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Tuesday, June 30, 2009

IT looks at sunny days as deals begin to flow

Small Deals Offer Big Hope Ahead Of Q1 Show

AS COMPANIES in the $60-billion technology services sector gear up to announce results for the first quarter of 2009-10, the straws in the wind suggest that they may have weathered the worst of the global economic downturn.
    The biggest indication is the return of the deal flows, albeit in smaller sizes of about $25-30 million. A welcome development considering that in the past couple of quarters clients had battened down the hatches by suspending discretionary spending, freezing IT budgets and putting offshoring decisions on hold.
    Many of the new deals involve what is
referred to as 'business transformation outsourcing', where an Indian vendor would work with a client to reshape entire processes such as payroll or HR administration to make them more efficient and achieve cost savings.
    In May, India's largest software exporter TCS signed a five-year deal with the Volkswagen Group in the UK to provide IT support and transformation of its IT infrastructure. TCS also bagged a contract from ABB in the UK to implement business software. Wipro signed a $34-million contract to extend a deal with Sunoco, a US-based marketer of petrochemical products.
'IT sales growth in Q1 will not exceed 15%'
IT SECTOR analysts believe that sales growth during the April-June quarter will not exceed 15%, but agree that the software services industry could be looking up. The first big result for the IT sector begins with India's secondlargest software exporter Infosys Technologies on July 10.
    Infosys has forecast a decline of 6.5-8.2% in its dollar revenues and a 11-13% increase in rupee terms for the quarter ended June 30, 2009.
    Research and advisory firm Booz & Co as well as investment bank Avendus Advisors see sales growing by 10-15% for the top six IT companies. Suvojoy Sengupta, a partner at Booz & Co, expects operating margins at over 20%. "Of course, it's a massive scale down from the 40% operating margin levels which companies had got used to," he says.
    However, Gartner, an IT-focused research company, predicts single-digit sales growth quarter-on-quarter for the sector.
    While the Q1 results may only be marginally better compared with the previous couple of quarters, the outlook seems more promising.
Says Partha Iyengar, vice-president and senior analyst at Gartner: "We have started getting calls from clients (in the US and Europe) on how to cut costs by offshoring. These are positive signs. We have already hit the bottom. But we might see a recovery only by late 2009."
    Software industry grouping Nass
com has said that it expects single-digit export growth during 2009-10. Some analysts are advising investors to stay away from the sector in the short term. "I don't see a recovery any time in the next two quarters. Infosys, however, has a habit of giving conservative guidance and may spring a positive surprise," says Dhirendra Kumar, CEO, Value Research Online, a mutual fund watcher.
    Harit Shah, IT analyst at Angel Broking, agrees that a wait of at least two quarters is warranted before a revised outlook is pronounced.
    "In the short term, we might see single-digit sales growth for top tier IT majors. Year-on-year, we might see a flattish sales growth. However, in dollar terms, we might see a dip for some IT companies," he said. Operationally, the manpower-intensive sector, which employs about 2.3 million, continues with its freeze on recruitment. Selective hiring is, however, on for those with specialist skills in areas such as enterprise resource planning, business software and IT architecture development, but the numbers are negligible. There is also a greater focus on shifting employees and work from client locations onsite to offshore destinations such as India.
    Among the positive signs is that the domestic
market looks attractive despite lower margins compared to exports. Also, with former Infosys co-chairman Nandan Nilekani now part of the government to oversee the Unique Identification Card Project, domestic IT spends could get accelerated. Telecom, e-governance initiatives, state-run companies and the Indian Railways are throwing up newer opportunities for IT. While export-focused companies look at the domestic market as well, the revival of confidence, especially among US clients, bodes well for large and small players.
    "Clients feel that the worst is behind them. Especially in the US, many customers took aggressive measures to cut costs and renegotiate contracts," says S Gopalakrishnan, CEO of Infosys.
    Infosys Australia recently won an IT application development and maintenance contract worth A$450 million (Rs 1,800 crore) from Telstra, a large Australian telecom company.
    A weaker monsoon this year is expected to increase agriculture imports, and thus weaken the rupee just as the rise in crude oil prices has weakened the Indian currency. Buoyed by the hope of recovery, IT companies are now going
all out to spend more to win new contracts and increasing their sales force.
    However, challenges persist. As KS Ananthanarayan, CFO, Birlasoft points out, the biggest challenge now is getting new business. "Companies are investing a great deal in salespeople, and there is an increased focus on incumbency of clients," he says.

