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| *LTP stands for Last Traded Price as on Friday, October 15, 2010 4:04:54 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. |
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| Nifty has formed a "rectangular pattern" suggesting correction In the week ended (October 11-20, 2010) Nifty managed to surge to its new 52 week high of 6,284.10 on Thursday 14th Oct, 2010. Though Nifty marked its new 52 week high on the back of heavy buying by FII's, witnessed in selective heavy weights stocks, it could not able to sustain above that and fell sharply from there, marked low of 6050 on last trading of week as investors preferred to book profit amid weak global cues, triggered heavy selling across sectors in last two trading session. It finally closed at 6,062.65 with a loss of 0.68% on w-o-w basis. Nifty is currently trading in range of 180 points in between 6,060-6,240, exhibiting rectangular pattern, trading within with support at 6060 and resistance at 6240. In spite of Friday sharp fall Nifty managed to close just above lower support line of rectangular pattern, closed at 62062.65. If Nifty manages to trade above it then we could see upside in forthcoming session otherwise not ruling out the possibility of major correction. On upside Nifty resistance level seems at 6,120 while support at 6,020. On upside if level of 6,120 breaches decisively then we could see rise up to mark of 6,180, on the lower side if level of 6,020 is breaches then Nifty could retrace up to its mild support of 5,980 mark first and thereafter up to its strong support of 5920. Technical momentum indicators are currently suggesting correction in it. Stochastic is currently moving in neutral zone, on the brink of entering into neutral territory indicating profit booking. RSI is trading in neutral territory at 55 showing negative crossover. Another momentum technical indicator MACD is trading in positive zone, showing negative divergence, also indicating correction. Despite of correcting sharply in last two trading session Nifty is still trading above its 8 Day and 34 day EMA, till the time it manages to trade above them not expecting any major correction in forthcoming session. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Looking Forward Industrial output in August grew at the slowest pace in 15 months at 5.6%, nearly half of last year is a cause for concern. The disappointing industrial output numbers is likely to trigger a huge sale on the bourses. We expect In Q2FY11 the overall margins of corporates are expected to be under pressure due to higher input & interest cost as in the June quarter. Among the sectors, Banking, Metals & Consumer Durables could positively surprise, while FMCG, IT, Cement & Autos are expected to deliver results in line with the expectations. Overall corporate earnings growth is unlikely to match the pace of rise in the stock prices in the near term. So it undergo a correction before the next upmove begins. Further, for the near term, a section of the market is concerned that the large IPO of state-run Coal India in mid- October 2010 would soak liquidity from the secondary equity markets. The government plans to raise about Rs. 15,000 cr from divestment of 10% stake in Coal India. Any correction, if it takes place, is expected to be short lived in near term & a dip of 7-10% from current levels should be considered as a buying opportunity. Investor's will eye on Q2 earnings of Heavy weights like L&T, HDFC, Bajaj Auto and TCS which are due next week.
| Daily Movement of Nifty  Daily Movement of Sensex, Net FIIs & MF investment Weekly return on BSE Sectoral Indices | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Alembic is demerging its relatively high-margin pharma business into its wholly subsidiary Alembic Pharma. Pharma business includes Domestic formulation, International Generic and API business. The company expects 7-9 months time period for completion of demerger. After demerger, it is planning to list the Alembic Pharma on both stock exchanges which unlock value for the shareholders. The management has indicated that capacities of Pharma facilities are sufficient for next couple of years. So, there will not be much capex plans in the next two years except normalize capex and research activities. It is also planning to reduce debt of Alembic Pharma in the next 2-3 years. Further, the company is also planning to develop its 70 acre land asset going forward.
