Bidders queue up for troubled UWB
United Western Bank (UWB) became the most sought after bank in the country after the Reserve Bank of India (RBI) placed it under moratorium due to lack of adequate capital. A slew of banks, public, private as well as foreign ones rushed to submit their proposals to the RBI for the acquisition of the troubled private bank. Some of the biggest names in the industry have thrown their hats into the ring to acquire UWB. These include: ICICI Bank, Citibank, Standard Chartered Bank, Corporation Bank, Allahabad Bank, Federal Bank and Andhra Bank. Indiabulls, a Delhi-based stock broker, too jumped on the bandwagon. However, the bank itself managed to muster Rs3.5bn with the support of the Maharashtra Government, SICOM (the state government owned financial institution) and HDFC. UWB submitted its restructuring package with the RBI. But, it remains to be seen as to which way the cookie crumbles and which suitor will get UWB. With a network of 230 branches, 75 ATMs and 12 extension counters, UWB can be a strategic fit for quite a few banks which are ready to shell out funds for cleaning its balance sheet. According to reports, RBI considers UWB's move to rope in SICOM and HDFC as financiers is too late. They should have shown some interest when the bank was going down and it was making losses, a RBI official was quoted as saying. As UWB has high potential to turn around and make profits again, there is a lot of interest among the bidders. The RBI will now study all the EoIs and take a decision within the next few weeks. The UWB stock continued to attract a lot of interest after taking a beating on Monday. According to market observers speculators are buying heavily into the counter hoping to get some returns if the bank is merged with a strong bank later on. As on March 31, 2006, the bank's maturing liabilities were more than assets by Rs318.8mn for short-term loans and by Rs13.26bn from long-term loans. For the financial year ended March 31, 2006, the bank had negative cash flows of Rs58.8mn. This is said to have forced the RBI to impose stringent curbs on UWB when it suspended the bank’s operations and banned withdrawals of above Rs10,000 from each account. Over 22-lakh depositors of UWB are now waiting for the bank’s merger with a stronger one so that they can access their money.
Tarapore panel wants CAC in 5 years
The S.S. Tarapore Committee proposed that the country should shift to fuller Capital Account Convertibility (CAC) in five years beginning the current fiscal year. In its report submitted to the Reserve Bank of India (RBI) on July 31, the panel recommended that the proposed regime be implemented in three phases - 2006-07 (Phase I), 2007-08 and 2008-09 (Phase II) and 2009-10 and 2010-11 (Phase III). The panel also said that FIIs should be prohibited from investing fresh money raised through participatory notes (PNs). Existing PN holders should be provided an exit route and phased out completely within one year. The RBI formed an internal committee to examine the regulations and suggest measures to further ease the rupee's convertibility. The panel will submit its report by December. The panel proposed a more moderate public sector borrowing and asked the Government to rein in liabilities such as small savings and unfunded pension. It also said that the Centre and States should graduate from the present system of computing fiscal deficit to a new measure of public sector borrowing requirement (PSBR).
The PSBR could be above the fiscal deficit by about 3% of the GDP. According to the fiscal responsibility and budget management (FRBM) Act, the Centre is mandated to reduce fiscal deficit by 0.3% every year. The deficit is slated to be reduced to 3.8% by the end of this fiscal. The previous Tarapore panel had set reducing fiscal deficit to 3% as one of the conditions for CAC. Which means that it will take a decade or so for the Centre to prepare the ground for CAC, if it adheres to the current FRBM pace. The committee recommended a series of measures to strengthen the banking system. It said that the minimum share of the Government/RBI in the public sector banks (PSBs) be reduced from 51% (55% for SBI) to 33%. It also said that to meet the increased capital requirement of the banking industry to comply with the Basel II norms and CAC, the proposed transfer of ownership of SBI from the RBI to the Government be put on hold. The panel, however, endorsed the view that the Government must give up majority ownership of PSBs.
