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Thursday, July 31, 2008

Indian funds listed abroad cue future market trend

MUMBAI: The recent woes of the Indian stock market have been blamed on the US sub-prime crisis and its fallout on the financial markets. Crude oil, at $85-95 per barrel, was not much in the picture that time.

In its monetary policy review on July 29, Reserve Bank of India said that the domestic markets saw severe bouts of volatility from January this year due to heightened concerns over the severity of sub-prime lending crisis in the US and its effect on other market segments and in other countries.

Contributing to the cautiousness were the downward trend in major international equity markets, an increase in international crude oil prices, and other sector- and-stock-specific news, the first quarter review said.

But was the January 21 fall of the India markets waiting to happen or did foreign funds see it coming?

The sudden fall in net asset values of Indian funds listed on the US bourses just few days before the market mayhem of Jan 21 would indicate so. One such fund, iPath MSCI India Index ETN, saw a steep fall in value just a week before the market sank. Between Jan 15 and Jan 18, the NAV of iPath MSCI India Index ETN fell 27.5 per cent. And the National Stock Exchange's benchmark Nifty fell around 17.5 per cent from Jan 18 and Jan 22.

Chart
(Source – Yahoo charts)

iPath MSCI India Index ETN is an exchange-traded note issued in the US. The notes provide investors with a cash payment at the scheduled maturity or early redemption based on the performance of the underlying index, MSCI India Total Return Index.

On Feb 5, iPath MSCI India Index ETN fell by 7.4 per cent while Nifty dropped by 11.4 per cent from Feb 6 to Feb11. Again from Feb 28 to Mar 3, the value of iPath MSCI India fell by 12.6 per cent and Nifty fell by almost 8.6 per cent from Feb 3 to Feb 7.

As recently as Jun 20, iPath MSCI India Index ETN dropped 6.21 per cent and the Nifty slipped about 7 per cent from Jun 20-24.

So, can one take cues from movement of Indian funds in the future to avert a repeat of the Jan debacle?

"Foreign investors went short on the Indian growth story just before the January fall. They were active in Indian funds on US bourses since November following curbs on P-note issuance by SEBI. Emerging economies like India and China were hit badly by the sub-prime issue by way of forex derivatives losses. Then came the spurt in oil prices. As Indian funds in US and the domestic indices are seen moving in tandem, any abrupt movement in these fund values may give a prior indication to local investors of a future havoc," concluded Gangadhar Acharya, fund manager at Flexion Capital.

Monday, July 28, 2008

HDFC Bank’s profit soars 45% on high loan growth

CENTURION ADDS TO NUMBERS

Interest Income Climbs 75% To Rs 3,622 Cr

 HDFC Bank posted a 44.6% growth in net profit at Rs 464 crore for the quarter ended June 2008. Breaking away from the industry's trend of slower credit growth, the bank has reported an 80% rise in advances.
    The figures for the quarter include that of the
merged entity, Centurion Bank of Punjab (CBoP), which was amalgamated with the bank with effect from April 1. Without the merger, the percentage growth in credit would still be in the mid-thirties.
    The results are marginally above market expectations. CBoP had reported a net profit of Rs 33 crore in
the first quarter of the previous year, while HDFC Bank reported a net profit of Rs 321 crore in June 2007.
    According to HDFC Bank executive director Paresh Sukthankar: The core loan growth on a standalone basis for HDFC Bank has been in the mid-30s. Retail loans have seen a growth of around 31%, while corporate loans grew 34-35%. The balance sheet size rose 59.5% to Rs 1,68,598.7 crore. Net advances rose 79.8% to Rs 96,797 crore during the review period.

    Last year's CBoP figures also included Rs 10 crore accrued from the sale of fixed assets and write back of provisions. Incidentally, HDFC Bank officials said retail lending will continue to grow at 25-30% for the year. This is in sharp contrast to the country's largest retail lender ICICI Bank's view, which said retail loans will grow at only 5-10%.
    HDFC Bank has been one of the few banks
to consistently post profit between 30.4% and 32.7% for the past few years. However, last year, the bank broke this trendline growth and posted quarterly growth rates between 34% and 45%. The bank's scrip ended flat at Rs 1,127.05 on the Bombay Stock Exchange.
    Interest income grew 75% to Rs
3,621.7 crore, while other income was flat at Rs 593.4 crore (Rs 572.5 crore). The major contributors to the other income were fees & commission, which grew 37.3% to Rs 511.2 crore. Forex/derivatives revenues stood at Rs 157.4 crore (Rs 146.5 crore), while the bank booked loss on revaluation/sale of investments at Rs 77.6 crore (profit of Rs 52.6 crore for the previous year).
QUARTER SHOW
ONGC
44%
NET PROFIT
Q1 FY09
Profit
surges to Rs 6,636 cr against Rs 4,611 cr in the year-ago period.

L&T
33%
NET PROFIT
Q1 FY09
Net rises to
Rs 502 cr in the June quarter. Total income up 51% at Rs 7,103 cr.
HDFC Bank's deposits grow 60%
    "THE bank posted a 47% year-on-year growth in its loan book and a 34% growth in deposits on a consolidated basis, which is healthy in the current economic environment," said Edelweiss Capital analyst Vishal Goel.
    Mr Sukthankar added retail and corporate loan segments will grow at 25-30% this year. This is against an industry growth of 15% in retail loans and 20% in corporate loans. Total deposits increased 60.4% to Rs 1,30,918 crore. The bank's current and savings account mix was at 44.9%. Provision
ing rose 12.2% to Rs 344.5 crore.
    Bad loans, however, have shown a sharp rise, though in percentage terms, it's marginal. Gross non-performing assets more than doubled to Rs 1,502.7 crore from Rs 710.2 crore (1.5% against 1.3%). Net NPAs also saw a similar rise as it rose to Rs 496.1 crore from Rs 214.2 crore (0.5% against 0.4%). The capital adequacy ratio (CAR) stood at 12.2%.
    According to Mr Sukthankar, there have been fresh additions of only Rs 80 crore on a quarter-on-quarter basis. Around Rs 520 crore was added to gross NPAs because of the merger.




How India Inc fared this quarter






Fertilisers are India’s lifeline :

The Right Equation

Fertilisers are India's lifeline. With enhanced availability of natural gas, India can create new capacities in urea, become globally competitive and reduce its dependence on imports

A BILLION-DOLLAR acquisition, capacity expansion and diversification into biofuels — Tata Chemicals (TCL) has seen it all in a short period of time. In a free-wheeling
chat with RAMKRISHNA KASHELKAR, TCL's managing director HOMI KHUSROKHAN discusses what lies ahead for the company...


