Sensex (19,508.8)
As the year grinds towards the finishing line, investors, both local and foreign appear to be in a rush to take some hard-earned money off the table.
This urgency is caused by the stream of reports on stock price manipulations that is currently doing the rounds. Price erosion in these stocks was exacerbated by brokers offloading them in the market to meet margin calls.
It is difficult to know when these investigations will end since the can of worms has just been prised open. With an impending fuel price hike and RBI's monetary policy review scheduled for the week ahead, it is going to be a tough challenge for Sensex to hang on to the current levels.
The point in favour of Indian equities is the rather benign global environment with most country benchmarks moving with an upward bias. It is to be seen when this positive mood permeates in to our country to fog out the flurry of scams that our country has 'suddenly' woken up to.
FIIs selling Rs 4742 crore in the last five sessions added to the mood of despondency in the market. DIIs were net buyers in the later half of the week. Volumes were high in both cash and derivative segment in the last three sessions. Low PCR denotes that many of the puts have been covered in this correction. Lower proportion of stock futures in the open interest is also a good signal since it implies that weaker hands are exiting leveraged trading.
Stocks are undergoing a rather turbulent December with Sensex closing 800 points higher one week and tumbling 450 points lower the next. The cut is of-course deeper in BSE mid and small cap indices. The small-cap index can decline a little further and come to halt around 8000. While a new life-time peak is still possible in the Sensex, BSE Small-cap Index will find it difficult to emulate this feat.
Sensex could not move above the resistance at 20,280 thus reiterating the negative bias in the short-term. Immediate targets of the current down-move are 18,954 and 18,886. Since these supports occur around the key medium term support zone around 19,000 that we have been watching over the past few weeks, investors can stay sanguine as long as the index does not record a strong close below 18880.
Resilience at these levels will maintain a positive medium-term bias for the index and will retain the possibility of sideways move between 19,000 and 21,500 for few more weeks before an upward break-out to 23,031 or 24,098.
What if the index declines below 18,880? That would mean a sharp dip to 18,530 or 18,000 before a rebound. The break-out targets will be pulled lower in this case. But positive medium term view will be maintained as long as Sensex manages to hold 18,000.
The up-coming events cited above can cause Sensex to trade with a negative bias next week. It will face short-term resistance at 19780 and 20280. Short-term view will turn positive on a close above the second target while inability to move above the first will drag the index down to the zone between 18,880 and 19,000. This remains a plausible reversal zone for the short-term. Break of this level will drag Sensex down to 18,393 or 18,064.
Nifty (5,857.3)
Nifty could not get past the resistance at 6070 and reversed lower to the intra-week low of 5721.
Since the lower boundary of our medium-term range between 5745 and 6400 has not been breached seriously, we stay with this medium term range for the index. Nifty could test the lower boundary in the days ahead and maybe decline to 5670 or 5650.
The medium term prospects for the index would be considered bright if Nifty manages to hold above 5650 in the days ahead.
This would mean that the index can break-out to 6680 or even 7270 over the medium term.
Decline below 5650 will mean an impending decline to 5514 or even 5425 over the medium term.
Such a decline will mean that the break-out targets will be adjusted lower but the medium term view will turn negative only on a close below 5400.
For the week ahead, Nifty would face resistance at 5912, 5936 and 6070. Failure to move above 5936 will be the cue for traders to initiate fresh shorts with stop at 5950. Downward targets would be 5721, 5670 and 5650.
Global Cues
Markets in US and Europe built on the previous week's recovery to close with modest gains.
Many benchmarks such as Russia's RTSI Index, Austria's ATX, S&P 500, Karachi 100, Mexico's IPC, Seoul Composite, Taiwan Weighted and so on closed at a new 2-year high last week. CBOE VIX recorded its first weekly close below 18 in the last 8 months implying that investors are confident that the uptrend will continue.
Next target for this index is the April low of 15.2.
Close below 15 will take the VIX in to bull-market terrain.
The Dow is once again testing its recent high at 11,450. Subsequent targets for this index are 11630 and 12002.