MARKET MOOD
Sensex fails to capture point 12k
Choppiness was the order for the week as the bulls faced stiff resistance in lifting the Sensex past the 12,000 mark. Every bout of buying was met with profit taking and vice versa, making the market volatile. However, traded volumes remained lackluster, reinforcing a view that the current rally is quite fragile and lacks conviction. Buying in Index Heavyweights and rally in Mid-Cap stocks pushed the markets higher for a seventh week in a row. Steady inflows from FIIs over last few weeks coupled with softening of crude oil prices and firm global markets boosted the sentiment.
Investors still appear to be wary and cautious following the rise in the last one and a half months. As a result, the Sensex continued to face pressure at around 12,000. During the week, Auto, Metal and Cement and Capital Good stocks were in momentum. While IT, FMCG and Banking stocks were at the receiving end. Finally, the Sensex added 141 points or 1.2% to close at 11,919 and the NSE Nifty gained 36 points or 1% to end at 3471.
| Short Name | Last Price (Rs.) | Closing Price 5 Days Ago (Rs.) | Change 5 Day Percent |
| HDFC BANK LTD | 850 | 873.7 | -2.71 |
| WIPRO LTD | 509.9 | 517 | -1.37 |
| INFOSYS TECH LTD | 1794.7 | 1811 | -0.90 |
| ICICI BANK LTD | 603.75 | 609.1 | -0.88 |
| ITC LTD | 188.1 | 189.6 | -0.79 |
Strong monthly sales numbers and buoyant prospects for the auto sector boosted auto stocks. Maruti rose 7.4% to Rs940 after the company and Suzuki announced mega investment plans. Tata Motors advanced 4% to Rs898, Hero Honda gained 1.2% to Rs736 and TVS Motors jumped 21% to Rs116.
After rising for the last many sessions, banking stocks cooled off owing to profit booking. HDFC Bank fell by 3% to Rs850, ICICI Bank slipped by 0.8% to Rs603, PNB lost by 0.80% to Rs469.
Capital goods stocks attracted buying interest with L&T leading from the front. L&T surged by 5.3% to Rs2558, BHEL advanced by 3% to Rs2325 and ABB gained by 1.1% to Rs2851.
| Short Name | Last Price (Rs.) | Closing Price 5 Days Ago (Rs.) | Change 5 Day Percent |
| RELIANCE ENERGY | 488.1 | 445.05 | 9.67 |
| MARUTI UDYOG LTD | 940.8 | 875.25 | 7.49 |
| HINDALCO INDS | 183.9 | 173.15 | 6.21 |
| LARSEN & TOUBRO | 2558.35 | 2428.05 | 5.37 |
| TATA STEEL | 524.8 | 501.75 | 4.59 |
Cement stocks were also up on hope of increased construction activities post monsoon. Cement companies announced their monthly dispatches numbers, which were in line with expectations. Birla Corp added 7.6% to Rs305, Prism Cement surged 6.7% to Rs38.7, Grasim was up by 3.7% to Rs2335 and ACC gained 3.3% to Rs945.
After a long time, the action returned to the mid-cap counters with the NSE CNX Mid-Cap adding 3.5% on the week. Adlabs Films, Birla Corp, Bombay Dyeing and Goetze India were among the major gainers.
Firm international metal prices boosted the metal stocks on local bourses. Bhushan Steel rose by 7% to Rs252, Jindal Steel advanced by 5% to Rs102, Tata Steel gained by 4.7% to Rs525, Hindalco advanced by 6% to Rs184 and Sterlite Industries climbed 12% to Rs474.
