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Thursday, October 30, 2008

PSU refiners face net loss of Rs 12k cr in H1

FOR the first-time ever, navratna refining majors — IndianOil (IOC), Bharat Petroleum Corporation (BPCL) and Hindustan Petroleum Corporation (HPCL) — are set to slip into the red in the second quarter. It is estimated that the combined losses of the three oil companies in the first half of 2008-09 are likely to hover around Rs 12,000 crore. The losses incurred by the oil companies come despite a hefty subsidy dole out from upstream major ONGC and oil bonds worth over Rs 20,000 crore being issued by the government.
    "For the first time all the three public sector oil marketing companies (OMCs) would slip into the red in the first half of the current financial year due to huge subsidy burdens on account of major petroleum products (petrol, diesel, PDS kerosene and cooking gas). This is despite factoring in oil bonds for the period," an official told ET.
    BPCL, which declared its result on Thursday, posted a net loss of Rs 2,625 crore in the second quarter of 2008-09. Its loss for the first half year was Rs 3,692 crore compared to
Rs 1,231 crore net profit in the corresponding period of the previous year. IOC and HPCL will announce their results for the second quarter on Friday.
    According to a senior IOC official, the estimates drawn up in June failed to hold good as the oil companies were left to absorb higher losses on their books.
Falling Re, rising interest rates add to OMCs' woes
    "THE inventory gain, which was estimated at that time given the high oil prices, has now reversed into an inventory loss," an official said. While the estimates had projected that oil companies will have to take a loss of Rs 20,000 crore on their books for the whole year, they have ended up absorbing a higher loss for the half year itself.
    When contacted, petroleum secretary RS Pandey said: "The government is aware of the deteriorating financial condition of PSU OMCs. We would do everything possible so that the three Navratnas would close the financial year with profit."
    Companies are incurring losses despite softening of crude oil prices since July this year (from a peak of $147/barrel) mainly due to inventory losses, liquidity crunch, rising interest burden (from 8% in Q1 to 13-14% in Q2) and the depreciating rupee. OMCs are still losing
money from the sale of petrol, diesel, kerosene and domestic LPG.
    As per calculations in the first fortnight of October, PSU oil companies are losing Rs 2.41/litre on petrol, Rs 6.42/litre on diesel, Rs 28.07/litre on PDS kerosene and Rs 332.14/cylinder on LPG. Their total under-recoveries are stated to be around Rs 1,47,000 crore. IOC, BPCL and HPCL have reported Rs 92,853 crore under-recovery on sales of the four sensitive fuels in April-September 2008.
    It is learnt from official sources that petroleum minister Murli Deora met finance minister P Chidambaram to apprise him of the grim financial condition of the PSUs. Mr Pandey was also present in the meeting.
    Parliament has approved oil bonds worth Rs 65,942 crore that includes around Rs 14,000 bonds for Q4 of 2007-08 and advance bonds of around Rs 4,000 crore for Q3 of 2008-09.
    rajeev.jayaswal@timesgroup.com 


Bigger fund stimulus may come banks’ way

Liquidity Taps Continue To Be Turned On Full Blast, With Govt Weighing Transfer Of Market Stabilisation Scheme Money To Its Accounts. But Consumers & Corporates Have Little To Cheer As More Wrinkles Emerge...

IN WHAT could prove to be a bigger liquidity boost than the 2.5% cut in the cash reserve ratio (CRR), the government is considering converting funds impounded under the market stabilisation scheme (MSS) into regular government borrowing. The move will free up funds with banks for lending to borrowers which they otherwise have to lend to the government.
    MSS was introduced by way of an agreement between the government and the Reserve Bank of India (RBI) in early 2004. Under the scheme, RBI issues bonds on behalf of the government and the money raised under bonds is impounded in a separate account with RBI. However, the money does not go into the government account.
    As on October 22, the balance under MSS stood at Rs 1,71,317 crore. Now, the proposal is that the money lying idle in the MSS account be transferred to the government account and be used for revenue and capital expenditure. Such a move, bankers say, will reduce volatility in the money market, as banks will now be free to use funds to lend to consumers and business. Otherwise, the fund would have been invested in
bonds issued by the government to meet its borrowing requirements.
    Because of the tightness in the money market, the government has postponed its borrowing. Since borrowing peaks in the last quarter, backending of the borrowing programme will put pressure on interest rates.
    The government will complete its budgeted borrowing by December 2008. But a large chunk of borrowing
is expected in the fourth quarter because of supplementary grants. While conversion of MSS will provide the government with low-cost financing without disrupting the markets, it would not immediately bring in liquidity. Banks are worried over the hardening of rates and fear that further intervention by RBI would result in cash shortage.
    Another move that could be consid
ered by the government for reducing volatility in the markets is to allow banks access funds against pledge of securities that are part of the statutory liquidity ratio (SLR) requirement.
    According to HDFC Bank head of interest trading Ashish Vaidya, RBI could consider allowing banks access to additional funds against their SLR securities. "To ensure that money
does not move from good assets to bad assets there could be certain conditions. For instance, one condition could be that the credit growth of the borrowing bank should not be out of sync with the system," he said. Mr Vaidya points out that this would achieve the goal of stability in the markets and protect banks against any liquidity crunch.
    The other major demand from banks that is being considered is direct lending in foreign exchange by RBI to banks. At present there is intense demand for dollars because of sales by foreign institutional investors. Some banks are also buying dollars here to support their overseas operations, which is adding to the pressure. The central bank has been meeting the shortfall by selling chunks of its foreign exchange reserves. Banks now want RBI to sell them dollars directly as this would reduce pressure on the rupee and consequently reduce the need for the central bank to intervene in the forex market and reduce rupee liquidity in the bargain.


Sunday, October 26, 2008

Domestic Banks Face Rising Bad Debts, Funding Squeeze

 DOMESTIC BANKS may be relatively sheltered from the direct impact of the global credit turmoil, but they are fighting rising loan defaults amid a liquidity crunch that can hit profits. Leading private sector bank ICICI Bank has so far borne the brunt of investor concerns about its exposure to the financial crisis, repeatedly stressing it is solvent and deposits are safe since Lehman Brothers filed for bankruptcy protection in mid-September.
    While bad debts are expected to rise in coming months, the government has declared Indian banks to be safe. In September, the Reserve Bank of India (RBI) put out a statement saying ICICI was well capitalised as customers in some parts of the country queued up to withdraw deposits. But ICICI's shares have still lost 70% of their value so far this year as investors fear the worst.

    "If a bank faces a liquidity crunch, it is serious trouble. Some of the overseas institutions fell, not because they did not have assets, but because they did not have liquidity to fund the assets," said AK Purwar, former chairman of State Bank of India (SBI), the country's largest bank. "In India, despite the mandatory requirements, it has happened so many times before."
    On Monday, top lender SBI is expected to post a 16% profit rise on solid loan growth, while ICICI is likely to report that its earnings slipped for the second consecutive quarter. But all eyes will be on ICICI's exposure to bonds linked to Lehman and other soured credit.
    The Indian banking system is dominated by government-run banks — they account for about 70% of assets and liabilities — and all banks have to hold nearly one-third of their deposits in government bonds and as
cash reserves with the central bank. Since 1969, India has not allowed a bank to collapse, merging at least two dozen troubled lenders with stronger, mostly state-run banks, according to the RBI. And Indian banks' total exposure to failed Western banks amounted to $1 billion, a fraction of their total loan book of $510 billion as of end-September, according to central bank data.
    "Indian banks do face headwinds, though it is not a worrying or dire situation now," said Ritesh Maheswari, senior director of Asia Financial Institutions Ratings at Standard & Poor's in Singapore. "But if the credit crisis is prolonged, it can have limited liquidity constraints on Indian banks and many others in the region will also face similar issues."
CREDIT EXPLOSION: Indian banks had outstanding loans of Rs 25.4 trillion ($510 billion) and total deposits of Rs 34.4 trillion ($690 billion) at end-September, according to central bank data. In the three fiscal years ended March '08, banks' lending grew at
annual rates of around 30%. That has slowed to around 25%, but still remains above the central bank's preferred rate of 20% in FY09 (April/March).
    Retail loans, mortgages, credit cards, auto and consumer durable loans, which were among the fastest-growing segments, are now likely to be major risk areas as bad debts are expected to rise to 4% of advances by March '09, said rating agency Crisil, a unit of Standard & Poor's. Loans for housing and stock investments also mushroomed in recent years, helped by booming economic growth. But interest rates have risen, the stock market has plunged by more than half this year and the property market has turned down.
    Five banking analysts expect net new bad loans at Indian banks to grow on average by close to 3% in the current financial year and next, leading to higher provisions, lower profits and less
money to lend. In a September report, Morgan Stanley and Oliver Wyman forecast defaults will peak over the next 12-24 months and overall provisioning costs will more than triple to Rs 75,000 crore from Rs 20,000 crore in '08.
    ICICI Bank and Axis Bank were among the most leveraged Asian banks that were exposed to a turn in the credit cycle, Morgan Stanley said in a separate report last month. "Korea, Australia and India are at top of the heap. These are countries where economic slowdown can have a big impact on asset quality and hence, earnings at banks," the report said. Analysts rank state-run banks with a strong deposit base and second-biggest private-sector bank HDFC Bank among the best suited to weather the storm.