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| US stocks higher during the week (till Thursday) following the minutes from Federal Reserve meeting kept hope alive that the central bank would further aid the slugging economic recovery. The minutes from the Federal Reserve's September meeting indicated most members of the central bank have agreed to consider reinitiating quantitative easing measures "before long". Also, central bankers reduced their growth projections through 2012 and believe buying assets to stimulate the economy is warranted. The markets also benefited from a positive reaction to quarterly results from Alcoa, Intel, CSX, Fastenaland JP Morgan Chase. Further, some positive sentiments were generated from continued activity on the merger-and-acquisition front.On economic front, investors were presented with encouraging economic data, which was fuelled the positive sentiments in the market. Looking ahead to next week, the markets will be presented with data on consumer prices, retail sales, New York state manufacturing activity and business inventories.Commentary from Federal Reserve Chairman Ben Bernanke regarding monetary policy in a low inflation environment is also likely to attract attention. In earnings, the markets will react to quarterly results from Advanced Micro Devices and Gannett . | Weekly return on major Global Indices Data of US and European markets taken from Oct 07 to Oct 14, 2010 Data of Asian markets taken from Oct 08 to Oct 15, 2010 Weekly Change in the Composites of S&P 500
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| Buoyed by huge foreign funds inflow in the domestic economy, Rupee strengthened to highest level in two years against the green back. Domestic equity markets are witnessing some of the most hectic buying by foreign investors as they remained net buyers from the last 31 trading days, the longest run of inflows in more than five years. Further, the slide in US dollar against major currencies has also led to soaring Rupee. US dollar once again hit a 15-year low against the yen and slid to USD 1.40 against the euro. After the release of minutes from FOMC, the expectation of further quantitative easing from US Federal reserve has increased which is hurting the greenback.
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| Nifty has formed a "rectangular pattern" suggesting correction | |
 | Nifty exhibited rectangular trading pattern, trading with support at 6060 and resistance at 6240. Nifty finally closed at 6,062.65, just above lower support line of rectangular pattern. If it, manages to trade above it then we could see upside in forthcoming session otherwise not ruling out the possibility of major correction. On upside Nifty resistance level seems at 6,120 while support at 6,020. On upside if level of 6,120 breaches decisively then we could see rise up to mark of 6,180, on the lower side if level of 6,020 is breaches then Nifty could retrace up to its mild support of 5,980 mark first and thereafter up to its strong support of 5920. Technical momentum indicators are currently suggesting correction in it. Stochastic is currently moving in neutral zone, on the brink of entering into neutral territory indicating profit booking. MACD is trading in positive zone, showing negative divergence, also indicating correction. Technical Pick 1.Uflex: Buy 2.Timken: Buy 3.Orchid Chemicals: Buy 4.BPCL: Sell |
| 7 to 10% correction from current levels could be a good buying opportunity | |
 | Industrial output in August grew at the slowest pace in 15 months at 5.6%, nearly half of last year is a cause for concern and it is likely to trigger a huge sale on the bourses. We expect In Q2FY11 the overall margins of corporates are expected to be under pressure due to higher input & interest cost as in the June quarter. Among the sectors, Banking, Metals & Consumer Durables could positively surprise, while FMCG, IT, Cement & Autos are expected to deliver results in line with the expectations. However, the overall margins are expected to be under pressure due to higher input & interest cost as in the June quarter. Overall corporate earnings growth is unlikely to match the pace of rise in the stock prices in the near term. So it undergo a correction before the next upmove begins. Any correction, if it takes place, is expected to be short lived in near term & a dip of 7-10% from current levels should be considered as a buying opportunity. Investors will eye on Q2 earnings of Heavy weights like L&T, HDFC, Bajaj Auto and TCS which are due next week. Fundamental Pick 1.Syndicate Bank: Buy 2.Alembic: Buy |
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| Global markets to be optimistic over the quarterly earnings, though economic numbers could also be watched | |
 | Global market showcase another strong weekly gain led by some better earning numbers and economic data. Expectations appear to be improving as second quarter earning season has begun and as there is still further room for stock market upside if bullish expectations prove accurate. However, some profit booking could be witnessed in the global equity markets after recent gains. Next week begins in the US with industrial production, expecting a modest gain, and the housing market sentiment index followed by the housing starts data. Further, all eyes will turn to the Asian region as China will release its monthly round of data of CPI, PPI, retail sales, industrial production on Thursday. Also, investors will eye on the September quarter GDP number of China. Moreover, the recent weakness in the dollar fueled equity and commodity markets to multi months high. Any positive move in dollar could weighed on markets. |
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| Liquidity in the system is expected to tighten | |
 | Liquidity in the system is likely to tighten next week as India's largest ever public offering is set open on October 18, 2010. Coal India's IPO is expected to suck Rs 15,000 crore from the system. Bond prices are likely to flat with negative bias as Inflation for the month of September 2010 came higher than expected and also liquidity in the system is expected to remain tight. |
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| Crude prices likely to pick up, gold prices may fluctuate near the high | |
 | The crude oil prices are likely to pick up in the coming week. The prices may inch higher on the speculation that dollar will extend lows against the euro, as Federal acts to support the economy. The efforts to ease monetary policy will erode value of the currency, thereby boosting the crude oil prices. The next week may see the precious metal fluctuating near the record high on concern that the metal's advance as an alternative investment to a weakening dollar may have been overdone. Ongoing festivities are likely to push the gold prices higher in the domestic market. |
Coal India Limited (CIL) is coming out with an initial public offer of 631.63 mn equity shares through the issue with a price band of Rs 225-245, which is an offer for sale by the President of India, acting through the ministry of coal, Government of India. The offer shall constitute 10% of the post offer paid-up equity share capital of company. The issue opens on October 18, 2010 and closes on October 21, 2010. Retail investors are entitled to 5% discount.