The long-term outlook for Dow will turn positive on a firm close beyond the 11,500 mark. The moot question is whether it can happen now or if the index is going to withdraw once more from this resistance.
Lokeshwarri S.K.
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| Nifty formed falling wedge pattern indicating uptrend Nifty belled the week on a negative note as heavy sell off was witnessed in front liners banking stocks and Nifty breached the 100 DMA. However, very last day of the week Nifty rebound smartly and closed above 100 DMA to 5857 level. On daily chart Nifty exhibiting "falling wedge" which is bullish breakout pattern if upper trend line breaks. In spite of Friday sharp rise Nifty managed to close just near to upper line of wedge pattern. If Nifty manages to trade above it then we could see upside in forthcoming session otherwise not ruling out the possibility of major correction. For the coming week support for Nifty comes at 5,750-5,822 level while resistance could be seen at 5,946-6,056 level.
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Looking Forward India's medium-term growth trajectory remains promising amid a still gloomy world outlook. better diversification in manufacturing & service sector contribution to GDP, underleverage and better demographics will continue to accelerate growth in the Indian economy. The Indian economy has posted yet another quarter of strong growth, with July-September GDP rising by 8.9% y-o-y. Looking ahead, GDP growth would be between 8.5% to 8.75% in the current fiscal that ends in March 2011. Since economies like China and Singapore are at best cautious in their regulation of capital flows, India is likely to see a gush of capital flows, which is likely to push up the stock prices. Further, money that MOIL has attracted will come back into the markets and buoy the indices.The time is right to pick up fundamentally sound stocks which may have got beaten down along with their peers. Cement, Banking, Capital goods and Shipping sectors could be good bet for investors. The next major trigger for the equity market is the advance tax payment of corporates for the third installment, which fdue on 15 December 2010.
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| US markets were up during the week(till Thursday). Initially, the indices managed to register modest gains despite disappointing employment report as investors remained comfortable in expectations that the poor jobs figures would push the Federal Reserve to continue efforts to stimulate the economy. Thereafter, the markets lacked signal and were trading mixed in a narrow range. The weakness in market came from Federal Reserve Chairman Bernanke's comment that it could be four or five years before the unemployment rate falls to more normal levels. The market sentiments continued to be confused due to the debate over tax cut. Finally, a modest pick up was seen towards the end of the week as Government's tax-cut deal lifted hopes for economic growth but sparked a surge in Treasury yields on thoughts of the expanding deficit. Looking ahead, markets are likely to remain cautious as investors will closely watch Fed monetary policy update, due next week. Asian markets were mixed during the week. Markets started the week on a flat note as Japanese carmakers and electronics companies dropped on concern that a weaker dollar will cut export earnings. However, Chinese markets were choppy amid growing speculation of a fresh round of monetary tightening in the next few days. Investors were worried after uncertainty about passage of a deal struck by US President Barack Obama with Republicans to extend Bush-era tax cuts. However, an agreement in the US to extend tax breaks provided support to the markets sentiment. Further, in the middle of the week rallies by the dollar and euro boosted the markets. Rise in the Australian markets on the back of a strong employment report also uplifted the sentiment in the Asian region. Moreover, rise in China's exports and imports put pressure on the government to raise rates to tame inflation and infused selling pressure in the markets at the last day of the week. European market gained during the week. Market started the week on subdued note due to the downbeat jobs report from the US weighed on sentiment and ongoing debt worries pulled other markets down.Further, stocks regained its momentum after a survey by Markit Economics showed that the seasonally adjusted construction purchasing managers' index in Germany rose to 53.8 in November from 51.7 in October. Later, markets held on to its gain led by miners and construction related stocks as US president Obama's decision to extend tax breaks bolstered recovery hopes in the world's biggest economy. The US president agreed to extend Bush-era tax cuts that were set to expire at the end of 2010 by a further two years, and unemployment benefits for the long-term jobless for 13 months. Some optimism also came from after from M&A front. Private-equity firm Apax is in talks to buy one of its rivals, Danish cleaning company ISS, for USD 8.5 billion. | Weekly return on major Global Indices
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| Open Interest in Nifty Future vis-Ã -vis Nifty  Most Active Contracts  Put-Call Ratio  Volatility Index  FIIs Cumulative trailing 5 day's data
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Bond Yield (7.80% CG 2020)
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GoI borrowing Program - 2010-11
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| Rupee posted fell against major world currencies during the week. Rupee started the week with downbeat tracking losses in the euro and a reversal in local shares but dollar sales by exporters helped the local unit notch its fifth straight daily gain. However, rupee pulled out of its previous day slump on the back of broad losses in the dollar versus majors, while some corporate dollar sales also aided. Again, rupee fell weighed down by strong dollar and a shaky stock market that could trigger foreign fund outflows.