LIQUIDITY PROBLEMS: A lack of liquidity has forced some banks to borrow at interest rates of 20% or more and frozen local money markets, prompting policy makers to unveil a slew of measures to boost lending activities. The central bank has slashed reserve requirements, cut interest rates and pumped extra cash into markets to keep credit flowing. Analysts say with the global credit markets virtually shut for local firms, the scramble for bank credit will rise, pushing up interest rates and worsen banks' asset quality.
    V Leeladhar, deputy governor at the RBI, said it was difficult to categorically give all banks a clean bill of health during such times, but he added that domestic banks were mostly well equipped to face the fallout of the global crisis. "I think nobody will be able to give you a certificate saying which banks are sound at such a time because we don't know which bank will be affected next," he said earlier this month. "Today it could be a strong bank, but tomorrow it could be bought down to its knees."
    reuters



BULLS'S EYE

TITAN INDUSTRIES
RESEARCH: HSBC RATING: OVERWEIGHT CMP: RS 900
HSBC reiterates 'overweight' rating on Titan Industries. The company's second-quarter FY09 results were quite good. It reported a 53% increase in sales and 88% net profit growth. Moreover, both the watches and jewellery divisions posted satisfactory sales growth and handsome margin expansion. HSBC expects that the effects of the slowdown will be reflected in Titan's results from Q3 onwards. Nevertheless, the risks to FY09E estimates are more to the upside than the downside. However, HSBC has cut the company's EPS estimate for FY10E by 3.5% to factor in slower demand next year. HSBC has identified the following growth drivers for Titan: 1) The company has recently forayed into the eyewear business with 30 stores, which may cross 150 stores by FY11E; 2) New designs and innovation across products should take wallet share; 3) Increase in charges for making jewellery; and 4) Increased preference of consumers for branded jewellery. HSBC values Titan at 20x FY10E EPS, with a target price of Rs 1,100 per share. The target price gives a potential total return of 31%.
PETRONET LNG
RESEARCH: INDIA INFOLINE RATING: BUY CMP: RS 37
INDIA Infoline upgrades Petronet LNG from a 'market performer' to a 'buy', with a target price of Rs 48 and upside of 22.8%. The company reported a flat sales growth, despite a near 10% fall in sales volumes to 75 TBTUs as one high-pressure pump was de-commissioned for repair. The fall in volumes was higher than expected as the repair work stretched over a period of 3.5 months. However, the volume decline was offset to some extent on account of higher realisations aided by depreciation in the rupee. Going ahead, the 5 mmt expansion at Dahej terminal is scheduled to commence operations in Q4 FY09, while the Kochi project is likely to go on stream in '12. With domestic gas supplies expected to increase, Petronet will find it tough to market the costlier regasified LNG. Further, with tightness in the international market, sourcing long-term LNG at affordable prices is difficult. However, the 35% correction in the company's stock price over the past couple of months is unwarranted and is steeper than the perceived risks.
CIPLA
RESEARCH: MERRILL LYNCH RATING: UNDERPERFORM CMP: RS 160

MERRILL Lynch maintains 'underperform' rating on Merrill Lynch, despite stable margin outlook, given rich valuations and lack of upside triggers. Cipla's Q2 net income was 7% lower than Merrill Lynch's estimates due to higher-than-expected forex loss (Rs 100 crore) despite 23% growth in topline and stable margins of 23.3%. Cipla trades at 21x FY09E and 16x FY10E earnings — over 25% premium to the average of the domestic generics sector. The stock has corrected in the past few weeks and it is expected to be range-bound, given lack of visibility on big product upsides. Within inhalers, Cipla has developed eight HFA inhalers for the European Union market, and six products have been submitted, which can involve a long clinical trial process. The company is setting up capacities at different places (four plants in Indore SEZ coming up in February '09); the full impact of this will be seen later. Work on the Goa SEZ remains stalled (Rs 150 crore has been invested so far). Cipla faces the risk of fluctuating margins in the coming quarters, given high contribution from low-margin HIV products (>30% of revenues) and pricing pressure in developed markets.

HERO HONDA
RESEARCH: EMKAY RATING: BUY CMP: RS 728
EMKAY maintains a 'buy' rating on Hero Honda. The company's Q2 FY09 results were in line with expectations. While net sales, at Rs 3,200 crore (yo-y growth of 36%), were in line with estimates, EBIDTA at Rs 440 crore (yo-y growth of 49%) was ahead of expectations by around 4%. However, significantly higher tax provision (Q2 FY09 tax rate was 32%, against expectation of 24%) resulted in net profit of Rs 310 crore (y-o-y growth of 51%), which was below expectation by 2%. The higher tax rate is due to reduction in target production at the company's Haridwar plant from 750,000 to 600,000 units. The required residual growth in FY09 and declining raw material prices warrant volumes/earnings upgrade in FY09, as well as FY10. However, considering the cautious stand adopted by the management, Emkay is leaving its estimates unchanged as of now.

CANARA BANK
RESEARCH: CLSA
RATING: UNDERPERFORM
CMP: RS 156
CLSA maintains 'underperform' rating on Canara Bank as the RoE is likely to be capped at ~12% for FY09-10 due to the sharp increase in loan loss provisioning costs. Canara Bank reported a 46% y-o-y growth in topline, led by 26% y-o-y loan growth and margin expansion of 24 basis points to 2.7%. Margin expansion was a reflection of: a) improving pricing power and increase in lending rates; and b) repayment of high cost deposits by Canara Bank in the previous year, which reduced cost of deposits from 6.8% in Q2 FY08 to 6.6% in Q2 FY09. Despite loan growth being sustained at +20% and margins likely to expand further, earnings growth in coming quarters and in FY10 will remain muted as Canara Bank will need to provide for: a) higher wage costs under the new wage settlement; and b) loan loss provisions as delinquencies pick up, since the bank has no cushion due to its dismal coverage levels. As a result, RoE is likely to remain at ~12%, justifying Canara Bank's low price-to-book multiple of 0.7x FY10 book.
ASHOK LEYLAND
RESEARCH: CITIGROUP
RATING: SELL
CMP: RS 18
CITIGROUP maintains 'sell' rating on Ashok Leyland and revises the risk rating to 'medium' because growth prospects for the company appear limited, and a rising capital outlay poses risks. Fundamentally, the key reasons for a healthy growth outlook in commercial vehicles include a sustained pick-up in economic activity, focus on infrastructure spending and a strong replacement cycle. Moreover, growth in agriculture, infrastructure and manufacturing sectors — all of which have positive linkages to the freight business — should remain positive over the long term. However, the near term looks challenging for Ashok Leyland due to sharp increase in interest rates, which will affect demand. A slowdown in the economy will also lead to a slowdown in the investment cycle, which will impact Ashok Leyland's profitability. The 12-month target price of Rs 19 for the company is based on 4x March 10E consolidated EPS, based on trough valuation multiples to reflect slower-than-expected earnings growth.