Issue Objectives :
The objects of the Offer are to carry out the divestment of 631,636,440 Equity Shares by the Selling Shareholder and to achieve the benefits of lisitng the Equity Shares on the Stock Exchanges. The Company will not receive any proceeds from the Offer and all proceeds shall go to the Selling Shareholder.
Valuation and recommendation:
CIL's status as the largest coal mining company in the world with access to the vast amount of coal reserves and highly favourable industry prospects driven by huge demand supply gap, is expected to result in strong growth prospects for the company. Further,the continuous improvement in labour productivity, use of better technology leading to a better control of costs and thus, leading to healthy overall profitability of CIL. The deregulated coal pricing regime gives CIL the power to fix the price for its produce which, along with the favourable demand supply position and cost competitiveness vis-à-vis imported coal, is likely to enable the consolidated entity to sustain its healthy profitability. We value the stock at Rs. 317 by using the DCF method (WACC: 13.50% and Terminal Growth 5%),which offers an upside of 41% over the lower end of the price band and 30% at the upper end. Going forward, we expect CIL's consolidated revenues and PAT is likley to grow by 10% to 12% from FY11E to FY15E. Thus, we recommend investors to Subscribe to the issue.
The issue closes on October 21, 2010.
Our Bureau
Mumbai Oct. 15
PSU issues have traditionally created excellent value for the 'buy and hold' kind of investor rather than the one looking for mere listing gains.
Analysts say PSUs have always made money for investors, but in the long-term, over a period exceeding five years (see table). "Take the case of NMDC. It was divested through a bidding process by the government on December 28, 1993 at an average price of Rs 83.52 and is now at Rs 287.4. Considering the dividend yield the stock has performed very well," said Mr Manish Laddha, Director, Ideas 1 {+s} {+t} Research.
There is also a feeling among market experts that one should pick those PSUs that have minimal government intervention in policy matters. "Oil marketing company stocks took a hit for three years because the Government was reluctant to bite the bullet on oil price deregulation," said Mr Varun Goel, AVP & Fund Manager, PMS, KC Securities.
"Though PSUs are perceived as inefficient, the markets seem to have woken up to the reality that these companies hold tremendous intrinsic value," he added.
The performance of the recent PSU offerings is still being measured in the short term, analysts said. Since June 2009 a total of eight PSU issues have hit the capital market — four IPOs and four FPOs by EIL, SJVN, NTPC, REC, United Bank, NMDC and OIL India. With the exception of EIL (16.4 per cent) and REC (18.9 per cent), no other issue has seen double digit appreciation on the day of listing.
To add to the Government's misery, retail subscription was far below expectation in NMDC (0.22 times) and NTPC (0.1646 times).
Key challenges
The problems faced by PSU issuers since last year include very low broker commissions, small lead time for marketing the issues, bunching of issues and small ticket sizes for retail investors. Faced with these challenges, the Department of Disinvestment got cracking and held meetings with brokers in Mumbai, Ahmedabad and New Delhi in April, Kolkata in July, Indore in August and Chennai in September this year to receive feedback and insights into what went wrong and what could be done.
Changes in approach
There has been substantial change in regulation in terms of implementation of ASBA for all categories of investors, in terms of doing away the 10-per cent rule for QIBs, bringing down the number of days from issue closure to listing to 12 from 22 and QIB book closing, since January 2010, a day prior to all other books. Finally, PSU issuers have started giving five per cent discount for retail investors as a norm.