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K.S. Badri Narayanan
Bharti Airtel: (Rs 330): The immediate outlook for Bharti Airtel appears neutral. The stock is ruling near its crucial support at Rs 325.
A close below the support could weaken the counter to Rs 282-85.
The stock has a key resistance at Rs 370, breaching which it could go up to touch Rs 402-405.
F&O pointers: The Bharti Airtel futures added fresh long positions on Friday.
Option trading, however, indicates a negative bias, as 320 put shed open interest even as 360 puts added.
This suggests the emergence of writers.
Strategy: Consider short strangle on Bharti Airtel as we expect Bharti Airtel to move in Rs 320-360 range. This can be initiated by selling 360 call and 320 put, which closed at Rs 3.5 and Rs 6.25 respectively.
Maximum profit would occur if Bharti Airtel closes between Rs 320 and Rs 360. On the other hand, if the stock moves decisively in a particular direction (either up or direction), the option spread would turn negative.
While the maximum profit in this strategy would be the premium collected (i.e. about Rs 10,000 as Bharti Airtel Market's lot size is 1000), the loss could be unlimited if the stock pursues unidirectional move.
The strategy therefore is only for traders, who can afford to take higher risks. Besides, writing (selling) options involves margin commitments.
ACC (Rs 1075): The immediate outlook for ACC appears positive. The stock finds support at Rs 965 and resistance at Rs 1,135. It appears now ACC could touch the resistance level.
A close above Rs 1,135 would take the stock to Rs 1,285.
A close below support has the potential to drag it down to Rs 823.
F&O pointers: ACC futures added fresh long positions on Friday.
Heavy accumulation in 1000 put suggests that the stock could have a strong support at that level.
Strategy: Consider going long on ACC futures with a tight stop loss at Rs 1000, for an initial target of Rs 1135. Trail the stop loss so as to protect profits.
Follow-up: We had advised traders to consider shorting Chambal Fertilizers and India Cements.
While the former achieved the target, the latter even though did provided many a profit opportunities, did not achieve our target price.
Note: The analysis and opinion expressed in this column are based on F&O data available at this point of time and on technical analysis based on past price movements. There is risk of loss in trading.
Reliance Industries (Rs 1023.7)
RIL was volatile last week; it recorded an intra-week low of Rs 977 before ending 1.7 per cent higher for the week. The stock is facing key resistance in the band between Rs 1040 and Rs 1050. Its 200-day moving average is poised around these levels. As long as the stock trades below Rs 1080, it continues to remain in a short-term downtrend. On the other hand, the Rs 990 and Rs 1000 range is an important medium-term support. The stock can be range-bound in the days head between Rs 990 and Rs 1080 and moreover, formation of spinning top candlestick pattern in the weekly chart signals indecisiveness. Consequently, short-term traders should tread very cautiously. The next key support is at Rs 960-950 range. Resistance above Rs 1080 is pegged at Rs 1120.
The stock may continue to consolidate sideways in the medium-term, in the broad range between Rs 900 and Rs 1200.
State Bank of India (Rs 2736.5)
Last week, the stock failed to move past Rs 3150, a key resistance level and tumbled 10.9 per cent. SBI has been on a short-term downtrend from its November 8 peak of Rs 3515. It is hovering well below its 21- and 50-day moving averages. Only a strong close above Rs 3100 will mitigate this downtrend. However, on Friday, the stock found support around Rs 2650 and bounced up 1.9 per cent with above-average volumes. Short-term traders can initiate fresh long position as long as the support at Rs 2650 holds. It can rally higher to Rs 2850 and then to Rs 2964.