Alembic offers an attractive investment opportunity

Alembic offers an attractive investment opportunity as it is restructuring its operations to unlock the hidden value in its business

KI R AN K ABT TA ET INTELLIGENCE GROU P


WHEN A 100-year-old business undertakes restructuring to unlock its hidden value, it offers an attractive opportunity for investors to pick up assets at 'value for money' prices. Alembic is one such company that is transforming itself from a pure domestic pharmaceutical company to a 'complete' pharma company, with a presence across the entire pharma value chain.
BUSINESS:With a turnover of Rs 1,000 crore, Vadodara-based Alembic is one of the oldest pharma companies. It lost out on growth to other players during the 1990s. The company, now managed by fourth-generation promoters, is restructuring its operations to catch up on lost opportunities. Alembic is an integrated manufacturer of formulations and active pharma ingredients (APIs) with 70% of its business coming from the domestic market. Its formulations business, consisting of generic as well as branded formulations, accounts for 70% of its total revenue, while APIs contribute the remaining. The company spends 4.5% of its sales towards R&D. It is involved in generic research, innovative research towards novel drug delivery systems (NDDS) and undertaking bio-equivalence studies. Recently, it entered into an out-licensing deal for its NDDS for Keppra XR, a leading anti-epileptic drug, with Belgium-based innovator company, UCB Pharma.
GROWTH STRATEGY:Alembic has adopted a dual-pronged strategy of new products for existing geographies and existing products for new geographies. While anti-infectives contribute more than 50% to its domestic formulation sales, the company has broad-based its product portfolio to include products from high growth chronic therapeutic areas like respiratory, orthopaedic and gynaecology. The acquisition of Dabur Pharma's non-oncology business in January '07 helped the company to include more such products in its portfolio.
    Alembic's global strategy is to be the preferred supply chain partner to multinational pharma companies. Towards this, it has been investing in FDA-approved manufacturing facilities and research centres. Through these initiatives, the company aims to increase its share of international business to nearly half of its revenues over the next 2-3 years.
FINANCIALS: The company's net sales have seen a compound annual growth rate (CAGR) of 14.5% since '03 to reach Rs 990 crore in FY08.
Net profit during the same period grew over 29% to Rs 112.2 crore. This growth has been completely organic in nature. The stock currently offers a dividend yield of 4.8%, which is relatively higher than that of its similar-sized peers. On an average, the company distributes around 20% of its net profit as dividends and this ratio has remained constant over the years. Dividends have recorded a five-year CAGR of 45%, which is faster than the growth in the company's profits. Alembic plans to hike its dividend payout to 35-40% in the next three years.
    The company has restructured its domestic business and invested heavily in acquiring new products, building up field force and creating new business divisions. While this has had a negative impact on its profitability during the first two quarters of this fiscal, the company expects the full benefits of restructuring to be visible in FY10.
    Alembic has land bank of 50 acres, which it plans to monetise in future to boost its cash flows. It is also considering acquisitions to expedite its growth.
VALUATIONS:The company's EPS is Rs 4.3. With an increase in products and production capacities, and emphasis on global business and R&D expertise, Alembic expects to achieve year-on-year growth of over 25% in its FY09 turnover to Rs 1,250 crore. Accordingly, considering the company's estimated earnings for FY09, the stock is currently trading at a forward P/E of four times. This is quite attractive compared to the P/Es of similar-sized peers.

Beta: 0.8 Institutional Holding: 14.03% Dividend Yield: 5.8% P/E: 6 M-Cap: Rs 354.4 cr CMP: Rs 25.60




ETIG is back with the 2008 edition of India’s 100 Fastest Growing Small Companies...

Small Wonders

THE MARKETS are in turmoil" — the drama unfolding in the stock market makes this a gross understatement. Bloodbath is the only word that can aptly describe the mad rush to sell off shares faster than the clock ticks. The reasons are many and varied, and the fall has turned into a self-propelling snowball, which just keeps on gaining mass and speed on its way down the hill.
When the large-cap giants have been
beaten out of shape and their valuations have turned cheap beyond imagination, it
surely is not a good idea to talk about small companies. And one also has to be extremely careful while talking about 'growth', else retail investors will discard it as an extinct word.
    But growth is the only way listed companies generate wealth and value for their shareholders and other stakeholders, including employees. The younger and smaller the company, easier it is to grow. And the earlier you are able to pick future leaders, the better it is for you. In fact, during the last bear run, which ended in early 2003, many small
companies gave double-digit annual returns on a consistent basis, even as frontline companies remained grounded.
    It was for the above reasons that we decided to come out with our first list of India's 100 fastest growing small companies in 2007. The list was highly appreciated by our readers. With the annual reports of most companies out now, we need to update this list. Here, we present the 2008 Edition Of ETIG's 100 Fastest Growing Small Companies.
    Last year's list was dominated by companies from the then hot sectors such
as real estate, capital goods and construction, with a sprinkling of IT companies. In the past one year, there has been a dramatic shift in the Indian growth story and this is clearly visible in this year's rankings. While investment-demand driven sectors such as capital goods, real estate and construction continue to be in the list, the toppers are now from less cyclical and asset-light sectors, especially infotech. This may surprise many readers as the IT sector has borne the brunt of the recent bloodbath in the stock market. Most IT companies are currently trading at less than half their market value a year ago due to market concerns over the slowdown in the industry's growth.
    Many IT companies figure in the top quartile of this year's list. A close study reveals that only a few of the companies in the list are typical IT companies. Most of the companies, including top-ranked ICSA, are new-age IT services providers which operate in their own niche with little competition. And unlike their frontline peers, these companies operate in the domestic market, which makes them immune to currency fluctuations.
    It won't be an understatement to say that this is the new face of the Indian IT industry — companies offering niche product and services with a clear differentiating factor. ICSA, for instance, offers supervisory control and data acquisition (SCADA)-based IT solutions to power companies, while Allied Digital provides remote infrastructure management and systems integration in the domestic market. Info Edge (India), on the other hand, owns niche portals such as naukri.com and shaadi.com, while Tanla Solutions develops value-added solutions for mobile phones.
    This just goes to prove that it is possible to grow in the toughest of economic environment. What is needed is a financially viable and scalable business model. The next challenge for these companies will be to further scale up their businesses in an environment which is getting excruciatingly difficult by the day.
HOW WE DID IT
It was only two weeks ago that we came out with the list of India Inc's elite club — ET500 — representing India's largest listed companies. In view of this, it was only logical that in order to find the fastest growing small companies, we exclude all companies that figured in ET500.
    So, the largest company in our sample had net sales of around Rs 720 crore, while the minimum net sales figure was fixed at Rs 100 crore. The next filter was market capitalisation. We considered only those companies which figured in
the bottom 20% of the cumulative market cap of all companies listed on the BSE. So, the most valuable companies in our sample had a market cap of Rs 2,500 crore (the average for September '08) and we excluded companies with a market cap of less than Rs 100 crore.
    To weed out the weaker constituents, we added criteria such as return on capital employed (RoCE), debt-equity ratio (DER) and interest coverage ratio (ICR). As a result, the final list comprised financially sound companies, which had an average RoCE of over 15%, average DER below 1.5 and ICR of above 5, for the preceding three years. We could find only 106 companies which met all our criteria, or less than 5% of our initial sample of around 2,000 companies.
    We calculated the compound average growth rate (CAGR) in sales and net profit for all these companies for the preceding three years. The final ranking was done by assigning a 30% weightage each to RoCE and ICR, while a 20% weightage was given to the three-year CAGR in sales and net profits. Basically, this means that while growth is key, the quality or the ways of achieving it are of greater importance. You are now free to take your pick. But keep in mind that the ranking is not an endorsement of these companies. Make your own assessment before investing in any of these stocks.
    (To view the complete list of ETIG's 100
    fastest growing small companies,
    log on to www.etintelligence.com)


ExpertSpeak: All’s not lost

Market Players At ET-Gujarati Meet Say FIIs Will Be Back Soon

CHIN UP when the chips are down. The climbing fear index (43 during the 1929 Great Depression and 75 in October 2008), is more disturbing than the slipping Sensitive Index. It took a good two-and-a-half hours and four of the country's best stock market analysts to reassure an 800-strong audience of Mumbai investors on Thursday that all's not lost. Every dip brings in a new buying opportunity was the message.
    The Economic Times, Gujarati, last week kicked off its latest initiative "Managing Financial Turbulence" by bringing the fourth edition of "Sensex Ni Sangathe" (In Tune With Sensex), a popular series of investor camps, to Mumbai. Eminent stock market experts Nilesh Shah, joint MD, ICICI Prudential Mutual Fund, Nipun Mehta, ED of Society General India Private Banking, CS Nanda, CCM, financial market investors protection committee, ICAI and Madhusudan Kela, head of equity investments, Reliance Capital Asset Management, reaffirmed their faith in the India growth story. The meet was jointly organised by ET (Gujarati) and ICAI, Western India Regional Council, at Bhaidas Hall in Vile Parle on October 23.
What they said...
Forced liquidation is happening in the market. Fear (among investors) is at the highest level. This is the worst situation in the past 100 years and so an overnight recovery is not on the cards. While the Indian economy is growing at 6.5-7.5%, the world is already talking of a negative growth rate of 0.5% and 1.5%.
Madhusudan Kela
Head of equity investments, Reliance Capital Asset Management
There are some good developments which the market has ignored. This year, we had an average monsoon, Indo-US nuclear deal is now a reality, we received FDI worth $10 billion during the past two quarters, crude oil prices have fallen and inflation is expected to ease out in the coming days. It is just a matter of time when FIIs will be forced to back the winning horse (India).
Nilesh Shah
Joint MD, ICICI Prudential Mutual Fund
Prices are indeed attractive. It's like the latest McDonald ad campaign 'Aap ke Jamaane mein, baap ke jamaane ke daam'. Lot of Indian global acquisitions happened at peak prices, and now fund raising has become difficult for these companies. Still, impact on the Indian economy will be limited. Investors need to have a longer time-horizon and take a fresh look at their portfolio holdings.
Nipun Mehta
Executive Director & Head, SG Private Banking (I)