After Coal India, follow-on/public public offers of behemoths such as Shipping Corporation, Power Grid, Manganese Ore India Ltd, Hindustan Copper and SAIL are in the pipeline.
They would come out with a combination of an offer for sale and a fresh issue of equity and are expected to mop up the sum envisaged (Rs 40,000 crore in FY-11) by the government's disinvestment programme.
DTC pampers FIIs
T.C.A. Ramanujam
FIIs find investingin the Indian stock market attractive on many counts.
The stock market is booming. The discerning observer will know that this is attributable to heavy influx of funds into the stock market by foreign institutional investors (FIIs). They find the Indian market attractive on many counts, one being the liberal tax regime in operation.
It has always been a matter of controversy whether stock market gains should be taxed as capital gains or business profits. Tax law makes a distinction between investment asset and business asset. Gains on investment assets are taxed as capital assets. The Central Board of Direct Taxes (CBDT) advised its officers in 1989 about the distinction between shares held as investment capital asset and those held as trading asset.
Guiding principles
This is a matter to be discerned by scrutiny of evidence from records held by the trader. The Authority for Advance Ruling (AAR) culled out several guiding principles for deciding this matter (in 288 ITR 641).
The substantial nature of transaction, the manner of maintaining books of accounts, the magnitude of and ratio between purchases and sales and the holdings would furnish a good guide to determine the nature of transactions. Ordinarily, purchases and sales of shares with the motive of earning profit would result in the transaction being in the nature of trade.
But where the object of the investment in shares of a company is to derive income by way of dividends, and so on, then the profits accruing by change in investment will yield capital gains. The Memorandum of Association of the FII will have to be scrutinised to find out if the FII has the power to deal in stocks as a business venture. We have to verify how the shares were valued in the books, whether as trading asset or as capital asset.
Two portfolios
Regulation 18 of SEBI Regulations enjoins upon every FII to keep and maintain books of accounts relating to remittance of initial corpus of buying and selling and realising capital gains on investments. The CBDT emphasised that it is possible for a taxpayer to have two portfolios, that is, an investment portfolio comprising securities which are to be treated as capital asset and the trading portfolio consisting of stock-in-trade which are to be treated as trading asset.
Where an assessee has two portfolios, he may have income under both heads, namely, capital gains and business income. These instructions were laid down by the CBDT in Circular No 4/2007 of June 15, 2007. They are in agreement with the principles laid down by courts in the Fidelity group of cases and the Supreme Court ruling in Morgan Stanley.
Business profits are taxed at a rate generally higher than the rate applicable to capital gains. If the foreign company has a permanent establishment (PE) in India, the profits will be considered as business profits. If there is no PE, probably capital gains will have to be considered. Either way, we will have look into the provisions of the Double Taxation Avoidance Agreement (DTAA).
In this situation of the law, the DTC Bill confers a big boon on all FIIs. The Discussion Paper takes note of the dispute about income from transactions in the capital market being characterised either as business income or capital gains. A foreign company is not allowed to invest in Indian securities except under a special regime provided for FIIs.
SEBI Regulations provide that FIIs can make investments in specified securities in India. Where they have no PE, FIIs can claim total exemption from tax even if the profits are to be characterised as business profits.
Litigation can be avoided, says the Discussion Paper. How? By one stroke of the pen, it is now proposed that from April 1, 2012, income arising on purchase and sale of securities by an FII shall be deemed to be income chargeable under the head 'capital gains'.
Case laws redundant
There is no need to go into technicalities such as the existence of PE, the motive for purchase and sale of shares, and so on. All the case laws on this subject are now rendered redundant and capital gains will be exempt from tax as we have seen in the case of investments routed through Mauritius. The Discussion Paper claims that the proposal would simplify the system of taxation, bring certainty, eliminate litigation and would be easy to administer.
Circular No.4/2007 will apply to Indian investors and not FIIs. The Revenue will suffer no-doubt, but the Government hopes that economy will gain.
(The author is a former Chief Commissioner of Income-Tax.)
DERIVATIVES EOD REPORT ON
| Buy / Sell (Oct 15, 2010) | |||||||
| Buy | Sell | Net | |||||
| FII | 2281.71 | 2394.46 | -112.75 | ||||
| DII | 1150.44 | 2203.89 | -1053.45 | ||||
Arvind Parekh
+ 91 98432 32381