Inability to rally beyond Rs 2850 will pull the stock down to Rs 2700-2650 zone. Nevertheless, emphatic fall below Rs 2650 will drag the stock to Rs 2600 where the 200-day moving average is positioned. Subsequent support for the stock is at Rs 2500.
Tata Steel (Rs 618.1)
Tata steel was choppy last week, moving between an intra-week high of Rs 644 and low of Rs 595 and finished the week marginally higher. With this the stock has expanded its sideways consolidation range to Rs 580 to Rs 650. Formation of spinning top candlestick pattern in weekly chart signals indecisiveness and the stock can continue to trade within the mentioned range in the days ahead.
We reinforce that only a strong move beyond Rs 650 will turn the stock bullish and it can rally to Rs 700 in the medium-term. However, decisive fall below the lower boundary of Rs 580 will accelerate the stock downward to Rs 550 and then to Rs 530 in the medium-term.
Infosys Technologies (Rs 3147.5)
The stock moved up Rs 24 in the previous week and achieved our initial target of Rs 3150 on Monday. Thereafter, it moved sideways. The stock is trading well above its 21 and 50-day moving averages. Short-term traders can prolong holding their long positions with stop-loss at Rs 3115 levels. Target of the stock is Rs 3200. Key supports are at Rs 3082, Rs 3,050 and Rs 2,950.
Medium-term trend has been up for the stock since August low. Investors can remain invested in the stock with stop-loss at Rs 2,940. Strong move beyond Rs 3200 will lift the stock to Rs 3250 or to new high in the medium-term. — Yoganand D.
Gitanjali Gems (Rs 181.6)
Gitanjali Gems nose-dived 28.7 per cent last week, conclusively breaking through the significant support range between Rs 200 and Rs 220. Since reaching its peak, made on November 12 at Rs 395 , it has been on a short-term downtrend. The stock found support at around Rs 160 and bounced up with good volumes on Friday. It is currently testing key longer-term support band between Rs 160 and Rs 180. Moreover, its 200-day moving average poised around Rs 180 could also provide support. A reversal upward from this zone can take the stock higher to its immediate resistance at Rs 200 and then Rs 220. Long-term resistance for the stock is pegged at Rs 250. The stock's downtrend remains in place as long as it trades below Rs 280 levels. Conclusive decline below this support range mentioned above can pull the stock further down to Rs 135 or Rs 112 in the medium-term. Slump below Rs 112 will eventually drag it to the May low of Rs 94.
Hexaware Technologies (Rs 97.2)
The stock zoomed 10 per cent last week with extraordinary volumes. Though it has breached the key medium-term resistance level of Rs 90, it is currently testing important longer-term resistance. The stock has been on a long-term uptrend from its January 2009 low of Rs 19. Medium-term trend is also up since August low of Rs 67.
An emphatic break through of resistance at Rs 100 will lift the stock higher to Rs 120 and then to Rs 136 in the weeks ahead. Conversely, reversal from the significant resistance can pull it lower to Rs 90, Rs 83 and then to Rs 74, which are key supports.
Yoganand D
While IPOs as a category aren't always poor investments, investors should be extra cautious while investing in them.
Vijai Mantri
Finding shortcuts is a way of life for most of us — we look for the shortest way to beat the traffic, take to proteins as a shortcut to that muscular look, and are always on the lookout for shortcuts to making money. IPO investing is one such money-making shortcut and of course, it's absolutely legal.
Here's a look at what an IPO means to its various stakeholders.
Promoter's perspective
Suppose you own a company and want to raise capital for expansion or want to cash out. At what market situation would you then like to sell out? No brainer, right? Obviously, at the time when markets are euphoric, as during such times investors tend to overlook company fundamentals and don't mind paying any price to participate in initial public offerings on expectation of listing gains.