    Infosys, for instance, added 217 employees to its sales and marketing team in FY09, its highest ever since the company was founded in 1981, according to Edelweiss Research. Similarly, Wipro, HCL, TCS and Birlasoft have augmented their sales teams. But this strategy needs to be improved with a focus on business rather than technology.
    "In the current scenario, multinational IT companies are still winning new contracts because of the effectiveness of their marketing teams which are focused on selling business needs. In comparison, Indian sales staff is focused on selling technical needs," remarks Gartner's Mr Iyengar.
    One reason for that could be the lack of topend skills and consulting capability. To plug this gap, companies are looking for acquisitions. The IT & ITeS sector accounted for 50% of cross-border acquisitions in 2007-08 and 40% in 2008-09. Buyouts like HCL's acquisition of Axon last year will provide the much-needed boost.
    Overall, the road to recovery seems visible now and companies just need the critical fuel in the form of new business to reach the end of this fiscal, after which offshoring is expected to see its next peak. Till then, the road is tough, but at least the worst is behind them.




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Govt may take action against RIL on KG gas

Says RIL Can't Commit National Property Without Its Nod; RNRL Says HC Ruling Overrules Executive Decision

THE government is contemplating penal action against Reliance Industries (RIL) for committing 28 million standard cubic meters of gas per day (mmscmd) from its KG basin block to Reliance Natural Resources (RNRL) at a price of $2.34 per million British thermal units (mmBtu) as part of the Ambani family settlement without the permission of the government.
    "RIL is merely a contractor for the KG basin block (D-6) and not the owner. Two promoters (read Mukesh Ambani and Anil Ambani) can't divide a national property between themselves without the government's approval. The mat
ter is being examined," a senior official in the know told ET, requesting anonymity.
    The government's intention of penalising RIL was first broken by ET NOW, this newspaper's business channel, on Tuesday evening.
    The proposed penalty could come as a blessing in rather thin disguise for RIL,
which would like to negate any contractual obligation on its part to supply gas to RNRL at a price of $2.34 per mmBtu, significantly lower than the government-set price of $4.20 per mmBtu at which RIL is selling gas to other users.
    An RNRL executive claimed that such a move against RIL would in fact help the company in its dispute with RNRL. According to this person, the government had approved the proposal to sell gas to RNRL at the lower price as "part of its approval of the scheme of demerger."
    When asked for comments, a senior
RNRL said: "These aspects (price, term and quantity) are adequately and clearly covered in the judgement of the Bombay High Court." The high court ruling clearly overrides any executive order. The only option for RIL is to approach the Supreme Court, if it disagrees with the order.



Sunday, June 28, 2009

The Correction Ends

FRIDAY'S surge helped the indices return to their winning ways, with the BSE Sensitive Index finishing the week 1.67% or 242.75 points higher, and the Nifty 1.43% up. The CNX Midcap Index was much stronger, with a gain of 3.82%.