Rising soda ash prices don't seem to have improved the performance of your chemicals business in FY08. How does the scenario look like in the current fiscal?
There were three specific reasons for the deteriorating performance by the chemicals business in FY08. First, a provision of Rs 75 crore had to be made for pension funds in the UK. This issue was not connected to the company's operations. Second, there were delays in ramping up volumes at the new pharma-grade sodium bicarbonate plant in the Netherlands, as well as delays in starting the pure ash plant in Kenya. And finally, last year, the production at our Mithapur facility was affected due to an excessively heavy monsoon, which diluted the brine. These one-time problems are now past us and going forward, we see favourable trends emerging, such as the appreciation of the yuan against the US dollar and rupee, and relatively higher energy prices compared to freight rates. On both these counts, we stand to gain as an integrated global business.

What is your outlook on the global soda ash industry?
The spot price of soda ash has jumped to as high as $450 per tonne, thanks to healthy demand growth. The outlook is still very positive as the slowdown in the US economy has been compensated by growth in developing economies, where demand is being driven by the requirements of the glass industry, particularly architectural glass. Some of the Chinese capacity,
which had been flat over the past two years due to relocation of some companies, is expected to be back on stream by the end of this year. But so far, indications are that all the incremental capacity in China is being absorbed internally due to the country's brisk economic growth and its ambitious plans for infrastructure development. We expect the current demand-supply scenario to be maintained for at least another couple of years.
    However, here one needs to understand that high soda ash prices are attributed only to the spot market. Most of the business in this industry happens on long-term contracts. Over 80% of our European soda ash business and nearly half of our Indian soda ash business is on yearlong contracts. Hence, the benefit is proportionately lower. Further, one cannot ignore the rising costs of inputs
and freight, which are also responsible for driving up prices. We have succeeded in maintaining absolute margins, but percentage margins have fallen.
How are the soda ash plants in Kenya progressing? Have you reached full capacity utilisation levels?
We have two plants in Kenya, one produces natural
'standard ash' and the other produces 'pure ash', where we eliminate the naturally occurring sodium flouride in the trona (which is the naturally occurring soda ash in mineral form). The older standard ash plant has performed extremely well, at over 100% of its capacity, but we have had a series of problems with the new plant even after it was commissioned. The political disruptions towards the end of '07 delayed commissioning and the plant operated at less than a quarter of its rated capacity during FY08. Today, the situation has improved and on an average, we run at between 55% and 60% of capacity. So, overall, we now operate at around 75% of the total capacity at Magadi, which is much better than last year.
    Additionally, out of our overall capacity of 5.5 million tonnes (mt), about 0.7 mt or 12.7% (i.e. 0.35 mt in the Netherlands and 0.35 mt in Kenya — the new pure ash capacity) is being affected by high energy costs, which depresses performance to some extent. We are taking steps to switch the new pure ash plant — which was earlier powered by fuel oil, the price of which has risen considerably over the past few months — to solid fuel.
How do you view the fertiliser industry in India?
This is a lifeline industry and its importance will grow with time, as the demand for food rises across the world. With the enhanced availability of natural gas, India can now create new capacities in urea, become globally competitive and reduce its dependence on imports (which have been rising of late). The industry has been assured that a new urea policy — which encourages fresh investment in urea capacities — will be announced soon.
    In case of the phosphatics policy in June, the announcement of import parity pricing was most welcome and will provide the industry much-needed relief. It will also give
the domestic fertiliser industry an opportunity to grow by aligning itself to the global market place. However, the industry's ability to tie up key raw material supplies such as rock phosphate or phosphoric acid will be critical, since these inputs are not available in India.
Tell us more about your 'Khet Se' initiative…
For several years now, we have seen ourselves as a company that does more in the rural space, than just manufacturing and selling fertilisers. In our 600-odd 'Tata Kisan Sansar' outlets, we have now widened our offerings to services like soil-testing, farming advice, facilitation of crop loans, insurance, etc. Moreover, by building new businesses like 'Fresh Produce' on this platform, we will, in effect, be co-creating value with farmers, which is the actual purpose for our being in this business.
    Our model for the 'Fresh Produce' business goes far beyond just wholesaling of agri-produce. We work with farmers to improve the quality and yield of their produce. We advise them on better farming practices, correct harvesting time, cleaning and quick transfer to our cold storages etc. We also help to reduce wastage and most importantly, we ensure that farmers receive the right value for their produce. As of now, only one centre is operational in Punjab, and the other is being set up in Maharashtra.
    We partnered with Total Produce of Ireland because it has over 100 years of experience in this business and its learnings have been very valuable for us. We plan to set up around 30 such centres over the next three years. In some states, there are restrictions on a corporate marketing agricultural produce and hence, our progress will depend on obtaining the required permissions. On an average, these centres will need investment of Rs 10-20 crore each, depending on their size.
You are also setting up India's first sweet sorghumbased ethanol plant. What were the reasons behind entering the biofuels space?
Biofuels is an area which will become increasingly important for energy security, as reserves of fossil fuels diminish and prices climb. After experimenting with various feedstocks, we found that sweet sorghum was an excellent choice as a starting material. It is a four-month crop, grows well in semi-arid climates and uses far less water than sugarcane. Our initial choice of this feedstock was also based on the premise that our bio-ethanol will be competitive even at crude oil price of $65/barrel.
    However, over the long term, we feel that the best feedstock for bio-ethanol will be biomass from agriwaste, and conventional feedstock like sweet sorghum will help us gain an early entry into the bio-ethanol segment. The ultimate goal for most companies engaged in biofuels today will be the enzymatic conversion of lingo-cellulosic material and our innovation centre is working on these new technologies. We are setting up a pilot plant with a capacity of 30,000 litres a day in Nanded, where the feedstock is easily available. The plant can be further scaled up to 100,000 litres per day, based on its success.
    ramkrishna.kashelkar@timesgroup.com 

Homi Khusrokhan, MD, Tata Chemicals



America For Sale


Foreign companies emboldened by a weak dollar are on the prowl for undervalued US assets