Since majority of IPOs are launched in euphoric times, they tend to underperform the broader market. The same is evident in the one-year, three-year and five-year performance of BSE Sensex vis-Ã -vis BSE IPO indices.
Investment Banker's perspective
Investment Bankers or Merchant Bankers are the ones who advise on issue pricing and underwrite IPOs on fee from the promoters. Therefore it is in their interest to fix a higher price such that it favours both promoters and merchant bankers. While promoters would get more for selling their stakes in such a case, merchant bankers benefit by getting a higher fee.
Due to this, it is not uncommon to see extra-ordinary salesmanship go into IPO promotion by the investment bankers. Usha Narayan, Executive Director, SEBI, recently warned bankers against 'planting news articles' and 'making forward-looking statements' in advertisements by companies coming out with IPOs.
This trend did not go unnoticed by C.B. Bhave, Chairman, SEBI, who in a recent missive to a newspaper observed that investment bankers, in a bid to maximise returns to promoters, were not looking at the interest of investors. "You need to introspect whether it is healthy practice. If you keep Investors disappointed day in and day out, the cause of investors will only be a lip service", he said.
Media's perspective
At the time of any IPO, especially when the market is euphoric, a lot of hype is generated around new issues, both by the promoters and investment bankers through media and publicity. The result — financial media and its many experts incessantly talk about the upcoming issues. IPOs, therefore, become so visible that most investors begin perceiving it as a "not to be missed opportunity".
Investor's Perspective
Here's what a typical investor faces during times of IPOs. While on one hand markets are euphoric, on the other, there is a huge hype by the media around IPOs. Then there are friends and relatives who start bragging about the astronomical returns they made in some previous IPOs. It's another story that no one mentions IPOs they have lost money on! These put together make IPOs very much irresistible for the regular investor. It, however, is also important to note investor behaviour post the listing of such shares.
While it is very common to see investors sell the shares where they stand to make listing gains, it isn't uncommon to see them hold on to IPOs that opened below the issue price.
On facing a poor listing, most investors tend to hold on to the shares, in wait for the stock price to scale back to issue price levels, though common sense might point otherwise.
Myth of Listing Gains
It is important to remember that 'listing gains' do not equal 'returns to investor'. While most investors tend to get lured by the outsized listing gains, the real returns to investors should ideally be on the number of shares allotted (Table).
Some recent headlines from national dailies — "Investors lose money in 5 out of 9 IPOs" and "Every 2nd IPO in 2010 bites the dust despite market boom" too serve as a quick reality check for people who think IPOs are tools to make quick money. Thus, while IPOs as a category aren't always poor investments, investors should be extra cautious while investing in them. Know that most IPOs are backed by enormous hard selling and favourable market timings, both of which are very potent weapons of wealth destruction.
The author is MD & CEO of Pramerica Mutual Fund. The views are personal.
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| *LTP stands for Last Traded Price as on Friday, December 10, 2010 4:04:27 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. |
Some investors prefer to have rule-based policies for asset allocation. This article shows how investors can create a rule-based core-satellite portfolio that accumulates core assets when equity prices decline and yet is trend-following for the satellite portfolio.
Mixed bag:Investors should have stocks, bonds and commodities in their portfolio. —
B. Venkatesh
Difficult times call for atypical strategies. It was, hence, not surprising when one investor wanted to set-up an asset allocation process that could accumulate core assets during declines and yet be trend-following during good times.
The question is: How can investors create such a portfolio containing stocks, bonds and commodities?
This article explains how investors can create a Convexo-concave portfolio. Such a portfolio effectively combines Modified Constant Mix Strategy and Dynamic Proportion Portfolio Protection (DPPP) inside the core-satellite portfolio.
Value core
We apply the Modified Constant Mix Strategy on the core portfolio. It is an asset allocation strategy on a two asset-class portfolio — stocks and bonds. The asset allocation policy is based on the investor's risk tolerance level, investment horizon, asset-class risk and investment capital.
Assume that the asset allocation so arrived requires 60 per cent exposure to equity and 40 per cent to bonds with a tactical range of 10 per cent. This means that the portfolio can carry between 50 and 70 per cent exposure to equity.