    Jaiprakash Associates was the biggest winner among index stocks with a 10.5% gain. The other index stocks to go up included Larsen & Toubro, ACC, HDFC and Grasim with gains between 7.7% and 5.8%. Sun Pharmaceuticals was the biggest loser among index stocks with a 13.2% loss. The other index stocks to go down included Ranbaxy Laboratories, Tata Steel, Mahindra & Mahindra and HDFC Bank with losses falling between 8.9% and 3.8%.
    IVRCL Infrastructures was the biggest winner among the more heavily traded non-index stocks with a 26.0% gain. The
other non-index stocks to go up included Educomp Solutions, IRB Infrastructure Developers, Nagarjuna Construction, IFCI, Punj Lloyd, Suzlon Energy and Indiabulls Financial with gains falling between 14.9% and 11.1%.
    Aptech was the biggest loser among the more heavily traded non-index stocks with a 6.9% loss. The other non-index stocks to go down included GMR Infrastructure, Satyam Computers, Ispat Industries, Reliance Industrial Infrastructure, Tata Chemicals, Hero Honda and Tech Mahindra with losses falling between 6.8% and 2.8%.
INTERMEDIATE TREND
The market appears to have ended its intermediate downtrend on Friday, with the Sensitive Index clearing its last minor top of 14,668, and the Nifty clearing its equivalent of 4,352. The CNX Midcap went past 5,381 earlier on Wednesday to confirm an intermediate uptrend.
    Quite a few stocks have already started intermediate uptrends, and it may already be safe to assume that the market is in one now. The Sensitive Index had gained 7,553 points during the preceding intermediate uptrend, and the downtrend carried a relatively small negative impact of 1,584 points. This works to a retracement of just 10%, and suggests that the bull market has considerable strength at this time.

LONG-TERM TREND
The market's long-term (i.e. major) trend is up, which means this is a bull market. Over 90% of the more heavily traded stocks entered long-term uptrends and went above their 200-day moving averages during the intermediate uptrend which has just ended. The bull market can be said to have started with the Sensitive Index's October 27, '08 low of 7,697.
TRADING & INVESTING STRATEGIES
Additional longer-term investments should have been acquired during last week's decline, as suggested last week. Stocks may
still be acquired if available around Friday's levels. Current long-term portfolios should be held on to.
    Banks, technology and sugar stocks are among the early leaders of the
new uptrend, and some exposure in them could yield better returns. Metals and automobile stocks are among the laggards at this stage, and it would best to be underweight in them right now.
GLOBAL PERSPECTIVE
The global intermediate trend had also turned down around the same time as it did here, with several indices falling to multiweek lows before starting to recover at the end of the week. In fact, some of the Asian markets appear to have started fresh intermediate uptrends on Friday.
    The major trends of a few global markets turned up recently. Brazil, China, Hong Kong and some of the other Asian markets are among those in bull phases, while US and European markets are not.
    The BSE Sensitive Index had lost 0.5% in the twelve months that ended on Thursday, up one position to the 3rd place among 35 well-known global indices considered for the study.
    Chile currently heads the list with a 0.9% gain. Shanghai, the BSE Sensitive Index, Turkey and Sri Lanka follow. The Dow Jones Industrial Average has lost 26.0% and the NASDAQ Composite has lost 21.2% over the same period. (These rankings do not take exchange rate effects into consideration)
(The author is an independent technical t)
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NO DEVIATION...YET