Nilesh Shah, Jt MD, ICICI Prudential MF, speaking at the ET-Gujarati investor meet in Mumbai on Friday


IT top guns may report slower growth in Q3

Most Players Expect $-Denominated Revenues To Remain Flat In Dec Quarter

 GOING by the guidance of a some of the country's top IT exporters, the quarter ending December 31, 2008 will be one of the toughest quarters the sector has witnessed in recent times. Most companies expect either flat growth, or a decline in dollar-denominated sales and profits.
    Infosys Technologies, the country's second biggest IT exporter, expects a mere 0.3% jump in its dollar revenue to $1.2 billion for the quarter as compared with the preceding threemonth period. It expects its earnings per share to grow by 1.8% to $0.57.
    Satyam Computer Services, the fourth biggest, estimates its dollar rev
enue to rise by 2.2% to $651.9 million. However, the EPS is likely to shrink by as much as 7.9% sequentially.
    Among other top companies, Wipro has given a guidance of near flat revenue in the next quarter, while Patni Computer Systems expects a substantial fall in sales and profit after tax (PAT) on a sequential, or quarteron-quarter, basis.
    The conservative guidance by these companies can be attributed to the global economic turmoil and fluctuations in the currency market.
    "There is a question mark over the growth of IT companies. In this situation, I don't see a recovery until the US credit crisis bottoms out," a senior IT analyst with a local brokerage says. The picture looks grim even for the rest of year (FY09). Both Infosys
and Satyam have revised their fullyear revenue guidance downwards. Infosys' revised revenue guidance is about 4.8% lower than earlier, indicating greater uncertainty in the demand environment.
    Satyam, too, has reduced its revenue guidance by 3.7% despite having lower exposure to banking and financial service clients.
    "A lot of companies across the BFSI sector have run into trouble over the last few weeks. This will definitely affect the individual performance of IT companies going ahead, though the extent of the impact will vary," says Mr Rajiv Mehta, IT analyst, India Infoline.
    However, during the September 2008 quarter, nearly all the top-five IT firms beat their quarterly sales and net profit estimates aided by a
falling rupee. "Most companies have delivered good results," Mr Mehta says. Even though the world is collapsing, IT companies are showing at least 15-20% growth for FY09, the analyst adds.
    The aggregate sales of the top-five firms rose by 9.3% sequentially and 32.4% on a year-on-year basis to Rs 24,067 crore as against the consensus estimates, which pegged it at Rs 23,652 crore for the September quarter. The aggregate net profit for the top-five firms also grew by 10.2% sequentially to Rs 4,618.4 as compared with a projected rise of 8.6%. Barring TCS, which reported a drop in PAT due to hedging losses and provisioning for doubtful debts, all other firms posted better-than-expected profits.
    ranjit.shinde@timesgroup.com 




Street sees more purge this week


Stress Signs: FII Exits, Margin Calls

Santosh Nair MUMBAI



    IT COULD be a stressful week for investors. Relief may not yet be at hand for beleaguered equity investors even though benchmark indices are down nearly 60% from their record highs seen in January this year. Much of the panic has been driven by global developments, but Dalal Street observers say there are also excesses in the home market yet to be purged.
    There are a number of stress points. FIIs, under pressure in Western markets, are exiting from emerging markets. This is particularly true of hedge funds. Domestic factors include promoters, who had pledged shares, are facing margin calls. "The market may not have bottomed out yet, considering there is still an overhang of global factors," Ambit Capital director & head of private client group Sandeep Jain said.
    "In addition, there is a large number of margin calls, leading to forced liquidation of positions. Deleveraging will lead to more pain in the market," he added.
    Many promoters had pledged shares with banks and non-banking finance companies (NBFCs) to raise funds — not always for official purposes. These promoters are now facing margin calls due to a steep erosion in stock prices, and are unable to honour them, thus forcing lenders to offload shares and recover their money.
Promotors exiting dubious investments
    IN addition, some promoters had 'parked' their shares held in 'benami' accounts through an arrangement with 'friendly' mutual funds. These accounts usually belong to investment companies or individuals associated with the promoters. With fund houses witnessing a sharp drop in fund flows, they are now exiting dubious investments when there is still time. There are also rumours of promoters who had allegedly been chan
nelling funds abroad into their companies through 'friendly' FII sub-accounts, which are nothing but fronts for promoters. This money, too, is leaving Indian shores for other safe havens.
    "Global factors are definitely at play, but the kind of selling that we have been seeing is definitely unwarranted, given that India will not be as badly affected like some of the other economies," said Birla Sunlife Mutual Fund chief investment officer A Balasubramanian. "There appears to be an
attempt by some players to aggravate the panic in the market," he adds. The market is abuzz with instances of promoters and senior management officials facing margin calls.
    On Friday, shares of a prominent telecom firm plunged, and talk was that the fall had a lot to do with the unwinding of long positions in the derivatives segment by a senior management official who was unable to meet margin calls. Brokers say that in a few cases, promoters may have played into the hands of NBFCs by pledging
shares with them.
    "In a falling market, some of the NBFCs have gone short on futures of stocks pledged with them. This puts pressure on the share price," says a broker. "The NBFCs then ask promoters to cough up additional margins, and if that fails to come through, they start dumping shares in the market. Once the share price weakens, prices of stock futures too fall correspondingly. The NBFCs then cover up short positions in the futures market for a tidy profit," the broker added.

BANKS MAY GET A SLICE OF FOREX PILE

LIFELINE FOR LIQUIDITY-HIT OVERSEAS BRANCHES

A COMMITTEE led by the finance secretary Arun Ramanathan has made out a case for using a part of the country's foreign exchange reserves to provide liquidity support to Indian banks for their overseas operations.
    Last week, the Reserve Bank of India (RBI) governor said that the monetary policy authority would take conventional
and unconventional measures to ensure financial as well as price stability and growth.
    The committee, appointed by the finance minister to assess the liquidity situation, has said that a portion of India's forex reserves, aggregating $273
billion, could be used to invest in securities such as bonds issued by foreign offices of Indian banks, said a person familiar with the issue.
    This will boost resources of these banks at a time when access to lines of credit or funds from overseas banks, with whom
    Indian lenders have arrangements,
have been severely curtailed. The forex pile, which could be utilised for this purpose, could be in the range of $1 billion to $5 billion. The seizure of financial markets world-wide has left many Indian banks with branches in some of the major financial capitals struggling to raise funds.
    The other measures suggested by the committee include opening a refinance window for small- and medium-enterprises. The committee is said to have indi
cated that policy makers would have to be mindful of the large foreign debt repayments which are due next year. The government and RBI are expected to take a view on the recommendation soon.
    There is a precedent for using a part of the forex reserves in this manner. Following an announcement in the 2007-08 Budget, the India Infrastructure Finance Company (IIFCL), in which the government is the dominant shareholder, has formed a company — IIFCL (UK) — to use up to $5 billion of the reserves to help Indian corporates finance their capital expenditure. The plan is to finance imports of capital equipment by the IIFCL subsidiary, with the entire transaction being done overseas to ensure that there is no impact on domestic liquidity.