Now, the strategy works this way: When stock market goes up, the proportion of equity in the portfolio also goes up. To align the portfolio with the asset allocation policy, the investor has to sell equity and buy bonds. Likewise, when stock market declines, the portfolio will sell bonds and buy equity.
To implement this policy, the investor has to follow certain rules. One, if the expected return from equity is 15 per cent, the investor can choose to take profits on equity but only use profits in excess of 15 per cent to buy bonds.
This will ensure that the portfolio has enough equity exposure to achieve the desired value at the horizon. Two, the cap on equity exposure would be followed strictly.
Otherwise, the portfolio will accumulate too much equity if asset prices decline sharply. And three, the optimal rebalancing frequency would be twice a year to moderate transaction costs, unless otherwise required due to extreme price movements.
Next, we apply DPPP on the satellite portfolio. This portfolio carries three assets- Gold ETF, Nifty ETF and Money Market Funds. To create this portfolio, the investor has to define three variables — risk tolerance level, leverage and cushion.
Suppose the satellite portfolio has assets worth Rs 10 lakh. Assuming risk tolerance of 10 per cent, the floor or the minimum portfolio value would be Rs 9 lakh. The difference between the floor and total asset value is the cushion- Rs 1 lakh.
The exposure to risky assets will be cushion times multiplier. The multiplier is the lower of cap, say, three and the realised volatility of the asset class of the previous month. We take half the realised volatility of Gold ETF and Nifty ETF, as we provide equal weights to commodity and equity.
Suppose equal-weighted realised volatility is 20 per cent, the multiplier will be lower of 3 and 5 (1/.20). On a cushion of Rs 1 lakh, the exposure to risky assets would be Rs 3 lakh (3 X Rs 1 lakh).
The investor will buy Rs 1.5 lakh each of Gold and Nifty ETFs and use the balance to invest in money market funds.
If the portfolio value increases due to increase in gold and equity prices and/or volatility increases, the rule requires the portfolio to increase exposure to risky assets. Similarly, a decrease in asset price and/or decrease in volatility would require cutting of exposure to risky assets.
Investors can rebalance this portfolio frequently. The portfolio should have a cap on risky assets to ensure that it is not exposed to high downside risk. We call this core-satellite portfolio as Convexo-concave portfolio, as Modified Constant Mix is concave strategy and DPPP is a convex strategy. Such a portfolio helps in moderating investor biases, as it is primarily based on pre-defined rules.
A scoring point for the bank is that the robust growth in advances has not been marred by slippages in asset quality.
Mr P. K. Anand, Executive Director.
Parvatha Vardhini C
Modest valuations, superior asset quality and high return on net worth make a good case for investment in the initial public offer of Punjab and Sind Bank (PSB). At the upper end of the price band of Rs 113-120, the offer price would discount the bank's annualised first half-year earnings (April-September 2010) by about 4.8 times on a post-issue equity base.
The price-to-book value, post-dilution, works out to 1.12 as on September 30, 2010. The issue is priced at a discount to peers such as Dena Bank, Bank of Maharashtra and United Bank as also to slightly bigger banks such as Vijaya Bank.
The PSB is raising about Rs 480 crore to boost capital adequacy which is necessary to fund future loan book growth. The capital adequacy of the bank, as on September 30, 2010, stood at 13.04 per cent (Basel II). After the issue, the government's stake will fall to 82 per cent.
This, being well above the mandatory 51 per cent, leaves ample room for the bank to raise further capital from time to time.
Advantage: Asset quality
PSB has a concentration in the northern region of the country (especially Punjab) with about 70 per cent of its 926 branches spread there. Driven by the CAGR of 38 per cent in advances over 2006-10, the total business (deposits and advances) for the first half of 2011 stood at Rs 88,800 crore.
A scoring point for the bank is that the robust growth in advances has not been marred by slippages in asset quality. The gross NPA ratio has shown a decrease during this period. As on September 30, it stood at 0.92 per cent, much better than peers whose GNPA ratios were between 2.25 per cent and 3.5 per cent.