FOREIGN BUYERSare circling, taking advantage of a weak US dollar and a depressed stock market to snap up US companies at discounted prices. Recent big deals include the July 13 acquisition of Anheuser-Busch, the owner of Budweiser and other iconic American beer brands, by Belgian brewer In-Bev for $52 billion. On July 21, Swiss biotech company Roche Holdings said it will swallow the rest of San Francisco-based Genentech that it doesn't already own for $43.7 billion. And on July 23, Japanese insurer Tokio Marine Holdings announced plans to buy US insurance company Philadelphia Consolidated Holding for $4.39 billion. FEEDING FRENZY:In the past five years, 2,331 US firms worth $772.3 billion were purchased by foreign buyers. In '07, 614 US firms, valued at $294.4 billion, were acquired by foreign entities, up from 226 firms worth $49.6 billion in '03. Foreign buying in '08 has slowed slightly, reflecting the global slowdown in merger-and-acquisition (M&A) activity in recent months. At mid-July, 266 deals valued at $121 billion had been announced, compared to 541 deals, totalling $155.1 billion, in all of '06.
    There are many reasons why foreign buying of US firms is expected to continue and even accelerate. One factor is a weak US dollar. The euro is near record highs against the dollar, up 13.6% in the past year. The dollar index is down 9% from a year ago.
    There's disagreement about how much a weak dollar actually entices buyers. A foreign company may pay less in its native currency, but it also gets less, because a US firm's cash flow and profits are also denominated in American currency, says H Hiter Harris III, co-founder of boutique investment banking firm Harris Williams. However, that logic doesn't apply if you're buying a hard asset, he says. Just as foreign tourists take advantage of the weak
dollar to buy clothes, jewellery and other items at steep discounts, foreign firms can buy assets such as land, buildings and especially brands. AN OPPORTUNE MOMENT: While the weak dollar may not be a decisive factor, it can speed up deals. Another factor may be the availability of credit. While the financial crisis is a global phenomenon, foreign buyers "seem to have a little better access to financing than we do in the US," says John LaRocca, a partner at Dechert. However, even if the price is right and credit is available to buyers, bankers say a potential acquisition must make strategic sense. For example, by combining with US companies, foreign consumer companies are often seeking to make global distribution systems more efficient. BUYER PROFILES:Companies in Canada and Europe's developed countries have been the most aggressive buyers of US companies and initiated 69% of deals last year, according to Capital IQ. Asian firms have stepped up their buying, particularly those from emerging economies such as India and China. Emerging Asian firms launched 23 buyouts so far in '08 and 62 in '07, nearly double '06's total and more than four times '05's. But emerging Asian firms, which tend to focus more on growing within their own borders, make up a small portion of the buyers. One thing that's not clear is how much politics will affect the pace of US buyouts. US shareholders usually lift a glass to acquisition proposals because they boost stock prices. Overseas buyers often have a longer-term view, which makes them more likely to invest in building the business. The Presidential election and a new administration can change the climate. Until then, foreign buyouts will be another reminder that US economic growth is falling behind much of the rest of the world.
    businessweek


Given its future prospects and valuations, Nu Tek’s primary offer looks attractive

Jiro WATCH

Building It Right


SANTAN U M I SH R A ET INTELLIGENCE GROU P


COMPANY: NU TEK INDIA ISSUE SIZE: Rs 76.5-86.4 CRORE PRICE: Rs 170-192 ISSUE DATE: JULY 29 - AUGUST 1, '08
TELECOM INFRASTRUCTURE services provider Nu Tek is coming out with an initial public offer (IPO) of 4.5 million shares. The IPO funds will be utilised for capital expenditure, working capital requirements and acquisition purposes. Post-listing, the promoters' stake in the company will come down to 42.4% from the current 53.2%. The stock seems to be reasonably priced and investors can consider it for subscription.
BUSINESS:The company provides telecom infrastructure services, including execution of turnkey projects, telecom implementation solutions, operation maintenance and resources. It carries out all civil and electrical work, such as installing passive and active infrastructure at the tower site. It also undertakes maintenance of this infrastructure on an ongoing basis.
    Nu Tek gets its business from service providers, original equipment manufacturers (OEMs) and third-party telecom infrastructure leasing companies. It has executed projects for various service providers in the country and for major OEMs like Ericsson, Motorola and Nokia, among others.
FINANCIALS:The company has reported robust growth over the past five years. Its net sales have more than tripled in the past three years to Rs 95 crore. It has managed to improve its operating margin significantly from 9% in FY03 to more than 30% in FY08. The reason for this is higher utilisation of human resources. As the company serves more and more customers in the same circle, this utilisation rate will increase further. Its three-year average return on equity is close to 24%, which is higher than that of its peers in the industry.
GROWTH DRIVERS: Though India is the secondlargest in terms of total number of subscribers, there is still substantial room for growth, as its tele-density (the number of telecom service users in the total population) is just over 26%. So, going forward, service providers will have to set up more towers and other operating assets to serve the rising
subscriber base. The total number of towers in the country is expected to double by '10.
    This augurs well for Nu Tek, given its area of operations. Further, as and when its scale of operations increases on account of more opportunities, the company can provide the same service at a relatively lower price in those regions where it already has its presence.
VALUATIONS:The company's net profit recorded a compound annual growth rate (CAGR) of more than 50% in the past three years. Even after assuming a conservative growth rate of 30% for the next two years, its earnings per share (EPS) works out to Rs 15.9 and Rs 20.7 for FY09 and FY10, respectively. This means that at the current offer price, the stock offers a P/E multiple of 12.1 and 9.3 at the upper price band for FY09 and FY10, respectively. This is relatively lower compared to its peers in the telecom industry. Considering these attractive valuations, investors can consider subscribing to this issue.
RISK FACTOR:The company has high working capital requirements due to the inherent nature of its business, which may have an adverse effect on debt repayment or distribution of cash to its shareholders.
    santanu.mishra@timesgroup.com 