IN the last derivatives dairy, we discussed how the Nifty may have to undergo a strength test even after continuous out-performance over its US complement Dow Jones Industrial Average (DJIA).
    However, not only did the Nifty remain in a tight range of 240 points last week but also the June futures showed a weak rollover into the July series. After losing more than 1% during the first four days of the week, the Nifty rebounded only on Friday. This rise however followed Dow's gains on the previous day as the US index managed to bounce back towards its 200 Day Moving Average (DMA).
THE STRUGGLE
As we pointed out last week, the 76.4% retracement of the rally from March'09 to Mid–June (from 2539 to 4693), at 4180 turned out to be a good support. However, as can be seen from the first chart, the crossover of 10 DMA
below 20 DMA, is weighing on the Nifty. Even as the Nifty managed to close past its 10 DMA on Friday, a strong resistance is expected to emerge in the coming week at the 20 DMA (currently at 4446) level. This resistance also coincides with the support line extending from the March 2009 lows, which was breached last week.
ROLLOVER ANALYSIS
With the expiry week in place, the Nifty was expected to show some striking moves as it did in the last four months. However, the rollover in the July series at 54.6% showed a sizeable decline from the average rollover of the last four months at 69.9%. A look at the open interest data in the last one week reveals that from Tuesday, the addi
tion in July futures open interest was higher than the decline in open interest in June series (see table). The premium of July futures over the underlying index also rose from 10.5 to 17.8 on Thursday. However, a decline in the July put call ratio (PCR) from 1.22 to 1.10 during the period indicates that number of calls written outpaced the number of puts.
    On Thursday, the July 4700 calls held the highest open interest of 14 lakh shares, while the 4200 puts held the highest open interest of 20 lakh shares. Even as the 4200 puts added the maximum open interest of 9.5 lakh shares, the 4300 calls experienced the maximum addition of open interest, of 4.8 lakh shares. This indicates that as on Thursday, 4200-4700 was perceived to be a key trading range for the July series.
DOW NEAR 200 DMA – RESEMBLING DECEMBER 2007?
In last two diaries, we highlighted how the 76.4% retracement has worked efficiently during all the corrective phases, which came since March 2009.
This magical level seems to have supported the Dow last week. As can be seen from the second chart, the Dow showed a rebound closer from 8300, which is the 76.4% retracement level of the index's move in the latest rally (from 6470 to 8878).
    After briefly moving above the crucial 200 DMA in the first week of June, the Dow gave away these gains in the second week. On Thursday again, a rebound from that retracement level and subsequent gains brought it closer to the key indicator.
    The Dow's current position is similar to the last week of December 2007. As shown in the third chart, after a decline from its peak in October, the Dow managed to move past 200 DMA in the first week of December but fell below it in the second
week. In the third week, it managed to surpass this crucial indicator, but the gains were given away for good towards the end of the month. One important difference between these two is the positioning of 100 DMA. While in December 2007, the 100 DMA was acting as strong resistance, it can act as a strong base this time around.
FRESH TRADE
While the support at 4180 held well last week, the call was not initiated as we recommended going long only when the Nifty moves past the 20-DMA. The analysis on Friday shows that July 4300
puts added huge 6.7 lakh shares in open interest, while 4200 continue to hold the highest open interest. Meanwhile, the July 4700 and 4400 puts experienced a piling of 5 lakh and 4 lakh shares respectively. To sum up, with the market's close above 4300, the important resistance range has now shifted towards 4400-4450.
    Since the Nifty is still capped by 20 DMA level, we recommend being on the sidelines. While a breach past the above mentioned resistance range could bring back the index on a gaining streak, a crossover of 10 and 20 DMA will be essential for the rally to continue.
    devangi.joshi@timesgroup.com 









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Balmer Lawrie:Stable and Able

A cash-rich business with strong growth record makes Balmer Lawrie an interesting long-term investment idea

Beta 0.89 Institutional holding 18.65% Dividend Yield 4.5% P/E 6.7 M-Cap Rs 728.5 cr CMP Rs 447.2
THE Rs 730-crore Balmer Lawrie (BLL), a staterun unit with mini-ratna status, is a mid-cap with long-term promise. Headquartered in Kolkata, BLL is a debt-free company with rising dividends every year. It has a healthy record of sales and profits growth, which makes it an ideal investment candidate for long-term investors.
Business: BLL operates in eight distinct strategic business units including industrial packaging, greases & lubricants, logistics
services, engineering & technology, logistics infrastructure, travels & tours, leather chemicals and tea.
    The company is India's largest producer of metal drums used in packaging chemicals and lubricants. Travel & tours services bring in the major share of revenues, while the logistics services account for the highest profits. The company has a wholly-owned subsidiary in the UK carrying out logistics business.
    Balmer Lawrie Investments (BLIL), which is 59.67%
owned by the government of India, holds a 65.7% stake in the company. It was created in 2001 with a view to divest the government's stake in Balmer Lawrie. The new UPA government, which is considering selling stakes in profitmaking PSUs, may look at BLL as a divestment candidate as it is a non-core, but profitable, public sector firm.
Growth Drivers: Balmer Lawrie is a debt-free, steadily growing company with strong presence in all the industries in which it operates. The company has plans to grow inorganically by acquisitions in the areas of travels & tours and logistics and has a budget of Rs 100 crore for this.
    During the past five years, the company has grown at a cumulative annual growth rate of 12.6% at topline to Rs 2,007 crore for the year ended March 2009, with the PAT growing at a
CAGR of 28.8%. BLL has a strong track record of paying dividends, and during the period its dividend payout has increased at a CAGR of 41.7%
Financials: The global financial slowdown hasn't left Balmer Lawrie untouched. Its operating performance stagnated in FY09 and the net profit was propped up by a spurt in nonoperative income. Revenues went up 13.7% in FY09 at Rs 2,007 crore and profits grew by 9.3% to bring in Rs 109 crore.