| Index | 8th Sep 06 | 1st Sep 06 | % Change |
| BSE Consumer Durable | 3108.4 | 3052.5 | 1.8 |
| BSE Capital Goods | 8079.7 | 7749.6 | 4.3 |
| BSE Auto | 5207.0 | 5050.5 | 3.1 |
| BSE Pharma | 3632.8 | 3610.3 | 0.6 |
| BSE PSU | 5654.5 | 5563.3 | 1.6 |
| BSE Small-Cap Index | 6031.2 | 5814.3 | 3.7 |
| BSE Metal | 8626.3 | 8158.8 | 5.7 |
| BSE-200 | 1435.5 | 1411.2 | 1.7 |
| BSE Oil & Gas | 5742.7 | 5688.5 | 1.0 |
| CNX-Mid-cap 200 | 4504.6 | 4352.4 | 3.5 |
| BSE IT | 4273.0 | 4287.1 | -0.3 |
| BSE FMCG | 2035.8 | 2034.2 | 0.1 |
| BSE Bank | 5362.0 | 5383.9 | -0.4 |
INVESTMENT STRATEGY
Bulls set sight on 12k!
So near, yet so far
The bulls could well be living over the edge. The psychological mark of 12K has come near and moved slightly afar. In fact in the last five days, on four occasions the bulls looked like they would breach past the mark. All it managed to do was hit a high of 11983.48 on Wednesday.
A correction is long overdue. Valuations have been looking expensive for some time now. Major positive triggers are also hard to come by. But after every fall, the markets have bounced back sharply, which is evident from Friday’s gain towards the end. Even the volumes traded on the bourses have picked up slowly indicating renewed buying interest among the investors. Global cues will again provided much needed direction to the bulls. Action is likely to be stock specific with mid-cap stocks appearing to have got back into action. Fall in crude oil prices have softened the concerns of the rate hikes. Bank of Japan kept its overnight lending rate stagnant at 0.25%, judging that the economy isn't expanding fast enough to require a second increase in two months. Even, the Bank of England JUSTIFY its benchmark interest rate unchanged at 4.75% after last month's unexpected increase to manage accelerating inflation. The market may continue to face pressure before the psychological milestone is taken out. Judging by the impressive comeback by the bulls on Friday, looks like they are set to conquer Mount 12k again in the coming week. Auto, Mid-cap, Pharma and Cement counter are likely to remain in limelight for the coming week.
STOCK SNIPPET
United Western Bank: RBI curbed the operations of United Western Bank Ltd until December 1 and announced that it may find another bank to take it over. The stock has been in limelight as Indian lenders including ICICI Bank, Canara Bank, Federal Bank are among the other major banks bidding to acquire United Western Bank to expand into the rural areas of one of the nation's richest states. Several banks have announced interest in buying the bank. The stock had a roller coaster ride this week. The scrip touched a low of Rs10 on Monday but managed to climb higher to close at Rs16.15 that day. The scrip closed the week at Rs21, locked at 10% upper circuit.
Reliance Energy Ltd. (REL): The scrip out performed the Sensex after being on the sidelines in the recent trading sessions. REL added over 9.6% to close at Rs488. The scrip made a solid breakthrough this week. The company plans to spend Rs200bn to complete the Dadri plant.
Jet Airways surprised everyone and flew up by 16.5% to close the week at Rs627.3. Lower oil prices coupled with rumours of an out of court settlement with Sahara fueled the rally. The company had increased fuel surcharge on tickets for flights within the country by 15% because local oil refiners have raised prices of aviation turbine fuel. Also, the company is to establish its own Hangar in Mumbai, to carry out major and line maintenance checks for its fleet of Boeing and ATR aircraft.
DOMESTIC NEWS
Core sector growth jumps in July
India's infrastructure sector grew by 9% in July as against 2.3% in the same month last year, the Government said. All the six key core industries, except steel, managed to register a substantial improvement in performance. The infrastructure index, comprising of crude oil, petroleum refining, steel, cemh
ent, coal and electricity, rose to 211.2 in July from 193.8 a year earlier. The six industries account for a quarter of India's index of industrial production (IIP). In the first four months of the current fiscal year (April-July 2006-07), the core sector index expanded by 7% as against 6.1% in the same period a year earlier. Five of the six sectors - except steel - recorded improved performance during July compared to the year-ago period. Crude oil output grew by 4.1% versus a decline of 3.9%, while refining throughput rose 12.6% as against 3.6% in July 2005. Coal production increased 10.6% as against a negative 1.6%, while electricity generation grew 8.6% from a negative 1% in July last year. Cement production rose by an impressive 13.3% compared to only 3.6%, while steel production slowed down to 8% in July from 10.4% a year ago.