BULL'S EYE

BHARAT HEAVY ELECTRICALS
RESEARCH: HSBC
RATING: OVERWEIGHT
CMP: RS 1,654.90
HSBC maintains 'overweight' rating on Bharat Heavy Electricals (Bhel) with a target price of Rs 2,300. The recent correction in the stock price provides a buying opportunity as fundamentals remain intact. The share price does not reflect the growth momentum of the domestic power equipment market. India aims to add 78 GW of capacity in the 11th Five-Year Plan, and Bhel, with a 65% market share, is its main beneficiary. Strong new order inflow of Rs 14,500 crore resulted in a Rs 95,000-crore order backlog. The gas turbine and railway locomotive businesses are additional growth drivers. Bhel has formed three JVs with state utilities to set up supercritical projects. HSBC maintains its revenue growth estimate of 27% for FY09E, given that Bhel has expanded its capacity and has been able to address its execution-related issues. But higher commodity prices and staff cost provisioning may impact the company's profitability, thus affecting EBITDA margins by 200 bps in FY09E and FY10E, lowering profit growth by 8-10%. HSBC expects Bhel to report EPS of Rs 79.3 and Rs 103.1 in FY09E and FY10E, respectively.
LARSEN & TOUBRO
RESEARCH: DEUTSCHE BANK
RATING: SELL
CMP: RS 2,625.60
DEUTSCHE Bank has downgraded Larsen & Toubro (L&T) to 'sell' with a revised target price of Rs 2,000 (-18%). Despite underperforming the Sensex by 6% YTD, L&T trades at 21x FY09E and 16x FY10E P/E, which seems high in the current market downturn. Deutsche Bank has cut its earnings estimates by 8% for FY09E and 12% for FY10E. Its concerns are: (1) risks to 44% of the order book in steel, oil & gas and real estate; (2) turnaround of international subsidiaries keeps getting pushed back; and (3) the quality of earnings may deteriorate as the working capital cycle stretches. L&T has seen significant order inflows in the power, construction, real estate and steel sectors. Earnings growth momentum picked up in FY08, albeit from a low base in FY07. However, the risk profile for steel, power and real estate sectors has increased significantly, and can impact the company's medium-term growth prospects. While the revised estimates are largely in line with consensus, operating free cash flows may be hit as order inflow momentum slows down.
SASKEN COMMUNICATION TECH
RESEARCH: MERRILL LYNCH
RATING: UNDERPERFORM
CMP: RS 154.40
Merrill Lynch has cut the target price of Sasken Communication Technologies by 7% to Rs 140 and has retained 'underperform' rating on the stock. Merrill Lynch has cut its FY09 and FY10 earnings estimates by 6% and 10%, respectively, to factor in sluggish Q1 revenue growth and muted Q2 revenue guidance in Sasken's IT services business. High attrition levels at 29% and potentially weak Q2 results remain cause for concern. The management has indicated that revenue growth in IT services can reduce to 17-20% y-o-y from 25-29% earlier. IT services revenues grew by 7.5% q-o-q — 1% lower than estimates — with EBITDA margins rising by 305 bps, driven by the rupee's depreciation. Employee numbers fell and the management scaled down net hiring numbers from 700 to 500 for the year. Sasken's products business grew 112% y-o-y, though 60% came from customisation revenues and can be volatile. With a weak Q2 ahead and growth likely to be back-ended, the stock can languish at current levels.

SESA GOA
RESEARCH: MORGAN STANLEY
RATING: OVERWEIGHT
CMP: RS 3,101.45
MORGAN Stanley maintains 'overweight' rating on the stock due to constructive stance on iron ore pricing and confidence in Sesa Goa's ability to deliver robust volume growth over the next two years. Sesa Goa announced Q1 PAT of Rs 636 crore, up 436% y-o-y. EBITDA was Rs 800 crore, 39% ahead of estimates, due to higher volumes and better realisations. Iron ore sales volumes were strong, at 3.2 mt, up 48% y-o-y, against the expectation of 18% increase. This should put Sesa Goa on track to achieve its annual target of 25-30% annual growth. Iron ore realisation was also ahead of estimates at Rs 3,400/tonne — a rise of 11% q-o-q and 92% y-o-y. This was mainly due to continued strength in spot prices, favourable rupee movement and 65% y-o-y increase in the contract settlement price. For the rest of FY09, Sesa Goa should realise the benefit of 81-97% increase in contract settlement price of iron ore. Sesa Goa's coke realisations were strong at Rs 21,000/tonne, up 42% q-o-q, driving the 8% q-o-q growth in coke EBIT. The company's EBITDA margin was a healthy 62% in Q1. Though this was 2,550 bps higher y-o-y, it was 850 bps down sequentially, because of higher transportation costs. This was due to higher proportion of sales from Orissa and Karnataka, and increased trucking and rail charges.
ABAN OFFSHORE
RESEARCH: GOLDMAN SACHS
RATING: BUY
CMP: RS 2,695.15
GOLDMAN Sachs reiterates 'buy' rating on Aban Offshore with a P/E-based 12-month target price of Rs 4,375, implying potential upside of 64%. Discounted cash flow value is Rs 4,500/share. Aban's FY08 pre-exceptional consolidated net profit stood at Rs 310 crore, beating the estimate of Rs 250 crore by 22%. Aban's reported FY08 profit of Rs 120 crore had a one-time translation loss of Rs 180 crore due to adverse movement of NOK-USD exchange rates since March '07. Strong operating results were offset by higherthan-expected interest cost. Better-than-expected operating results and persistent market fears of large derivatives loss proving to be untrue will lead to re-rating of the stock. Goldman expects Aban to announce contracts for five assets — jack-up rigs Deep Driller III, VI, VII and VIII and semi-submersible rig Aban Pearl — over the next 1-6 months. Goldman estimates the jack-up day rates to be $180-185K for short-term contracts and at a 10% discount for long-term contracts. For Aban Pearl, Goldman has assumed a day rate of $275K. So far, Aban's last nine contracts have been at rates higher than estimates. Aban's stock is trading at 5.8x FY10E EPS, which implies a discount of 23% to the global average for offshore drilling companies. Aban still has the best earnings growth profile in the medium term in its peer group, with EPS CAGR of 162% between FY08 and FY10E, even after cutting FY09E EPS by 3.5% to reflect delay in deployment of Frontier Ice at higher day rates.
ULTRATECH CEMENT
RESEARCH: INDIABULLS SECURITIES
RATING: HOLD
CMP: RS 550.50
INDIABULLS Securities reiterates 'hold' rating on UltraTech Cement. A slowdown in construction activity in the real estate sector is expected to adversely affect cement sales. However, ongoing infrastructure-related construction activities should protect volume growth from declining sharply. Going forward, Indiabulls expects that the company's new capacity addition in South India, along with strong demand in the region, will help cement sales volume to witness a CAGR of 13% in the next two years to reach 19.2 mt in FY10E. During the quarter, EBITDA margin fell 239 bps y-o-y due to rise in raw material and fuel costs. Realisation rate has also started moderating — it increased a mere 1% q-o-q in Q1 FY09, lower than the 3% q-o-q increase in Q4 FY08. Excess cement supply projected in FY09E and the government's price control policies may further reduce realisation rate. Indiabulls believes that escalating costs and moderating realisations will continue to keep UltraTech's margins under pressure in coming quarters.


Sunday, July 27, 2008

Over two lakh sign up for SIPs in June & July

After dabbling in stocks with abandon, and a few burnt fingers later, the average Indian investor is now wider, and more mature. With the markets remaining volatile in the past six months, swinging with global developments, investors have taken refuge under mutual funds (MFs). More and more investors are signing up for systematic investment plans (SIPs) of MFs, rather than investing in equities directly.

Indian MFs have seen more than 2 lakh new SIP accounts being opened with different fund houses in the last two months.

This month, Birla Sun Life Mutual Fund (BSLMF) registered over 50,000 SIP investors, while UTI Mutual Fund (UTI MF) saw over 60,000 SIP investors joining it in June. Reliance Mutual Fund registered over 90,000 SIP investors last month, while ICICI Prudential Mutual Fund opened over 36,000 SIP accounts in June-July.

