BUY ASAINPAINT SL 2588 T 2930
| 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. |
& http://www.indiabulls.com/securities/mailermis/weekly-reports/weekend-platter-01Oct2010.aspx
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).
SUPPORT & RESISTANCE LEVELS IN CASH /SPOT MARKET FOR 4TH OCT
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| *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.
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) Buy Sell Net FII 4563.50 2738.30 +1825.20 DII 1594.87 2265.95 -671.08
| 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 competitionShriram 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.
Arvind Parekh
+ 91 98432 32381