THE GAMEPLAN
The committee has proposed digging into forex reserves, aggregating $273 billion, to invest in securities such as bonds issued by the foreign offices of Indian banks

NOT THE FIRST TIME
After 2007-08 Budget, India Infrastructure Finance Company formed an arm, IIFCL (UK), to use up to $5 b of the forex kitty to help cos finance expenditure abroad

HAPPIER RETURNS
This time, RBI will invest in bonds issued by IIFCL (UK), with govt assuring that returns would be higher than those generated by RBI on deployment of its reserves
RBI's dollar selling depletes forex stockpile by $35b
    INthis case, RBI will invest in bonds or securities issued by IIFCL (UK), with the government providing an assurance that returns on this investment would be higher than the returns generated by the central bank on deployment of its reserves. In 2007-08, the returns on India's foreign exchange reserves were 5.1% (4.8% net of depreciation) compared with 4.7 % a year ago.
    Over the past few months, the forex stockpile has depleted by $35 billion as RBI had to sell dollars to stem the erosion in the value of the currency caused by foreign portfolio investors selling stocks and
pulling out their money. Till mid-year, the debate in India centred around how to utilise the relatively large hoard of forex reserves to increase earnings. But, RBI was treading cautiously, saying, unlike other countries like China, which have huge reserves (over $1 trillion at last count) due to a current account surplus, India still runs a current account deficit.
    Bankers say that it makes sense to provide a funding line to Indian banks' overseas operations, considering that their predominant business is financing the needs of Indian corporates which are expanding their operations globally or to overseas subsidiaries of Indian firms. There is very little money available for Indian banks which have foreign branches to draw upon from and the proposal could go a long way in easing their funding needs, a senior banker said. Banks had raised this issue with the central bank last week. In fact, the liquidity squeeze had resulted in some of these banks buying dollars in India and sending them abroad to meet their overseas requirements.
    Many liquidity boosting measures were announced by RBI and the government before the committee finalised its report. The committee includes, besides the finance secretary, IBA chairman TS Narayanswami, UTI AMC CMD UK Sinha, L&T CFO YM Deosthalee and Sidbi CMD RM Malla.
    shaji.vikraman@timesgroup.com 




Friday, October 24, 2008

THE FLOOR GIVES WAY MARKET TANKS 1071 PT

HINDALCO, UNITECH, SUZLON, IDFC SHARES FALL BELOW Rs 50

The Sensex and Nifty fell 11-12% on Friday, the third-largest single-day fall in percentage terms

 THERE'S an eerieness about October 24 — something that the children of the bull market can never sense. The crash of 1929 began on that day and eventually led to the Great Depression. Almost 79 years later, the world is haunted by a similar spectre. Blows from stock losses are slowly giving way to a strange fear of job losses. The drop in markets across continents simply mirrors these concerns. However, with booms getting longer and busts shorter in the past few decades, today's investors and businesses are hoping that they would be a lot more lucky. But a string of bad news continues to smother such hopes.
    The UK is well into recession, Russia has been downgraded, some of the Latin American economies, including Argentina, are on the brink of default, Asian miracle South Korea is busy defending its currency and the economies
of eastern and central Europe are in a shambles. Banks and institutions with high exposures to these markets are scrambling to offload these securities, sparking tremors which are being felt in distant Dalal Street. The Sensex and Nifty fell 11-12% on Friday — the third-largest single-day fall in percentage terms — as signs of pain in the real economy become evident. The talk is no longer just about slowing corporate earnings; in fact, the biggest fear now is corporate defaults, which will then hit the banks which have lent to companies.
    The bull market from 2003 till early 2008 was un
precedented, and indications so far are that the ongoing bear phase too promises to be one. The pain could be prolonged: with the rupee touching 50 against the dollar, companies with foreign currency loans, FCCB oustandings and synthetic derivatives contracts that have converted expensive rupee loans into dollar and yen liabilities will be in for a shock.
    The 30-share Sensex hit a 35-month low of 8,566.82, before crawling higher to 8,701.07 at close, a decline of 1,070.63 points over its previous close. The 50-share Nifty fell 359.15 points or 12% to close at 2584. Foreign institutional investors continued to
exit India in a tearing hurry, offloading Rs 1,432 crore worth of shares at the net level. Amid the outflow, the RBI is selling $500 million-$1 billion every day to defend the rupee — a move that will pose a monetary policy challenge as liquidity gets squeezed.
    It's cold comfort that even after the downgrades in GDP growth, India will still be among the fastest growing economies in the world. With Friday's
fall, benchmark indices are off 60% from their peaks seen 10 months ago. India was the worst performer in Asia on Friday. Among the other prominent losers, Japan, Hong Kong and South Korea were down 8-10%.
    Trading in futures on the Standard & Poor's 500 Index and the Dow Jones Industrial Average was limited to prevent contracts from further declines after drops of more than 6%. European equities, too, took a pounding with key markets down 8-11%.
Yen at 13-yr high against dollar
    PRICESof crude oil, copper and gold fell sharply on persistent concerns of a slowdown in the global economy. Crude prices slumped even as the Organisation of Petroleum Exporting Countries announced a production cut. The yen climbed to a 13-year high against the dollar, as investors continued to pare their carry trades — a process of borrowing in yen and deploying the money in high-yield securities, often in emerging market equities.


Exercising your mind TO HAPPINESS

Most stressed-out Mumbaikars are taking up body-mind-soul regimen

Mumbai: Senior accountant Jyoti is worried that she may not get a bonus this Diwali. "The boss has been cribbing about losses,'' says the 43-year-old who works in the retail sector. But Jyoti doesn't let her financial preoccupations get in the way of her new love—gymming. "I cannot do without it,'' she says about her early morning exercise sessions.
    Jyoti may not be able to explain the subtle biochemical equation between exercises and happiness, but she is vocalising what doctors have for long been prescribing: exercises help people cope—be it with the ravages of cancer, the crippling effect of arthritis or mind-numbing stress. With the tumbling Sensex, the threat of pink slips and salary cuts looming large, there is merit in following Jyoti's example, doctors say.

    Incidentally, a subtle change was noticed in New York after the meltdown on the Fleet Street: business people were turning to exercises to weather hard times. An article in The New York Times says, "Adding classes in yoga, meditation and other so-called mind-body regimens is just one way fitness professionals in the financial district are responding to recent economic uncertainties roiling their corporate
clientele. Some are also offering shorter, cheaper personal training sessions and, in at least one health club, quiet discounts for members who lose their jobs.''
    In Mumbai, the financial problems haven't yet turned so messy as in the US ("the trickle of patients with financial
problems are just trickling in,'' says a doctor), but the medical fraternity advises that staying fit in body and mind is more important now than before.
    Social psychiatrist Dr Harish Shetty recalls that the support group he had started after the Harshad Mehta scam in 1992 had helped many people cope with their financial losses. "People talked openly to each other about their losses
and how to get around them. This helped many of them,'' he says about the group that met regularly for over 18 months. Talking it out is one of the best medicines in times of stress, he adds.
    Exercises play a crucial role too. Dr Aashish Contractor, preventive cardiologist from Asian Heart Institute in Bandra Kurla Complex, says it has been proven beyond doubt that exercises help in most medical conditions. "It is often joked that if the benefits of exercises could be incorporated in one pill, it would be the best medicine,'' he says. Not those turning to fitness regimes in times of financial stress, but those already hooked on to the healthy way of life would reap better benefits, he adds. It has, after all, been proved that exercises spur creativity and can help people find ways to bust their own stress.

    At least that is what the Yoga Institute in Santa Cruz is trying to do at a special two-day camp organised on Saturday. Yoga exercises have a tranquilising effect on the pain of day-to-day living, says family physician Dr Shantaram Shetty, who is also a faculty at the yoga institute. "Moreover, the yoga philosophy of accepting things and having faith in oneself helps in busting stress,'' he says.
    Another yoga teacher, Deepak Gup
ta from the same institute, says that "once they accept things, they can work further to resolve it themselves''. "The point,'' he says, "is to make people accept breakdown as a breakthrough. They have to look upon the incident as a window to bring betterment to their lives.''
    toireporter@timesgroup.com

WAYS TO COPE WITH STRESSFUL TIMES...
    
Sudden loss is like an earthquake and so there should be no shame nor blame, says social psychiatrist Dr Harish Shetty. "Drop your guard and let the facts and feelings surface, share it with loved ones, including your children,'' he adds
    Discussions of the future within the family should always have a friend or a non-affected relative. This prevents the family from falling into a depressive spiral, says Dr Shetty
    Normal routines of school and work should never stop. Attending family functions and celebrating festivals should never stop either
    Cutting down on expenses should be discussed with the entire family
    People with financial problems should keep in touch with debtors and creditors and never avoid them
    In case of excessive fear, sadness, anger or lack of sleep, you should see a counsellor immediately




SOS: Save Our Stocks

As Wave After Wave Of Bad News Buffets Markets Globally, Investors Plead...