Provision coverage, at 87 per cent for the first half year, is much above the RBI mandated norm of 70 per cent, implying that unlike several other banks, earnings may not take a hit due to higher provisioning in the quarters ahead.
At 0.44 per cent for the April-September 2010 period, the net NPA ratio of the bank is also better than the average of nationalised banks.
Besides, as a result of conservative provisioning, the bank recovers a portion of its technically written–off accounts, which directly contribute to profits. The recovery has ranged between Rs 100 and Rs 200 crore in each of the last three years.
Other positives for the bank include a healthy credit-deposit ratio of about 68 per cent, a reasonable cost to income ratio of 48 per cent and a high return on net worth of 13.5 per cent (not annualised) for the half year ended September 2010. Restructured loans constitute only 2.7 per cent of total loan assets.
Low CASA, a handicap
An area in which the PSB is at a disadvantage is with regard to access to low-cost deposits. Despite wide spread presence in rural and semi-urban centres which are catchment areas for low-cost deposits, the CASA ratio for the bank stands at a modest 25 per cent, compared to between 35-40 per cent for peers.
This partly reflects in the bank's cost of funds being higher than the average cost for nationalised banks. Net interest margins (NIMs) have also been lower at 2.67 for FY-10 and 1.50 (not annualised) for the April-September 2010 period.
Given that the days of lower cost of deposits for banks have ended and that several bigger banks are hiking deposit rates, NIMs are likely to be pressured from now on. Apart from this, the bank has a high investment-to-deposit ratio.
A higher ratio here implies that earnings may be impacted by volatility in treasury income and profits. From 36.5 per cent in FY-10, the investment-to-deposit ratio has since come down to 32 per cent in the first half of FY-11.
A rising interest rate scenario merits watchfulness on the bank's performance on these two parameters. It is recommended that only investors with an appetite for some risk and who have a medium-to-long term perspective can subscribe. It is open from Dec13 -16.
Investors with a medium-term perspective can consider buying the stock of infrastructure constructor and developer Ramky Infrastructure, taking advantage of price declines post-listing. The company has a well-diversified order book of Rs 12,200 crore (5.6 times the consolidated FY-10 revenues). This will help tide over any sluggishness in near-term order inflow, a phenomenon witnessed by other construction contractors which have had to contend with limited order flows. An average execution period of 30 months for the company's orders also offers near-term earnings visibility. At Rs 329, the stock trades at a reasonable 10 times estimated consolidated per-share earnings for FY-12. Valuations are at a discount compared to peers such as CCCL and Madhucon Projects. Water and waste management and irrigation projects, where the company has a strong presence, offer superior margins and make up the bulk (41 per cent) of the company's order book. Urban development schemes of the Government offer vast scope for orders in this segment. Road projects account for 33 per cent of the order book followed by residential and commercial buildings at 16 per cent and industrial projects at 10 per cent. This diversified portfolio mitigates risks of segment concentration and allows flexibility to make the most of opportunities in various segments. Ramky undertakes projects on an engineering, procurement, construction and lump-sum basis, while also executing projects as a developer. It has completed road and residential projects as well as an SEZ and industrial parks, a few in partnership with other players. Its developer status offers better margins than a pure-play contractor and a platform to scale up order sizes. Average order size improved from Rs 31 crore in 2008 to about Rs 100 crore now. Geographically too, the company moved away from a focus on Andhra Pradesh to a more diversified presence. It recently secured a Rs 1,101-crore NHAI order with a Chinese company on a development basis in Jammu & Kashmir. It has also moved overseas, securing an order to construct an SEZ for Rs 380 crore in Gabon, West Africa. The six months ended September 2010 saw the company's consolidated revenues increase 35 per cent, while net profit expanded 50 per cent on controls over interest costs and depreciation. Margins have held at 17 per cent at the operating level and 7 per cent at the net level. However, current debt-equity ratio is at 1.2 times but with more development projects in its fold, the ratio is likely to go up, pressuring margins to some extent.
Bhavana Acharya
BL Research Bureau