    The services sector did well during the year with travels and tours posting 19% growth and logistics services growing at 21%. Both these businesses posted healthy improvement in profits as against a fall in profit for manufacturing businesses such as industrial packaging and lubricants. With established businesses and very low annual capex, the company has maintained its return on employed capital to beyond 40% for last four years. Valuations: The company's current market capitalization of Rs 728.5 crore is just 6.7 times its annual profit of the year ended March 2009, out of which Rs 150 crore is represented by cash equivalent. The dividend yield works out to 4.5%. We expect the company to post an EPS of Rs 77 in FY10, which discounts the current market price by 5.7 times.
    ramkrishna.kashelkar@timesgroup.com 



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The Sensex has moved up much faster than Nifty

Widening Gulf

The Sensex has moved up much faster than Nifty in the current rally for the first time in last six years. Investors should better be watchful...

SINCE the start of the bull run early this decade, there have been many rallies. This sounds more like a restatement of the obvious, but a bull run is nothing but a combination of several rallies happening over the course of long period of time. That bull-run came to a halt in January 2008.
    Since March 09, 2009 the bear market saw a rally, which caught everyone by surprise. An aspect of this rally has virtually gone unnoticed. In no other rally dating back to 2003 that the performance of Nifty and Sensex had diverged so much. Consider this: Sensex is up 81% since March 09 and Nifty is up 70%. The difference is of eleven percentage points. Let us compare this with earlier rallies. The first rally of the previous bull-run started on May 12, 2003 and went on unabated till January 13, 2004. In that time period, Sensex had gone up by 108%, while the Nifty was up by 110% implying a difference of just 200 basis points. It must be noted that the rally in 2003-04, was much stronger, yet the divergence in two indices was much lesser compared to current rally.
    In a similar way, in the next rally, which started on May 17, 2004 and lasted till January 7, 2005,
Nifty had gone up by 45%, while Sensex climbed up 43% - translating into a difference of again 200 basis points. The case wasn't much different in many other rallies, which followed.
    One obvious reason for divergence between Sensex & Nifty is that while the former is an index of 30 companies; the latter is constituted of 50. However, both the indices are supposed to be barometers of India Inc's financial performance. And, therefore such a difference can confuse the investors. It might also
show that there is some kind of weakness in the current rally, or in other words, it is not as broad based, as one would expect it to be.
    Well, purely based on this data, we cannot say whether the current rally will continue or not. But,
it can be easily said that Sensex, at best, is a very weak approximation of our economy. So, investors should better be careful! Sample this: mining and quarrying contribute just 2% to India's gross domestic product (GDP) but mining companies account for 11% of the total market capitalization of 30 Sensex companies. Financing, business and services contribute 15% to country's GDP, while its contribution to market-cap of Sensex companies is 25%. This clearly establishes that what is bad for economy may not be bad for Sensex and what is good for economy may not be good for Sensex. This has precedence in recent times. Corporate India was in the pink of its health in the first half of FY 2009, when Sensex had corrected by 38% on September 30, 2008 (end of first half of FY 2009) since January 2008. When the markets started rising in March this year, there was no reason to cheer for Indian companies as most of them saw their top and bottom line growth falling in third quarter of FY 2009 and they expected little or no improvement in the fourth and the last quarter of the fiscal. In terms of representing economy, Nifty is no better than Sensex. This is because the sectoral composition of Nifty is almost same as that of Sensex. So, Nifty can be more broad-based, but it too fails to be a good proxy for economy. Another reason of such lopsidedness in Sensex and Nifty's performance is that the top 20 companies of India contribute to almost 50% of the total market capitalization. So, any rally in the prices of these 20 companies will reflect in indices. In view of such asymmetry between two indices and between the performance of economy and indices, the investors are advised to keep a sharp eye on the developments in the real economy and not get swayed away by market movements.
karan.sehgal@timesgroup.com 