SIPs are plans where an investor can put in a specific amount of funds every month. This also helps him even out his costs in volatile times. Anil Kumar, CEO, BSLMF, said, "Compared to January, our SIP accounts have risen 10 times in the current month. We have registered 50,000 new investors in SIP only in July. We can attribute this growth to the uncertainty in the equity market and increasing investor awareness about mutal funds."

The surge in SIPs is also significant since most other investment avenues are giving low to negative returns in these volatile times. Pankaj Gupta, fund manager, SBI Mutual Fund, said, "It is really difficult for an investor to foresee a bottom when he is directly investing in equities. However, a SIP route makes sense now."

Some dealers say in the past two months, there has been a big rise in SIP accounts, due to a series of SIP-linked insurance schemes. In the last two months Reliance MF, BSLMF and UTI MF have introduced SIP +Term insurance plans, which are the flavour of the season, they say.




Monday, July 21, 2008

Time to shop




J



The sharp downward swing in market sentiment in the past six months has rendered stock valuations attractive. Here are some stocks experts say will deliver handsome returns.
 
The previous six months has seen stock valuations of domestic companies take a huge knock, thanks to macro headwinds like rising inflation rate, high crude oil prices, input costs pressures, global uncertainties and a weak rupee.
 
The swing in market sentiment has been so rapid and deep, that a majority of market experts and research heads say that "today, fear has taken over the fundamentals".
 
And, this is also a reason that some of the well-known and high growth companies are trading at attractive valuations, with some quoting at below their fair value.
 
But, what does this mean? As rightly put by Warren Buffet, the legendary investor, "Be fearful when others are greedy and greedy when others are fearful". The current situation indicates that its time investors start reading into the second half of Buffet's remark. 
 
STREET ECHO
Market No body knows where it is headed
Fundamentals  Overtaken by fear
Valuations  At attractive levels
Strategy  Selective stock picking irrespective of market
Sectors to buy  Capital goods, construction, telecom
Sectors to avoid  Interest rate sensitive - auto, real estate, banking
Investors  Could see more pain 
Bottom  10-15% lower?
Concerns  Oil, inflation, interest rates and elections
Positive  GDP growth, earning growth at 15%
Contrarian   Banking and IT
Recovery  Longer but first in large cap
Value  More in mid caps
Investment  Horizon of at least one year
Returns  Decent from current levels
 
In a bid to identify investment worthy stocks, which are available at attractive valuations and exhibit characteristics like sound business fundamentals and strong earnings visibility, we spoke with experts including research heads of leading brokerage houses to know their views about the prospects of these companies.
 
While the list of stocks turned out to be long, we fine-tuned the same and considered stocks that were most preferred and importantly, capable of delivering robust returns.
 
Aban Offshore
In light of rising global crude oil prices, drilling oil from the deep water has become an alternative and feasible option. This, however, has also led to increasing demand for offshore drilling services.
 
As a result of this, the day-rates for different offshore drilling equipment and services have gone up significantly and the availability of rigs has reduced drastically.
 
This is despite the fact the numbers of rigs added during FY09 were the highest. The favourable change in the industry has also meant better days for the companies in this space, like Aban Offshore, one of Asia's largest oil drilling equipment and services providers. The company operates about 16 jack-ups, three drill ships and one semi-submersible ship.
 
Apart from higher demand, the company will also benefit from re-pricing of its existing assets at higher day-rates as contracts come up for renewal, besides substantially ramping up of its asset base through organic and inorganic initiatives.
 
The company is estimated to maintain a strong revenue growth of about 70-80 per cent over the next two years. Analysts say that if its Singapore-based subsidiary, Aban Singapore (ASL) gets listed, it would help the company raise some funds that may be used to reduce debt (on its own books) raised for the acquisition of Sinvest, and unlock value for its shareholders.
 
The stock is trading at attractive valuations viz. at a one-year forward PE of just 7 times its consolidated FY09 earnings.
 
Bharti Airtel
Bharti Airtel, which commands about 24 per cent market share of the Indian mobile industry, will be the key beneficiary of the fast growing subscriber base.
 
India's mobile subscriber base is expected to touch 500 million by FY10 from 300 million currently, translating into an annual growth of over 30 per cent, mainly on account of rising affordability.
 
Also, the company has amongst the most extensive networks in the country covering 71 per cent of the country's population, which Bharti aims to increase to 80-85 per cent by March 2009.
 
Besides the growth from its core business, the embedded value in the company's tower businesses is equally worth a mention. The combined value of the tower business of Bharti Infratel and Indus Towers is estimated at Rs 165-170 per share of Bharti.
 
Going forward, even as the core business continues to grow at a healthy pace, new offerings like DTH and IPTV (to be launched soon) and foray into markets including Sri Lanka, should boost growth rates further.
 
Analysts expect Bharti's consolidated topline and bottomline growth to range 25-30 per cent (annually) during FY09 and FY10. At Rs 748, the stock is trading at a PE of 17 times and 14 times its estimated FY09 and FY10 consolidated earnings, respectively. 
 
RETURNS KICKER
Company FY08 PE (x) CMP 
 (Rs)
Upside
(%)
Research House
Sales % ch Net
profit
% ch FY09E FY10E
TV18 401 62.3 26 -20.8 26.9 19.4 194 106.2 IDBI, Sharekhan, PL
India Glycol 1,344 52.2 179 334.9 3.2 2.5 227 102.6 AnandRathi, ULJK, Emkay
HCC 2,995 30.2 89 170.2 16.6 11.1 83 100.2 Angel, Karvy, Motilal, Pinc Research, Emkay
Tanla Solutions 460 107.2 163 75.8 8.7 6.9 208 92.3 PL, Religare, Networth, Emkay
Aban Offshore* 658 32.9 158 58.5 7.2 5.3 2,661 91.7 Indiainfoline, Sharekhan, Emkay, Macquarie
Sintex Industries 2,274 95.2 230 73.4 10.0 6.9 291 85.6 Religare, Emkay
Garware Offshore*# 131 117.4 48 179.0 8.7 5.8 173 82.1 Ambit, Pinc Research, Indiainfoline, Emkay
Nitin Fire 132 31.7 19 94.3 10.5 7.0 315 81.0 Religare, Karvy, AnandRathi
Opto Circuits 468 86.1 132 80.7 12.7 9.3 279 75.6 Ambit, Religare
Karuturi Global 401 295.8 102 159.8 6.6 4.8 24 69.5 Ambit, Religare
Axis Bank 7,005 57.0 1,059 61.9 15.9 12.0 635 65.4 Angel, PL, Share Khan, Macquarie, Emkay
Thermax 3,482 49.6 291 50.1 13.3 11.0 386 63.2 IDBI, Sharekhan, PL, Raligare
Maruti 18,104 22.4 1,790 12.7 8.8 7.6 599 61.9 Sharekhan, Emkay
DLF 14,433 447.8 7,812 304.0 9.0 7.6 457 60.8 Macquarie
Bharati Airtel 27,012 46.6 6,395 57.4 17.0 14.1 748 60.4 Angel, Indiainfoline, MOST, ShareKhan, Macquarie
IDFC 2,795 78.5 742 47.3 16.4 12.5 105 52.4 ULJK, KR Choksey, Macquarie, Motilal
Jubilant Organosys 2,489 37.5 401 75.7 13.3 10.6 319 47.3 Enam, Emkay, SBI Cap, Religare, Karvy
L&T 29,199 43.6 2,325 3.8 24.5 18.8 2,521 46.8 SBI Cap, Indiainfoline, Sharekhan
Note: *Standalone figures, # Previous year figures (sales and net profit) are added for the preceding four quarters ending March 2007. 
PE for the FY09 and FY10 is based on the analyst estimates. Upside in % are averages of target prices provided by research houses
 
