. The total loan book of major housing finance companies expanded by 20 per cent annually in 2008-10, when scheduled commercial banks' home loan growth was in single digits.

This may come as a surprise as many banks came up with teaser loans, but the growth in the loan books of some banks led to fall in the others, reducing the pressure on housing finance companies. They also maintained margins despite pressure on yields (due to teaser loans) as they brought down operating costs and cost of funds.

Even as HDFC saw its price-book value expand from 2.5 to 5 times, it was LIC HF, Dewan Housing and Gruh Finance that enjoyed the highest re-rating. The re-rating of LIC Housing and Dewan Housing was due to their non-metro focus, which improved their market share in the total loan book. Loan book growth was at 31 per cent and 45 per cent compounded annually over the two years ended March 2010. Over the years, not only have the volumes increased, but also the ticket size of loans, boosting the overall loan book size of the housing finance companies.

Going forward, the demand for loans may improve given the 2.47-crore unit shortfall in housing expected in Eleventh Plan. According to Crisil estimates, mortgage loans from NBFCs and banks will grow at 14.7 per cent compounded annually over the five years ending FY15.

Our preferred picks in this segment are HDFC (diversified business income across various segments of finance) and Dewan Housing (low valuation and improving presence , thanks to tie-up with banks). Investors can book profits in LIC Housing and Gruh Finance, which are trading at stiff valuations, limiting the upside.

Asset-Financing

Auto financing companies were hit the most during the fall, because of their high dependence on growth in vehicle sales, which headed south during the latter half of FY-09 and early FY-10. However, the rebound also has been spectacular, thanks to stimulus efforts. Sundaram Finance, Bajaj Auto Finance and Mahindra Financial Services benefited from the revival in the vehicle sector.

Commercial vehicle (CV), two-wheeler and car volumes grew 38 per cent, 26 per cent, and 26 per cent for the year ended March 2010 after a muted performance a year ago. Bajaj Auto Finance saw its loan book grow by 94 per cent in the last 15 months after a slowdown in 2008-09.

Similarly, Sundaram Finance and Mahindra Financial, which saw moderation in 2008-09, have improved their loan book growth for the year-ended March 2010.

The current price-to-book value of Mahindra Finance, Bajaj Finance and Sundaram Finance stands at 2.2 to 3.5 times, up from 0.3 and 1.4 times the value in March 2009.

The Society of Indian Automobile Manufacturers estimates that car and utility vehicle sales will grow at 13 per cent in the current year with CV sales growth moderating to 19 per cent and two-wheeler sales increasing to 9-10 per cent as the base effect kicks in. With the rate of growth getting normalised, the upside in these stocks may moderate. Investors can hold on to Sundaram Finance and Bajaj Finance.

Rising competition

Shriram Transport Finance (STFC), Manappuram General Finance and the recently listed SKS Microfinance are all trading at a high valuation premium to other NBFCs due to lack of peers for such businesses in the listed space.

These three have a presence in very high margin (albeit risky) businesses and make margins of more than 8 per cent.

STFC is a commercial vehicle financier but predominantly finances used vehicles, in which it is almost a monopoly in the organised space.

SKS and Manappuram, despite facing competition from their peers have advantages of scale as well as a first-mover edge in certain geographies, helping them attract more borrowers and keeping the high growth rates ticking.

STFC is up 218 per cent since its March 2009 lows and 92 per cent from the January 2008 market peak, while Manappuram ended up being the star performer amongst the large NBFCs, with more than 900 per cent in gains since March 2009 and 777 per cent gains from market peaks. SKS, which listed in August, has already gained 35 per cent in the last 45 days.

The current price-to-book values of STFC, Manappuram, and SKS are 4.2, 7 and 5.5 times respectively.

The loan book growth for STFC, Manappuram and SKS during the last two-year period was 22 per cent, 222 per cent and 101 per cent respectively.

Given their current valuations they have to clock exceptionally high growth in earnings over the next few years to justify these prices.

Despite huge untapped potential left in these segments, competition is also on the rise.

In addition, there are individual business risks relating to vulnerability to a downturn and asset quality due to a low-income focus.

Therefore, it is safer for investors to stay away from these stocks at this juncture.

Overall, we continue to be bullish on infrastructure financing companies, thanks to their growth prospects, and on investment companies such as Bajaj Holdings, Tata Investment Corp, JSW Holdings as they are trading at significant discounts to their investment book value.


*Disclosure: I don't have any positions in the above said scrips & NIFTY FUTURES. 

Disclaimer: "I do not make any warranties, express or implied, as to results to be obtained from using the information in this e-letter.  Investors should obtain individual financial advice based on their own particular circumstances before making any investment decisions based upon information in this report
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Arvind Parekh
+ 91 98432 32381