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Bull's Eye


PANTALOON RETAIL
RESEARCH:MORGAN STANLEY
RATING:OVERWEIGHT
CMP:RS 323
Morgan Stanley reiterates `Overweight' rating on Pantaloon Retail with a target price of Rs 422. It also maintains the investment thesis regarding improving business outlook and availability of capital to fund growth plans. Consumer demand has picked up sharply in the last two weeks, and the company has various alternative funding plans to expand its business. The management has also expressed its intention to improve transparency through better communication with investors. According to the management, consumer spending in categories is nearly back to the peak witnessed in the last 18 months. Home Retail had been particularly badly hit in this downturn; it is now witnessing a sharp reversal in growth trend, particularly in the furniture and furnishings segments. PRIL is also evaluating various plans that include private equity investments in subsidiary companies and/or restructuring the group to ensure that Pantaloon Retail does not need to fund non-retail, finance subsidiary companies.
NIIT
RESEARCH:CITIGROUP
RATING:SELL
CMP:RS 59
Citigroup recommends a `Sell' rating for NIIT with a target price of Rs 50, given concerns of a US/global economic slowdown. NIIT, an acknowledged leader in IT and IT-enabled training, provides learning and knowledge solutions in more than 30 countries. NIIT's business is not recession proof as: (1) NIIT feeds into the IT industry and hiring has slowed (particular in Tier-IIs) due to cautious demand. (2) Corporate business is ~60% of revenue and ~80% of this is US exposure; training budgets face pressure amid the slowdown. NIIT's margins in individual businesses have expanded from 0% to ~20% in three years. If revenue momentum slows, the high share of fixed cost in business will lead to a sharp erosion in profitability. Corporate business profitability will be affected by the appreciating rupee. Institutional and new businesses are too small to change the company's prospects. Citigroup values NIIT at Rs 50 based on 10x average of FY10-11E consolidated EPS.
GLENMARK PHARMA
RESEARCH:GOLDMAN SACHS
RATING:NEUTRAL
CMP:RS 232
Goldman Sachs maintains `Neutral' rating on Glenmark Pharma with a 12-month target price of Rs. 263. Glenmark announced that Melogliptin, its novel molecule for diabetes, is set to enter global Phase III trials by end-'09. It stated that Phase IIb trials were completed successfully and achieved 1% average HbA1c reduction and a positive safety profile. With implications in the patient group with higher baseline HbA1c, the study reported a reduction of 0.88% and 1.05% (at different doses) thus reducing HbA1c levels to the range of 7.5%-9%. Note that for glucose control, the Intl Diabetes Federation recommends HbA1c values below 6.5%. Goldman Sachs believes this increases the statistical likelihood of Melogliptin entering the market, in which case sales peak a $1 billion per annum. Note that treatment has progressed from monotherapy to combination therapy (with Metformin). As a reference, Alogliptin (another DPP-IV) has been delayed by two years as the FDA has asked for combination trials. This implies longer trials and increases the need for an outlicensing partner. Also, safety continues to be a key issue, as some DPP-IVs have seen significant adverse effects. The next pipeline milestone is Phase IIb results for GRC3886 from Forest Labs in July.