HCC
Hindustan Construction Company (HCC), a leading construction company, has presence across diverse segments including transportation, hydro and nuclear power, irrigation and water supply, marine projects, utilities and urban infrastructure.
 
The company's diverse portfolio of projects along with higher spending towards infrastructure makes HCC one of the better investments among companies in this sector.
 
Also, diversification has not only helped in managing growth, it has also helped sustain high margins.
 
Amitabh Chakraborty, president � equity, Religare Securities, says, "The rising contribution from the power, water and irrigation segments has helped the company to improve its operating margins from 9.1 per cent in FY07 to 11.9 per cent in FY08".
 
Besides, in real estate business, it plans to develop 186 million sq ft of land on 14,000 acres of land in Maharashtra. Out of this, the 12,500-acre Lavasa-based Township (near Pune) is HCC's flagship realty project, which will be developed in phases over 12�15 years.
 
However, considering the prevailing uncertainty in the realty market, the stock has been hammered down. Analysts believe that there is excessive negative sentiment built up in the stock price, which is why the stock is trading at discount to its fair value.
 
Fundamentally, rising infrastructure spending in the country should drive the growth in HCC's core business. A strong order book of Rs 9,560 crore, which is 3.1 times its FY08 revenues, provides visibility. Any improvement in the sentiment towards the real estate sector should provide further fillip to the stock.
 
On an SOTP basis, HCC's fair value is pegged at Rs 165 per share, comprising of core business at Rs 98-110 per share and Lavasa project at Rs 34-40 per share. Adjusted for Lavasa and other real estate projects, the stock trades at 9 times it's FY09 estimated earnings and 6 times FY10 earnings.
 
IDFC
The country's infrastructure needs should only rise as the economy grows bigger. Even at current projections, the opportunity is huge. The proof: the Eleventh Five Year Plan indicates that $500 billion worth of investment will be required for creation of new infrastructure space, which in turn is positive for companies like Infrastructure Development Finance Company (IDFC), a leading infrastructure financing institution.
 
The company's infrastructure lending business is expected to grow at CAGR of 37 per cent during FY08-FY10. While interest spreads could see some pressure, better fund management should help offset some of this.
 
Additionally, non-interest income should continue to contribute about 47 per cent of total income during FY08-FY10, driven by consistent increase in asset management fee, income from its principle investment book and growth in IDFC-SSKI (broking and investment banking) business.
 
IDFC has also entered into an agreement to acquire 100 per cent stake in Standard Chartered AMC.
 
Overall, the net interest income is expected to grow at CAGR of 28 per cent during FY08-FY10, with net interest margin expected to hover at 3 per cent.
 
"Looking at its business growth and expertise in infrastructure financing, we believe the stock is undervalued and provides an investment opportunity for decent return in medium term," says U R Rao, head of research, ULJK Securities.
 
At Rs 105, the stock is trading at 16 times its FY09 estimated earnings and 12.5 times FY10 earnings. The research house has puts a price target of Rs 160 per share.
 
L&T
Thanks to the slower growth in industrial production and capital goods output in the recent past, Larsen & Toubro (L&T), too, has seen its share price being hammered down. This offers an opportunity to buy into the country's largest engineering and construction player, which is among the best plays on India's infrastructure and industrial capital expenditure (capex) boom.
 
Also, the benefits of its diversification into power equipment, shipbuilding, defence equipment and railways are yet to pay, and help sustain growth in the long-run.
 
"Flush with cash flows from high oil prices, the Middle East region is likely to achieve infrastructure spend of $1,000 billion. L&T has not fully exploited the opportunity in the region due to constraints of resources. In case of slowdown in India, the company can derive more growth in Middle East," says Anil Advani, head Research, SBICAP Securities.
 
These factors and a strong order book of Rs 52,700 crore, the company is expected to maintain its growth at about 35 per cent over the next two years. Any value unlocking from its IT and Finance subsidiaries (expected to be listed separately) would further add to the shareholders wealth.
 
Regards valuation, at Rs 2,357, the stock is trading at 22 times its estimated FY09 consolidated earnings and 17 times FY10 earnings, which is not very expensive historically.
 
On SOTP basis (factoring valuations of different businesses and subsidiaries), analysts have estimated a fair value of Rs 3,000-3,200 per share.
 
Maruti Suzuki
India's leading passenger car company, Maruti Suzuki is available at half the price compared to its 52-week high of Rs 1,252 per share seen in October 2007.
 
Historically, the share price of Maruti has been trading in the PE band of 13-17 times. But, thanks to the market turmoil, it is now trading at just eight times its FY09 estimated earnings.
 
The correction was partly on account of concerns over the rising input cost (for the company) and, high crude oil prices and interest rates (for its customers).
 
Analysts believe that though concerns remain in the near term, the stock should get rerated in the long run on account of benefit accruing from new launches, including WagonR Duo, Zen Estilo, Diesel Swift and SX4.
 
Also, with the ongoing expansion at Manesar plant, exports are expected to go up. The company will manufacture small cars for supply to its parent's customers in global markets.
 
Estimates indicate that Maruti will be exporting about 100,000 units to its parent, Suzuki Motor Company of Japan, while another 50,000 units would be supplied to Nissan Motor Company. The expansion of its capacities should also help company to maintain its margins, helped by economies of scale.
 
Along with the benefits of new launches and the expansion, the company's target of selling one million cars in the domestic market by FY2011, translates into a volume growth (for domestic market) of 12 per cent over next three years.
 
Overall, the company is expected to grow at decent pace. Investors can use the current market conditions to gain from the stock's re-rating once the macro concerns ease out in the future.
 