Sensex Sinks To Lowest Level Since Nov 2005
    On Wednesday morning, India was counting down to the launch of Chandrayaan. On Friday afternoon, there was a countdown of quite another sort for the day's trading on the stock market to come to an end. When one of the most brutal sessions ever on the bourses finally closed, battered investors were left taking stock of the damage—the second biggest single-day fall in the sensex in terms of points (1,071) and the third biggest single-day percentage loss (10.9%).
    The sensex closed at

8,701.07, a level last seen on November 24, 2005. Every single share in the 30-scrip index ended in negative territory, with DLF (-24%) and Ranbaxy Laboratories (-18%) the worst-hit.
    The market was disappointed that the RBI had left key rates unchanged while announcing the credit policy. But it was also spooked by rising concern that a global recession has already started to bite. World markets had signalled as much earlier in the day. Tokyo's Nikkei fell 9.6% to its lowest close in five years, while Seoul's Kospi plunged 11%. Samsung, the South Korean company that is the largest chipmaker in Asia, dived 14% after reporting a 44% fall in Q3 earnings. Sony Corp,
the world's second largest consumer electronics company, fell 12% after sharply cutting its profit forecast on Thursday.
    Brokers warned this could be the start of steep falls in the stock prices of biggies that depend on exports to the US and Europe for much of their profits.

Rupee breaches 50/dollar level
    
The rupee on Friday breached the 50-mark against the dollar in intraday trade as the greenback posted gains against most major currencies. After hitting an all-time low of 50.15, the rupee closed at 49.95/96. Friday's close marked the 11th straight week the rupee has lost ground, its longest losing streak since Dec 2005. P 21 
PM, RBI predict slower growth
    
PM Manmohan Singh on Friday said the economy was likely to grow at 7-7.5% this fiscal compared to over 9% last year. The RBI in its mid-year review of the economy also revised the GDP growth forecast to 7.5-8% from the previous figure of 8%. P 21 

    Friday's fall in the sensex was the 2nd biggest single-day pts loss, and 3rd biggest one-day percentage fall
    Investors lost Rs 3.3 lakh cr in a single day. BSE's market cap is now at Rs 27.41 lakh crore
All 30 sensex stocks closed lower, with 20 ending over 10% down
For every stock that closed with a gain on the BSE, 9 ended as losers
RIL fell to 991 in intraday trade, the first time it
has fallen below the Rs 1,000-mark since Aug 2006. It closed at Rs 1,016 on the BSE, losing Rs 29,038 cr in mkt value
    Unitech closed 51% down at Rs 30, a 2½-yr low, despite denying a payment default
CRASH COURSE RBI to play the waiting game
    An announcement by Britain that economic output had shrunk for the first time in 16 years by 0.5% between July and September added to the gloom. MSCI's all-country world index dropped 2.8% to its lowest level since August 2003.
    The RBI would have had to take some radical steps to cheer up the domestic market. It conceded that the global financial situation was the worst since the Great Depression and vowed to strengthen the regulatory framework and monitor overseas operations of Indian banks to ensure their safety. But having already infused almost Rs 2 lakh crore into the system, it opted to keep key rates unchanged.
    Explaining the central bank's complete inaction on Friday, RBI governor D Subbarao said the central bank had taken all required measures ahead of the curve and would wait for some time for their impact to be felt at the ground lev
el. The liquidity situation had already improved, he claimed. Against average borrowing of over Rs 90,000 crore by banks from the RBI under the liquidity adjustment facility in the last week of September, on Thursday banks parked excess liquidity of about Rs 35,000 crore with the RBI. On Friday too, banks deposited Rs 19,605 crore of excess liquidity with the central bank at 6%.
    The RBI reiterated that having moved swiftly over the last fortnight to ease monetary levers, maintaining the status quo on rates for the time being was a pragmatic move.
    Subbarao made it clear that the central bank would take appropriate action as and when the need arose, given the volatility in global financial markets, rather than waiting for predefined dates to announce changes. But the markets were not impressed, and went into meltdown mode. TNN


`I made a mistake,' admits Greenspan


By Alan Beattie and James Politi in Washington

Published: October 23 2008 17:37 | Last updated: October 23 2008 21:26

Alan Greenspan, the former Federal Reserve chairman, said on Thursday
the credit crisis had exceeded anything he had imagined and admitted
he was wrong to think that banks would protect themselves from
financial market chaos.

"I made a mistake in presuming that the self-interest of
organisations, specifically banks and others, was such that they were
best capable of protecting their own shareholders," he said.

EDITOR'S CHOICE
Full coverage: Global financial crisis - Oct-22Editorial Comment:
Bail-out threat to free markets - Oct-22US to host G20 world summit
over crisis - Oct-22Comment: How the financial crisis is changing
China - Oct-22Comment: The complexities of a multipolar future - Oct-
22Credit agencies `broke bond of trust' - Oct-22In the second of two
days of tense hearings on Capitol Hill, Henry Waxman, chairman of the
House of Representatives, clashed with current and former regulators
and with Republicans on his own committee over blame for the
financial crisis.

Mr Waxman said Mr Greenspan's Federal Reserve – along with the
Securities and Exchange Commission and the US Treasury – had
propagated "the prevailing attitude in Washington... that the market
always knows best."

Mr Waxman blamed the Fed for failing to curb aggressive lending
practices, the SEC for allowing credit rating agencies to operate
under lax standards and the Treasury for opposing "responsible
oversight" of financial derivatives.

Christopher Cox, chairman of the Securities and Exchange Commission,
defended himself, saying that virtually no one had foreseen the
meltdown of the mortgage market, or the inadequacy of banking capital
standards in preventing the collapse of institutions such as Bear
Stearns.

Mr Waxman accused the SEC chairman of being wise after the event. "Mr
Cox has come in with a long list of regulations he wants... But the
reality is, Mr Cox, you weren't doing that beforehand."

Mr Cox blamed the fact that congressional responsibility was divided
between the banking and financial services committees, which regulate
banking, insurance and securities, and the agriculture committees,
which regulate futures.

"This jurisdictional split threatens to for ever stand in the way of
rationalising the regulation of these products and markets," he said.

Mr Greenspan accepted that the crisis had "found a flaw" in his
thinking but said that the kind of heavy regulation that could have
prevented the crisis would have damaged US economic growth. He
described the past two decades as a "period of euphoria" that
encouraged participants in the financial markets to misprice
securities.

He had wrongly assumed that lending institutions would carry out
proper surveillance of their counterparties, he said. "I had been
going for 40 years with considerable evidence that it was working
very well".

Republicans on the committee dissented from some of the Democratic
attacks, and said the government-backed housing entities Freddie Mac
and Fannie Mae had also been to blame.

"It wasn't deregulation that allowed this crisis," said Tom Davis,
the senior Republican on the committee. "It was the mish-mash of
regulations and regulators, each with too narrow a view of
increasingly integrated national and global markets."

Mr Greenspan said that when, as Fed chairman, he declined to advocate
regulating credit default swaps – derivatives that have been blamed
for worsening the crisis – he had been following the will of Congress.