Apr-Aug direct tax collection up 50%
The first five months of the current fiscal (April-August 2006-07) have witnessed a 50.3% jump in direct taxes, with a substantial contribution of 70% coming from the corporate tax. The budgeted increase in tax collections is 25% for FY06-07. The budgetary estimate for direct taxes is Rs2.1 trillion, while for customs duty it is Rs770.66bn. Total direct tax collection is up at Rs429.17bn as against Rs285.44bn in the year-ago period. Corporate tax receipts are up at Rs225.87bn in the period under consideration versus Rs122.58bn the corresponding period last year. Personal income tax collection is up 32.9% at Rs203.30bn compared to Rs152.96bn last year (April-August 2005-06). For the month of August, corporate tax receipts were up 11.54% at Rs30.34bn while personal income tax mop-up grew by 9.5% at Rs38.02bn. On the indirect tax front, customs duty collection is up 34% at Rs341.1bn in April-August 2006-07. In August, customs duty collection went up by 30% to Rs74.07bn.
Kamal Nath: exports may cross $126bn target
India's merchandise exports are likely to surpass the target of $126bn during 2006-07 if the first quarter growth is sustained, Commerce Minister Kamal Nath said. The target of $126bn exports will be exceeded going by the 40% growth seen in the first quarter of this fiscal, Nath said at a meeting of the Parliamentary Consultative Committee of the Commerce Ministry. Exports grew by 23% to $103bn in 2005-06. Kamal Nath also said that Engineering Process Outsourcing (EPO) services from India would be a key element of the country's engineering export strategy, and the development of the EPO sector will have a far-reaching impact on India's engineering industry as a whole. The EPO market in India has the potential to exceed US $40bn by 2020, which would catapult India's market share in this category to 30%, from the current 12%, the Minister said. Engineering goods exports from India have crossed $5bn in the first quarter of the current financial year, showing a growth of 20%, he said, adding it had the potential to grow at 30% annually. The Government is giving high priority to engineering, which was an important segment of India's manufacturing sector, he said.
Inflation climbs past 5%
India's inflation, based on the Wholesale Price Index (WPI), rose to 5.01% for the week ended August 26, the Government said. It was at 4.91% in the previous week. Inflation stood at 3.33% as in the comparable period last year. Meanwhile, inflation rate for the week ended July1 has been revised upwards, from the preliminary estimate of 4.96% to 5.21%. The final WPI for the same period stood at 203.8 as against the provisional figure of 203.3. The index for Primary Articles Group (weight: 22.02%) rose by 0.3% to 205.7 from 205.0. The index for Fuel, Power, Light & Lubricants (Weight 14.23%) remained unchanged at its previous week's level of 328.3. The index for Manufactured Products (Weight 63.75%) too remained static at its previous week's level of 177.7.
ONGC earmarks Rs23bn investment
Oil and Natural Gas Corp (ONGC) approved an investment of Rs23bn for re-development of its ageing Heera and South Heera fields at Mumbai offshore in the Arabian Sea. The re-development will enhance production with improved recovery and redistribution of water injection, pattern sweep and pressure maintenance. The project includes development of a marginal field B-134 A through Heera facilities, which would not have become viable for exploitation on stand-alone basis. ONGC recently received approvals from the Director General of Hydrocarbons (DGH), for redeveloping its Heera oilfield. The estimated incremental gain is estimated at 10.685mn tons (MT) of crude oil and 2.265 bn cubic metres (BCM) of natural gas by 2030. ONGC's output has stagnated at about 520,000 barrels per day in recent years and fell to 490,000 barrels per day in the full year to March 2006, after an accident destroyed an offshore oil platform in July 2005. The oil major recently said it plans to spend Rs600bn during 2007-12 to raise its total production to 140 mn tons.