Opto Circuits India
Opto Circuits, too, is seen as a good investment, with the stock having fallen by over 45 per cent since it high in January 2008, thereby rendering its valuations attractive at 13 times FY09 estimated earnings and 9 times FY10 earnings.
 
The company manufactures healthcare products in the invasive and non-invasive segments. Historically, the company has been growing at 47 per cent during the last five years ending FY08, mainly on account of a series of organic and inorganic initiatives.
 
Given the strong growth across segments, the company is expected to grow at about 57 per cent during FY08-10, while its net profits could grow at a 45 per cent.
 
A part of this growth will come from by its subsidiary EuroCor, which is engaged in the design and manufacture of cardiac and peripheral stents. The estimated size of the global market for its products is pegged at $8 billion, and growing 15 per cent annually.
 
Opto's other business segments include medical electronic and monitoring products such as optical sensors, electro-medical equipment, security systems and pulse oxymeters manufactured.
 
"The company's unique chip design capabilities, USFDA approved products and strong relationship with customers, have led to a 51 per cent revenue growth in the past," says Amitabh Chakraborty.
 
Also, the company recently acquired US-based Criticare Inc for $70 million to strengthen its position in the non-invasive space. Along with this, the analysts also estimate that its invasive business would grow at 55 per cent during FY08-10, on the back of a strong product portfolio as well as a series of products to be launched in the near future.
 
Besides good fundamentals, the research houses like its business model, where the company is a niche player in the medical equipments commanding high margins along with high entry barriers.
 
Sintex Industries
Sintex is a strong play on the domestic consumption story. The company's popularity improved sharply after its foray into the plastic water-tank segment. While it is still a leader in the business, it has also moved into and emerged as a leader in many value-added plastic-based products.
 
These include new concepts like prefab and monolithic construction, which notably are growing at a fast clip. Analysts expect these businesses to grow at about 70 per cent, driven by strong order book of Rs 1,500 crore (65% of FY08 sales) and growing demand for quick and affordable mass housing solutions.
 
Additionally, the company has also emerged as a strong player in the auto and electric plastics product segment, after making several acquisitions in these businesses in FY08. The full impact of these acquisitions will be visible from FY09 and is expected to contribute about 27 per cent of consolidated revenues.
 
Driven by larger product portfolio, geographical diversification, higher domestic demand and benefits of its acquisitions, the company is estimated to grow over 50 per cent in consolidated earnings. At Rs 291, the stock is trading at attractive valuations of 10 times and 6 times estimated FY09 and FY10 consolidated earnings, respectively.
 
Thermax
Thermax was among the stocks that have fallen sharply due to the slow down in the industrial capex seen recently. High input cost also impacted sentiment, leading to a 60 per cent fall in its share price where valuations at 13 times its FY09 estimated earnings and 11 times FY10 earnings are proving to be attractive.
 
Importantly, except for these short-term blips, the company's fundamentals continue to hold ground. The company's order book of Rs 2,637 crore provides revenue visibility of about two years.
 
The company has also taken several initiatives, which should help sustain growth in years come. Thermax operates in a specialised segment within the engineering sector, catering to the needs of a number of industries. Also, the company is leader in small and medium-sized industrial boilers, heaters, and captive power plants in the energy sector.
 
Notably, the company will gain from its entry into higher capacity boilers, which are used by power utilities. It recently signed a 15-year agreement for sub-critical boilers up to 800MW with Babcock and Wilcox. The company has already completed the first phase of 3,000MW boiler facility at Baroda and the second phase is expected to be complete by October 2008.
 
In this direction, the company has already announced its largest order win ever, valued at Rs 820 crore for the supply of a coal fired boiler to a captive cogeneration plant of a refinery.
 
While the margins may remain under pressure as 70-75 per cent of its order backlog is on a fixed price basis, these are already reflecting in the share price. Such issues are being taken care off with the company immediately securing inputs for new orders. TV18
Stocks from the media sector are finding favour among many research houses post the market correction. Television Eighteen India (TV18) is India's premier 'Business News' broadcaster and leading content provider in the electronic media space. It owns and operates business channels CNBC TV18 and CNBC Awaaz and has several strategic investments in the internet business such as moneycontrol.com, which is among Asia's largest financial portals and commoditiescontrol.com.
 
The company's existing businesses have been doing well; news operations has witnessed a CAGR of over 54 per cent for the last three years, while the web and news wire business are currently in an investment phase.
 
Its internet subsidiary, Web18, operates different businesses like travel, technology, movie bookings and financial news. While TV18 holds 85 per cent in Web18, revenues are still small, but offer good scope for growth over the longer term.
 
On the existing and new businesses, the company's revenues are expected to grow at over 37 per cent over the next 2-years. However, its ability to replicate its success in its foray into print and digital media needs to be watched.
 
The company has already started the process and is acquiring 53 per cent stake in Infomedia. The acquisition will provide the company access to the yellow pages directory business and, several special interest magazine segments.
 
Shahina Mukadam, head equity research, IDBI Capital Markets, says, "In the medium to long run, benefits would also accrue from its JV with Forbes (English business magazine), Jagran Prakashan (Hindi business daily) and global media giant Viacom for a strategic alliance across television, film and digital media."

Sunday, July 20, 2008

Steel companies likely to raise prices from August

Mumbai: Domestic steel industry, which has been holding the priceline for over two months, may be compelled to raise rates in August owing to increasing raw material costs.
    "There is a good possibility of prices to increase in August, but I cannot confirm that right now because there is still 12-15 days before August comes," JSW Steel's vice chairman and managing director Sajjan Jindal told reporters on the sidelines of a function on Saturday evening where he was felicited by the Haryanvi Mumbaikars on being the president of industry body Assocham.
    Steel producers had rolled back prices of flat products by Rs 4,000 a tonne and Rs 2,000 per tonne for structural steel last May and promised to hold prices for three months, ending in the first week of August, to help government rein in runaway
inflation. However, far from cooling off, inflation galloped to 11.91% as per the latest available data mainly because of the sky rocketing crude oil prices.
    At the same time price of raw materials, mainly coal and iron ore, have shot up by around 10% in the last three to four months. Domestic steel prices are 15,000 to Rs 20,000 lower than international prices now,
according to steel makers.
    Tata Steel managing director B Muthuraman had last week said "there is every justification to increase steel prices" since the industry cannot go for capacity expansion at the current profit margins. "The rise in input cost could be absorbed for some time, but it persists many projects will be unviable. The growth of the industry will hamper. If the industry does not make money then they will not be having surpluses to reinvest and the projects will slow down," Jindal said.
    India currently produces around 59 million tonnes of steel a year. The government estimates it to go up to 124 million tones in the current plan period ending 2012. "While the growth of the global steel industry was at 5.8% during the last three months, Indian steel industry only observed 1.8% growth during the same period," he said. AGENCIES