SESA GOA
RESEARCH:BNP PARIBAS
RATING:REDUCE
CMP:RS 192
BNP Paribas downgraded Sesa Goa to `Reduce' as the stock runs ahead of the fundamentals. Sesa is currently trading at 13.1x FY10 PE and 6.5x FY10 EVEBITDA, a 151% and 110% premium to its eight-year average PE of 5.2x and EVEBITDA of 3.1x, respectively. With the onset of the monsoon in India, the first two quarters of FY10 will be seasonally weak for Sesa due to lower sales volumes. Sesa sold 30.8% of its yearly sales volumes in 1HFY09 and it is to sell 6.0 million tonnes in 1HFY10, or 33% of FY10 target. Sesa has recently entered into an agreement to acquire the mining assets of Dempo Group for Rs 1,750 crore in an all cash deal. The acquisition provides an additional 70 million tonnes to Sesa's existing reserves of about 240 million tonnes. BNP has increased the target price to Rs 147 from Rs 110 per share with Sesa being valued at Rs 123/share and Dempo at Rs 24/share. BNP expects the proportion of Karnataka and Orissa ore will increase to about 50% of sales volume in the later years in comparison to 30% now with expected new volume growth from these territories.
PARSVNATH DEVELOPERS
RESEARCH:CREDIT SUISSE
RATING:UNDERPERFORM
CMP:RS 84
Credit Suisse maintains `Underperform' rating on Parsvnath Developers with a target price of Rs. 75. Credit Suisse revised the NAV estimate up by 83% to Rs 126 on the back of lowering weighted average cost of capital (WACC) and assumes a 5% p.a. hike in property prices from FY11 onwards. They employ an average 40% discount to calculate the target price to reflect high gearing of 1x; its high concentration risk in tier III cities; focus on SEZ and commercial projects (47% of land bank); and unpaid land cost of Rs 1000 crore. With an EBIT/interest cover of 0.9x in FY09 and 0.6x in FY10, Parsvnath will find it difficult to meet its interest commitments let alone Rs 230 crore of debt repayments scheduled for FY10. Further, Parsvnath's strategy to continue with its land acquisitions for the SEZ projects and not to exit from non-strategic land parcels will put considerable strain on its balance sheet. Parsvnath is looking to gain private equity investment in its projects. Red Fort Capital, a private equity fund has recently invested Rs 90 crore ($18 mn) in a Delhi residential project. Credit Suisse estimates it needs at least a $170 million equity infusion to reach FY10 EBIT/interest cover of 1x. We raise our revenue estimates for FY10 and FY11 by 15% and 13%, respectively, on the back of improved liquidity and a better macro environment. FY10E EPS is expected to decline 30% y-o-y to Rs 4.20 and thereafter increase to Rs 5.14 in FY11E. Parsvnath is trading at a 34% discount to forward NAV and 20x FY10E P/E and 16x FY11E P/E and 0.74x forward P/B.
VOLTAS
RESEARCH:EDELWEISS
RATING:BUY
CMP:RS 132
Edelweiss maintains `Buy' rating on Voltas. Voltas' engineering and agency services (EAS) and unitary cooling businesses (UCL) bore the biggest brunt of domestic slowdown, with 2% decline and 11.3% growth in revenues respectively. The UCL division is estimated to have a better FY10 compared with H2FY09 due to a severe summer and better realisation on high-end products. But primary sales growth for Voltas has been slower than the industry due to its conservative stocking policy, leading to stock run-outs in a few models. Among the three segments, recovery in EAS is likely to be the slowest, despite improvement in mining and materials, and construction equipment segments. On current estimates, the stock is trading at a P/E of 16.6x and 13.9x for FY10E and FY11E respectively. While upsides to current valuations may not be immediate, expectations of positive surprises on order wins could support valuations. Further valuation upsides could be driven by higher order accretion and faster execution, leading to higher FY11E estimates. Even after the recent run-up in the stock price, Edelweiss advises investors to initiate fresh positions and build existing ones as triggers in the form of order wins and improved macro scenario are likely to support valuations.


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smarter way to gain from the FII activity on the Street;

Ride the trend!