Wednesday, October 22, 2008

Heard on the Street

BSE tightens circuit filters as panic sets in
THE desperation is palpable. While nothing seems to be stopping the free fall on Indian bourses, stock exchanges are now trying out measures that would help soften the blow from intra-day crash in share prices. The Bombay Stock Exchange, for instance, has been revising circuit filters in an increasing number of stocks, particularly those where the fall has been sharper. Given the technical nature of such a move, brokers feel it would only restrict intra-day fall to some extent but would not help in boosting investor confidence, which is badly shaken by global financial turmoil and consequent FII outflows. The BSE surveillance department has revised circuit filters in about 40 stocks so far in the current week. The list mostly includes beaten down stocks of medium- and small-cap companies.
Govt orders back on radar
DEALERS tracking the high-profile technology sector were, for long, looking for investment ideas. The days of largesized fancy orders coming from remote parts of the world are over and analysts were left wondering what to say to attract investors. Luckily, they found support from one of the most unexpected quarters. Government orders hardly figured in the 'pitch' of dealers that they made to clients. But now many dealers can be heard talking to their clients about the passport order that TCS bagged recently from the ministry of external affairs. The order, in the company's own words, is valued at over Rs 1,000 crore. And that's not all. Vakrangee Software, which is known to be a favourite counter for most punters, has attracted a lot of attention after it joined hands with Financial Information Network and Operations (FINO) for the execution of the Rashtriya Swathya Bima Yojana (RSBY).
It's Raining Bears
With apologies to the 1982 The Weather Girls classic —It's Raining Men...
Volatility is rising — Hope's getting low According to all sources, the street's the last place to go Cause today for the n-th time Just about 955 AM Not the first time in history It's gonna start raining bears... It's Raining Bears! Hallelujah! - It's Raining Bears! I'm gonna go out to run and keep my cash under the mat Absolutely buried in a big net! The bears' are rough, tough, strong and mean Gone is the bull run when they were sad, mad, afraid and lean It's Raining Bears! Everywhere!
    Contributed by Vijay Gurav,
    Ashish Rukhaiyar & Gaurav Pai


Moody’s is ‘negative’ on Tata Steel’s outlook

 MOODY'S Investors Service has downgraded Tata Steel's outlook on its 'Ba1' corporate family rating to 'negative' from 'stable', following worries after Corus announced production cuts due to a slowdown in demand in Europe and the US.
    Corus recently said it would cut production by around 20% over three months. Since the Anglo-Dutch steelmaker accounts for about 76% of Tata Steel's total revenue, any change in Corus' financials would impact Tata Steel also.
    "The change in outlook reflects the more challenging operating conditions now facing Tata Steel UK (Corus) as a result of the likely deterioration in demand in Europe and the UK in the next 18 months, with declining steel prices and
reduced production volumes," Moody's analyst Ivan Palacios said in the statement.
    Tata Steel acquired Corus in 2007 for $12 billion in a highprofile transaction that catapulted the Tata group company to the world's sixth largest slot,
with an annual production capacity of around 30 million tonne of crude steel.
    The recent squeeze in credit and an overall weak sentiment after the collapse of large US and European banks have affected demand, forcing many industries in the steel sector to adopt production cuts. Apart from Corus, other large steelmakers such as ArcelorMittal and Posco have also announced their intention to cut output.
    Incidentally, Tata Steel's rating is two notches higher than the rating of Corus, reflecting its stronger business and financial risk profiles mainly due to the profitability of its Indian operations. Tata Steel is largely insulated from the ongoing economic conditions because the Jamshedpur-based company has its own iron ore mines and also accounts for a prominent share of the local steel market.



RIL’s Q2 net may not lift sentiments

RELIANCE Industries — India's largest company by market capitalisation and one of the most widely held stock — is unlikely to liven up the market when it announces its second-quarter result on Thursday. RIL's profit for the quarter is expected to grow only marginally, or even dip, compared with the year-ago period.

    "Reliance has come out with steady results in volatile markets. However, RIL will struggle to touch two-digit profit figure this quarter because of the slowdown in refining margins. On the other hand, improved margins in petrochemical business could result in flat growth in net profit," said an analyst working with a leading international brokerage.
    The petroleum refining industry has entered a slowdown phase globally, with the gross refining margins (GRM) — the differential between prices of crude oil and refined products — coming down from the previous quarter. Motilal Oswal in its Q2 earnings preview report said, "During
the quarter ended September 2008, Singapore GRM at $5.4/bbl was down 15% against $6.4/bbl in Q2FY08 and down 33% compared with $8.1/bbl in the immediately preceding quarter."
    As a result, RIL's petroleum refining business, which contributes nearly twothird to its revenues, is likely to record a lacklustre performance in the latest quarter. Analyst estimates put RIL's GRMs in the $11-$13 per barrel range, weaker from $15.7 posted in June 2008 quarter and $13.7 in September 2007 quarter. This means its refining profits will be lower on a year-on-year basis.
    In contrast, RIL's petrochemicals business is expected to post healthy revenues and improved margins due to stagnancy in feedstock naphtha prices. Petrochemicals represent around 30% of RIL's revenues and profits. The smaller segment of oil and gas production is also likely to per
form well due to higher petroleum prices in the September 2008 quarter compared with the previous year. Weakness in the rupee is another factor that will impact RIL's performance. Despite being India's largest exporter, RIL has always had more imports than exports. Particularly, a major chunk of its petrochemicals is sold domestically within India. However, since the domestic petrochemical prices are linked to their import parity prices, RIL is likely to benefit from the weak rupee. "We expect RIL's petrochemical EBIT to rise 5% y-o-y to Rs 2,130 crore mainly driven by a weaker rupee," mentioned a Merrill Lynch report.
    Brokerage houses are divided on RIL's profit growth this quarter. Among them, Angel Broking is the most bearish on RIL, projecting a 13% fall in its Q2 profits. As against this, Motilal Oswal and Sharekhan are the most bullish, estimating around 9% rise in RIL's profit. The estimates of other brokerages like Prabhudas Leeladhar, Merrill Lynch, Citi Investment are somewhere in between. The company is expected to post good profits in the coming quarters because of sale of oil & gas from the KG basin.
    ramkrishna.kashelkar@timesgroup.com 

SLIPPING FORTUNES
Slowdown in refining margins likely to hit RIL's Q2 bottomline
Broking houses divided over RIL's financial performance
Angel Broking is bearish, while Motilal Oswal, Sharekhan keep a bullish view

Banks seek RBI help to resume infra lending

 WITH just two days left for Reserve Bank of India's (RBI) quarterly review of Annual Monetary Policy, heads of large banks have told the RBI that it would be impossible for them to fulfil the government's directive to lend to the infrastructure sector, unless RBI eases norms on reserve requirements.
    Bank chiefs have called for a change in norms on cash reserve ratio (CRR) and the statutory liquidity ratio. CRR is the portion of deposits which banks have to maintain as cash with RBI, while SLR is the proportion of deposits which they have to hold in the form of se
curities, gold and cash. Currently, banks have to maintain 6.5% of deposits as CRR, while 25% must be held as SLR. Cash kept as CRR does not fetch any interest for the banks.
    The meeting with a deputy governor of RBI came just a day after they met the Union finance minister in New Delhi.
    On Monday, the finance minister had met the chiefs of seven stateowned banks and urged them to lend to corporates. On Tuesday evening, bank chiefs made out a strong case to RBI officials to exempt banks from reserve requirements such as SLR and CRR for long-term deposits.

BANKERS' BLUES
T H E B A C K G R O U N D Banks have been paying more for long-term funds Due to this, they need to charge core borrowers more Currently, banks charge around 15% for infra projects They fear corporates may not be able to service them T H E D E M A N D Exemption for long-term deposits Aid for banks facing issues with reciprocal credit lines Room to offer higher rates on foreign money Worry over lines of credit from abroad
    THE money thus raised could be used to fund infrastructure projects, they said. An easing of rules on this count could help reduce their cost of fund for long-term bonds, a senior banker said.
    Banks have been discouraging firms promoting infrastructure projects because the interest rate on these projects is 13-15%. "It is not that there are defaults. We only feel that these rates are too high to be serviced by infrastructure companies," a senior banker said.
    Another reason behind their reticence is that the share of long-term deposits (for three years and above) in the overall basket has come down to 11%, compared to 25% three years ago. This indicates that banks would have to pay a higher rate to attract long-term deposits and therefore, they would be forced to charge higher interest rate on long-term loans. However, if longterm deposits do not attract reserve requirements, their cost of funds would
come down automatically.
    The bank chiefs also sought financial support for their overseas operations, said sources close to the development. Domestic banks with overseas operations are worried over foreign banks not rolling over reciprocal lines of credit. Indian banks with overseas presence have a reciprocal line of credit with their foreign counterpart. Under this arrangement, the Indian bank lends to the foreign bank's branch here while the foreign bank extends a similar support to the Indian bank's overseas arm. Since reciprocal lines of credit are not being renewed, some banks are remitting dollars out of India to sustain their overseas operations.
    The banks also told RBI to allow them to offer a higher interest rate on foreign currency deposits. The RBI now caps the interest rates which banks can offer on such deposits. For FCNR(B) deposits, banks can offer 25 basis points over Libor and for NRE deposits, banks can offer 100 basis points over Libor.