No dream rally this, market yet to touch bottom

 THE question in everyone's mind at the moment is whether the market has bottomed out. Just as one swallow does not make a summer, one bounceback does not mean the bottom has been touched. Also, it is mandatory for any index to cross an immediate high (as in the current case 4220/14100) for bulls to regain their confidence. And last, but not least, one needs to see if the oscillators are supporting the trend.
    If one were to study all these three parameters together in order to judge the 'bottoming' of the market, then except for the oscillators the other two parameters are yet to support our judgement. The major oscillators like relative strength index and rate of change are diverging positively, which may help the market grossly to sustain above immediate lower levels (3790/12514). A bullish consolidation is still missing. However, sustenance of the market above 3800/12500 for the next few weeks and breach of 4215/14100 may certainly lift
overall sentiment and the market may even retest the levels of 14550/4370. In case the market touches these levels then our advise is to book profits on trading long positions. Investors can reduce weakest long positions of the portfolio around these levels, as heavy profit booking cannot be ruled out. However, failure to breach an important level 4215/14100 and sustenance below 3880/12840 may drag sentiment as the formation of lower top, lower bottom, may favour bears grossly. In that event a steep sell off cannot be ruled out, which may even break previous lows.
    Last week proved to be full of surprises for most emerging markets and Indian markets, in particular, where the beta of the sensitivity is higher in comparison to other markets. An exceptional fall in crude prices, remarkable recovery in US markets and inflation at an unchanged level all helped reverse overall sentiment in the last two trading sessions, making it possible to end the week above previous week's close. If one were to closely monitor indices over the last three weeks, some kind of bounceback from lower levels can be seen. It maybe termed as a support at lower levels which could have triggered the bullish sentiment in the market.
    For traders our advice is follow market trend and avoid second guessing major events like political developments, etc. In case the market goes up sharply post an event, one can reduce the weakest positions of the portfolio, while a sharp fall post an event may be an opportunity to buy index stocks namely Reliance, SBI, L&T and Tata Steel with a long-term view in mind. Except for banks and cement sectors, not a single sector lived up to expectations in the current upmove. However, based on the move of stocks like L&T, BHEL and Punj Lloyd, we may see bullish consolidation in the capital goods sector in the coming few days. CNX IT is at its crucial support level and bargain hunting is "not" advisable at current levels. Avoid mid-cap stocks as the market has still not established any specific trend.
    Buy Reliance at around Rs 2,080/2,085 Target: Rs 2,200. Stop loss below Rs 2,043 is a must. CMP: Rs 2,113.00.

(The author is vice-president technical research at Kotak Securities)


It’s Building Up, Now

SHAKTI SHAN K AR PATR A ET INTELLIGENCE GROU P

FOR ADVENTUREsports enthusiasts, India can be a very frustrating place. But thanks to the madly gyrating equity market, we now have a surrogate in place. For, if just last week is taken into consideration, the moves have been nothing short of a bungee jump. We had the initial free fall, then the strong rebound and to make things complete, the rebound
stopped just short of the peak from which the jump had begun. Incidentally, for many, the rebound was more enjoyable and thrilling than the free fall, as is typically the case in a bungee jump, contrary to popular belief.
THE VIX POLE VAULT: With almost a consensus in the market that the previous bottom at 3848 will act as a support and that all hell will break lose if that's broken, the market saw a never-before-seen fight between bulls and bears in the last hour on Tuesday. As frantic efforts by bears to hammer this last nail in the bull's coffin succeeded, a plethora of shorts got piled up in that eventful last hour, as the market sensed an apocalypse. What this also meant was that volatility shot up through the roof — the India VIX (the volatility index of Nifty options) witnessed its highest ever single day jump, as it shot up by a whopping 57.95% on Tuesday. But with the expected catastrophe not materialising, the VIX gave up all of its gains and some more, even though the Nifty actually ended in the red the next day. What was even more interesting is that more than 50% of the fresh shorts initiated on Tuesday used the small fall on Wednesday to bail out. This was evident
in Nifty July futures, which shed around 8 lakh shares in open interest — probably they got a whiff of what was to follow.
BULLS STILL IN HIBERNATION: While the stupendous upmoves in the last couple of days of the week brought in a lot of relief for hapless bulls, there's enough evidence to suggest that the show is still being run solely by bears. While a whopping 35 lakh shares, or 10%, of the total open interest was shed on Thursday, hinting at just one thing — short covering, even Friday's upmove didn't see any respectable long build-up. In fact, each of the top five gainers on the Nifty on Friday — ICICI Bank, HDFC, HDFC Bank, DLF and Bharti — saw a trimming of open interest in their July futures. This is yet another evidence of short

covering. So, although bulls have made a huge statement in the past two trading sessions, it's the bears, who are clearly dictating the terms. And bulls seem to be still at the mercy of bears, who seem to make them dance to their tunes. FREEDOM AT LAST: The 20 DMA (daily moving average) is often considered as the best short-term trend indicator. After falling below that on May 22, the Nifty had made multiple attempts to take it out — once on
June 18 and again on July 11. But the failure of all such attempts meant that before Friday, it had spent 41 hapless nights below its 20 DMA — the longest span in more than a decade. No wonder, it had lost a whopping 25% in this period. Now, with the 20 DMA conquered, bulls have definitely taken the first step in redeeming themselves.
FRESH TRADE: While everything seems to be in place for a decent relief rally, the biggest set-back for it continues to be the lack of any substantial long build-up. On most days, when the market cracks, one sees the build-up of shorts and on the rare occasions when it goes up, all one sees is that some of these shorts are getting covered. At the same time, the Nifty is still in its bear market avatar, consistently mak
ing lower tops and lower bottoms. However, the bear stranglehold over the market clearly seems to be waning with each passing day. And now with the 20 DMA conquered, it just seems to be a matter of time, before bulls come back strongly.
    So, if and when the last top at 4216 is taken out, bulls should ideally use it as a trigger to go long, with a stop loss at the 20 DMA. In fact, with a considerable improvement in the health of equity markets the world over, there seems to be enough reason for the Nifty to make a decent recovery. The fact that even far out-ofthe money call options like the 4300 call and the 4400
call saw unwinding on Friday, suggests that the Nifty can even go on to test its 50 DMA, which is at around 4492. At the same time, this long trade should ideally be made only if the conquest of 4216 is followed by a build-up of long positions in Nifty futures. As for the bears among you, enjoy the gains of the past couple of months because opening up fresh shorts or averaging the bad ones above the 20 DMA can only further fuel this probable rally.
    shakti.patra@timesgroup.com 



 

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