Don't try to chase the foreign institutional investors. If history is any guide, there is a smarter way to gain from the FII activity on the Street; pre-empt them

KR I SH NA K ANT ET I NTELLIGENCE GROU P


TALK about the Indian equity market and the discussion invariably shifts to foreign institutional investors (FIIs). And their mention is not without merit. Over the years, FIIs have become a big force on Dalal Street and had a big role to play in the 5-year long bull-run that ended in January 2008. Their importance was even more pronounced in the ensuing bear-run as they led the sell-off on the street.
    Their influence can be gauged from the fact that the value of FII holdings in the BSE-500
companies is equivalent to 12% of the combined market capitalisation of the index and they are one of the biggest non-promoter groups on the Street. The FII holdings in key large counters are even higher. For instance, the average FII holdings in Nifty 50 companies are nearly 15% of the total paid-up capital. All the above figures are based on the company's shareholding pattern as on March 31, 2009.
    Given their purchasing power, it's but natural for FIIs to play a key role in the market movements. The adjoining charts show relative movement in FII investments in equities (on cumulative
    basis) and NSE Nifty Index for the
last ten years. As is evident, the Nifty closely follows the trajectory of FII inflows into the country. The correlation has actually become more pronounced from 2003, which coincides with the beginning of the big bull-run. As readers will notice during the bull-run, every big move in FII investment (either positive or negative) was followed by a similar change in the Nifty. This aspect becomes clearer in the second adjoining chart, where we have plotted the monthly percentage change in Nifty against similar changes in the cumulative FII investment into the country. This foreign connection was in full force during the recent volatility in the benchmark indices. In the past two weeks, the benchmark Nifty lost nearly 10%. This was blamed on the dwindling dollar inflows into Indian equity markets. In the last eight trading sessions, FIIs have been net sellers to the tune of over half a billion dollars. This sent shivers through the bones of bulls, many of whom fear that this may be a precursor to a big FII sell-off on the street. Given the recent FII activity, the fear is not without merit. The Friday rally would have, however, soothed many a nerves on the street.
    The readers would thus be better served tracking the FII money inflows into the market rather than chasing dozens of other "leading" indicators. However, this is easier said than done. As the adjoining charts show, the FII investments are as volatile as the stock market

itself. For instance, in the last 76 months, while average FIIs inflows have been to the order of $ 636 million, the monthly flows have ranged from a high of nearly $5700 million worth of inflows to outflows of $3100 million.
    While such wild fluctuations make future estimates a tough exercise, we can make some sense out of the long-term trend in FII inflows into India. First, barring the blip in 2008, FIIs have always ended the year in a green zone. This has meant that Indian equity markets have always been bullish in the long term. So if we average out the short-term fluctuations, long-term investors can expect a positive return from Indian equities. For instance, even during the lowest point in 2008, the Nifty was up nearly double its value from the peak of dotcom boom. Secondly, the FII investments never follow a one-way trajectory.
Never A Dull Moment
EVERY big purchase is followed by equally big sell-offs . There's never a dull moment for an FII watcher. As the adjoining chart shows, dollar inflows take a roller-coaster ride and few months of positive inflows are followed by months when they are net sellers. The lesson for the retail investors is clear. Never try to chase or mirror dollar inflows on the street, but rather pre-empt them and act accordingly. To put it simply, start accumulating when FIIs are relatively inactive (i.e market is looking dull) and begin booking profits just as the FII investment cycle is peaking (or the market is making new highs). For instance, in the latest rally, the FII investment peaked in early June and that was the time for retail investors to start booking profits.
    If the past is any guide, every 4-5 months of positive FIIs inflows is followed by 2-3 months of negative inflows. And the wave length is getting shorter and the frequency is rising. For instance, between 2004 and 2004, the FIIs were net buyers for 19 consecutive months; next year the green patch never lasted more than 6 months and from middle of 2007, the buy and sell cycle alternated every 2-3 months.
    The current buy-cycle is now 3 months old and FIIs may hit the sell button anytime now. Since early March, most large cap stocks have doubled while many mid-cap and small-cap counters have tripled. This is the kind of buoyancy that FIIs will love to book profits on. The same rule applies to those of you who were smart enough to invest during the down cycle. It is time to book some profits so that when the FIIs press the sell button, you have ready cash to take advantage of the opportunity. As the saying goes, don't try to catch the peak/bottom, ride the trend.
    krishna.kant@timesgroup.com 




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