FIIs slash stake in 18 Sensex firms in sept quarter

MUMBAI: Foreign Institutional Investors have reduced their holdings by up to 3 per cent in 18 blue-chip firms, including ICICI, on the 30-share b


enchmark Sensex, in the September quarter this fiscal.

FIIs reduced their stake in country's leading private lender ICICI Bank to 36.44 per cent at the end of September quarter from 38.85 per cent in the previous quarter, according to latest shareholding information available on the bourses.

FIIs, which have sold equities worth over 11 billion dollar so far this year on Indian bourses, reduced their holdings in 18 Sensex companies by up to three per cent in the reviewed quarter.

"FIIs are on selling spree on Indian bourses as they have to shore up all funds for deploying in their home countries like US and Europe, which are suffering from severe credit crunch and not because they do not believe in the Indian growth story," an analyst from a leading brokerage firms said.

Steel major Tata Steel, Jaiprakash Associates and ICICI Bank saw the FII holdings in their stocks reduce by over two per cent in the September quarter.

Tata Steel's foreign institutional holdings reduced to 17.65 per cent in the three months ended September from 19.8 per cent in the first quarter this fiscal, while in Jaiprakash Associates their holding fell by 2.78 per cent to 21.66 per cent in the reviewed quarter.

Meanwhile in the same quarter, FIIs have increased their stakes marginally in eight Sensex companies including Maruti Suzuki, NTPC, Reliance Infrastructure, HDFC, state-run BHEL, Aditya Birla Group flagship Hindalco, realty major DLF and Larsen and Toubro.

Centre shock for markets

THE liquidity crisis faced by the banks in early October could be one of the reasons for the delay in the monsoon session of Parliament. The government had more than Rs 25,000 crore parked with RBI at a time when interest rates went through the roof in the call money market. According to an RBI official, the money was raised for farm loan waiver subsidy, but could not be released without the government's nod. Though the FM announced the release of these funds last week ahead of Parliament session, funds were lying idle in the central bank's coffers when the liquidity crisis was more acute in the earlier weeks.
JOB FEARS
FOREIGN bankers are a worried lot. With market activity across different segments coming to more or less standstill, there is not much work. Most bankers are showing deals around, but with the credit crunch, its unlike to cut ice. Most of them have lost all hope of getting any substantial bonus this year. If the situation persists, it would be only months before job cuts become a reality in India too.
SPACE ODYSSEY
DEVELOPERS may be holding back prices, but there has already been a crash in high-end rentals. Two financial services firms, in advance talks with Indiabulls for office spaces in its new project in central Mumbai's mill lands, are having second thoughts. Reliance Capital has booked some properties, but is not going to move all its operations from its present office in Wadala. Birla Sun Life, which has also booked space, is now looking at cheaper options in the Bandra-Kurla Complex.
COMPLEX DEALS
THERE has been a lot of speculation over the names of bidders for AIG's business in Asia. A couple of Indian business houses too are rumoured to be in the fray. Sources in one of the business houses that has looked at AIG's subsidiaries say that the entire list of group companies runs into several pages and the ownership itself is a maze. The Byzantine group structure was so complex that even the corporate house, which itself is not new to holding company structure, found it difficult to figure out how things would unwind.
LOSE-LOSE
IN ORDINARY circumstances, a depreciating rupee brings cheer to a small segment of the population. This includes, exporters, software companies and employees of multinationals with Esops. But that is not the case this time. Exporters including software companies are not seeing any major growth in orders. Employees of MNCs with Esop shares held in overseas trusts are finding that while the exchange rate has moved in their favour, the value of the stocks has almost halved.
WEST NOT THE BEST
THERE was a time when NBFCs floated by multinationals had only to announce that they were issuing debt and money would start pouring in. Investors were not bothered about looking into their balance sheets or guarantees. The tide has changed. An Indian arm of a leading multinational NBFCs found it so difficult to raise funds that it had to finally come out with a guarantee from its parent before it could raise funds.




LET THE CREDIT FLOW: PM

MANMOHAN SINGH ASKS CHIEFS OF PUBLIC SECTOR BANKS TO RESUME LENDING TO PRIORITY SECTOR AND INDUSTRY, AS THE LIQUIDITY CRUNCH HAS STARTED EASING

PRIME Minister Manmohan Singh is learnt to have directed public sector bankers to honour their credit commitments to the industry in general and the infrastructure sector in particular. In an unscheduled meeting with the top PSU bankers late on Monday evening, Mr Singh took stock of the liquidity situation and assured the bankers of all possible support from the government. He has also asked bankers not to take steps which may affect priority sector lending.
    Top bosses of the State Bank of India (SBI), Union Bank of India (UBI), Punjab National Bank (PNB), Bank of India (BoI) and senior finance ministry officials were present at the meeting. Mr Singh left for a three-day visit to Japan and China on Tuesday morning.

    "There is no reason now for banks to find it difficult to meet their commitments to industry. The situation has completely changed from what it was two weeks ago when the cash reserve ratio (CRR) was 9%. At that time, banks had to put their commitments on hold as there was a paucity of funds. But the problem no longer exists," said a senior official with a public sector bank who was present at the meet.
    The prime minister's meeting with bankers will help facilitate resumption of lending to major borrowers of India Inc, bankers said. Due to the liquidity crunch, banks had the slammed brakes on such lending.
    Banks have a cash-deposit ratio of about 10% in most of the cases. On an average, it is pegged at around 9.8%. This means when CRR was 9%, banks were left with just 0.8% of available resources to lend.

CASH AWASH
STEP ONE: CRR
The quick succession of cuts in cash reserve ratio by 250 basis points has infused Rs 1 lakh crore into the financial system
STEP TWO: REPO
On Monday, RBI cut the repo rate for the first time since 2004 by 100 basis points, in a clear signal to banks that they should cut interest rates soon
RBI still cautious on loans to developers
    CRR is the ratio of the total deposits that the banks have to park with the central bank. This left the banking system with just about Rs 40,000 crore to lend before the CRR cut, making them go slow. With CRR reduced by 250 basis points in a series of steps, the banking system has received Rs 1 lakh crore.
    That Mr Singh himself decided to meet bankers directly indicates the importance the
government attaches to addressing the financial sector crisis. Usually, it is the finance minister who interacts with chiefs of public sector banks.
    Despite the steps initiated by the government, it is felt that loans to real estate companies would be under check. "RBI's view is that banks should be restrained in lending to real estate and follow more stringent norms," the public sector banker said.
    niranjan.bharati 
    @timesgroup.com 


SPARKLE FOR BORROWERS

Banks ready to cut home loan rates by Diwali

 IN WHAT may come as a Diwali bonanza for creditworthy borrowers, many commercial banks are planning to cut home loan rates by about 50 basis points after RBI cut the repo rate on Monday. The country's largest lender, the State Bank of India (SBI), is likely to reduce retail home loan rates before Diwali while Punjab National Bank (PNB) and Union Bank of India (UBI) have already slashed rates by up to 50 basis points. But the rate cut of 50 basis points may not be applicable to all types of loans.
    Although private home loan providers like HDFC and ICICI are planning to wait and watch as of now, a rate cut by market leader SBI often has a ripple effect on many banks. UBI has cut rates by 50 basis points for loans up to Rs 30 lakh. The rate cut for loans above Rs 30 lakh, however, will be only 25 basis points. Also, there is the possibility that for
loans amounting to Rs 75 lakh and above, the rate cut may be even lower. Sources say some banks may even decide against cutting rates for loans above Rs 75 lakh.
    Many banks, including SBI, have put a new ceiling of home loans above Rs 75 lakh;
they prescribe a different rate structure for these loans. The government, however, recognises only two types of home loans — those below and above Rs 30 lakh. The former comes under priority sector lending. Also, rate cuts would not be applicable to commercial borrowers like real estate companies.
    "Our bank is contemplating a
rate cut following the recent measures taken by the Reserve Bank. Though the decision to reduce rates may come at any point in time, it's expected that the bank would take a decision after seeing RBI's half-yearly monitory policy on October 24," an SBI official said. Govt's credit balm
    BANKS are also following some tough norms. He said the bank is following stringent norms for deciding an individual's creditworthiness while allocating loans so that the bank does not fall into a subprime-like trap.
    Finance ministry sources said the government is in constant touch with commercial banks to ensure easy liquidity for priority sector loans. "The government and the central bank have taken a series of measures to infuse liquidity into the system and there is no reason that the banks should be wary of providing credit to genuine borrowers even after that," an official said.
    niranjan.bharati@timesgroup.com 

 

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