HDFC's $720mn fund gets Cabinet nod
The Cabinet Committee on Economic Affairs (CCEA) cleared an investment by HDFC's global real estate fund to invest up to Rs32.4bn in the country. The Mauritius-registered India Offshore Real Estate Investments (IOREI), which is sponsored by HDFC, has been allowed to invest this amount, raised overseas, in units issued by HDFC's International Real Estate Fund (IREF), which would in turn invest in Indian companies. The CCEA also allowed the HDFC-sponsored fund to raise $30mn (nearly Rs1.35bn) from the domestic market. The Series A units that India Offshore Real Estate Investments would subscribe to will have a face value of Rs 1,000 each. The international scheme of the fund would be managed either by HDFC Venture Capital or a different entity from within the HDFC group. Investments in the HDFC property fund would be subject to the existing FDI policy in respect of the real estate sector, including not allowing repatriation of original investment before three years from completion of original capitalisation. HDFC Property Fund is a venture capital fund, whose investment manager is HDFC Venture Capital and the trustee company is HDFC Ventures Trustee Company. The fund was set up in 2005 and has launched two schemes over the last one year. These include the HDFC India Real Estate Fund and the HDFC IT Corridor Fund. The Cabinet decision comes at a time when the country's real estate sector is going through a boom period and property prices in major cities are at an all-time high. A lot of global real estate players have also shown considerable interest in the Indian realty market.
Govt unveils Auto Plan 2016
The Government unveiled an ambitious "Automotive Mission Plan-2016" to make the country a global hub for automobiles and auto components. The plan envisages the auto sector contributing more than 10% of the GDP in a decade. Under the plan, the output of India's automotive sector will be $ 145bn and will provide additional employment to 25mn people by 2016. The Government would play a key enabling role in facilitating infrastructure creation, promote country's capabilities, create a favourable and predictable business environment, attract investments and facilitate R & D, Heavy Industries and Public Enterprises Minister Santosh Mohan Dev. On the other hand, the role of industry will primarily be in designing and manufacturing products of world class quality, cost competitiveness, improving productivity of both labour and capital, achieving scale and R&D capabilities and showcasing India's products in potential markets.
Meanwhile, Suzuki and Maruti scaled up their investment plans for the country by Rs30bn, taking the total investment to Rs90bn, and announced they would start contract manufacturing for Nissan from 2008-09. Maruti's new car plant at Manesar, which is expected to begin production soon, will manufacture 100,000 units of the 'Swift' as well as 200,000 units of a new small car that the company is developing in collaboration with Nissan. Out of the production of the new small car, Maruti will export 100,000 units to Europe while 50,000 would be exported by Nissan and the remaining 50,000 units will be sold in India. Reports also suggested that Suzuki is in talks with Nissan to build a new car plant in India that will export 400,000 vehicles annually.
Fiat and Tata Motors are reportedly examining options whereby the Italian auto major will use the Indian auto giant's platforms to manufacture cars for select overseas markets. Fiat is considering making a low-cost car with Tata Motors, Sergio Marchionne, CEO of Fiat said. At a gala event held late to celebrate the 100th anniversary of Lancia, one of Fiat's premium brands, Marchionne told reporters that a low-cost car could be one of the projects to be pursued with Tata Motors. Tata Motors Ltd. will pump in Rs120bn in a four year span, to expand capacity and develop new products. The automobile behemoth will fund the capex through cash reserves and borrowings, Ravi Kant, Managing Director, Tata Motors, said. Toyota Kirloskar, Hyundai, Honda, Mahindra & Mahindra (M&M) and Eicher Motors also made big-ticket announcements on their expansion plans.
Aug GSM subscribers base up 5.1% MoM
The GSM-based cellular operators witnessed the highest ever subscriber additions in August. Thus, the GSM industry set a new record by adding 4.2mn subscribers in August. The GSM subscriber base has touched 86.6mn at the end of August, compared to 82.4mn as on July 31. Among all the circles, Category B witnessed the highest rate of growth at 7%, followed by Category C at 5.6%. Within Category B, UP (West) and Madhya Pradesh recorded the highest growth at 13% and 10% respectively. Within the Category C, the highest growth was recorded by Assam (8%) followed by Himachal Pradesh (7%). Category A also witnessed a healthy growth of 5% in August. Karnataka recorded the highest growth at (5.6%) followed by Tamil Nadu (5.3%). The Metro subscribers also grew by 2% over the previous month. Kolkatta recorded the highest growth at (5.3%) followed by Chennai (3.3%).
Reliance Comm applies for GSM licences
After ruling the roost in the CDMA space, Reliance Communications Ltd. is now eyeing the GSM segment. The Reliance-Anil Dhirubhai Ambani (ADAG) company has reportedly approached the Department of Telecommunications (DoT) for 21 spectrum licences out of the total 23 circles in the country. "The move is in line with our enhanced focus on GSM. However, it is clear that the company will continue with its emphasis on CDMA and deploy GSM for future expansion as is being done by many global operators," Reliance Communications said in a statement. According to reports, the DoT is awaiting detailed business plans from Reliance Communications to gauge the seriousness of the company's planned diversification into the GSM business. Separately, Reliance Communications joined hands with Nokia to market Nokia 1255 mobile handsets across the country at Rs1,999. With this Nokia partnership, the company is expecting to sell about two million handsets in the next six months, Reliance Communications CEO Sajive Kanwar said. Reliance Communications also launched commercial operations of Falcon, its 2.56 terabit undersea cable, connecting West Asia with India. Falcon has been laid by Flag Telecom, a subsidiary of Reliance Communications. The submarine cable system connects 11 countries and four continents as it stretches 11,859 km from Mumbai to Egypt. It covers Oman, Kuwait, Bahrain, Qatar and Saudi Arabia, where Falcon is expected to bring down the bandwidth costs. Falcon has 14 landing stations.
CBoP-LKB merger gets nod
The Boards of Centurion Bank of Punjab (CBoP) and Lord Krishna Bank approved their merger. The proposal is subject to all the requisite statutory, regulatory and shareholder approvals, including the approval of the Reserve Bank of India (RBI). Rana Talwar will be the Chairman and Shailendra Bhandari the Managing Director & Chief Executive Officer of the merged entity. It is proposed that Mohan Puri would join the Board of CBoP, subject to regulatory approvals. The share swap ratio has been fixed at 5:7 i.e. for every 5 shares of Lord Krishna Bank, its shareholders will receive 7 shares of CBoP. There will be no retrenchment of staff of either bank and there will be no closure of any rural branches. The merger provides for a one-time increment to all existing employees of Lord Krishna Bank. CBoP will have an EGM of its shareholders on Sept 30, and Lord Krishna Bank would have its AGM on the same day. Both banks will seek approvals for the merger from their respective shareholders at these meetings. The Board of CBoP also approved a proposal to raise additional capital through a preferential issue of fresh equity. The bank will issue up to 75mn shares at Rs 24.54 per share for up to Rs1.84bn to India Advantage Fund V, acting through its investment manager, ICICI Venture Funds Management. Up to 95mn shares will be issued at not exceeding Rs 25 per share for up to Rs2.37bn to Bank Muscat. The additional capital raised will enable CBoP to maintain a strong capital position post merger and provide the support and drive that the bank requires to ensure accelerated growth over the following quarters.
Grasim inks JV with Chinese Co
Grasim Industries Ltd. said that it has reached an agreement with Hubei Jing Wei Chemical Fibre Company in China - a 30,000 TPA VSF manufacturer head quartered in the Hubei Province. Under the agreement, the Aditya Birla Group, through its Cellulosic Fibre companies (Grasim, Thai Rayon Public Co and PT Indo Bharat Rayon) along with Hubei Jing Wei, will form a JV. The new entity will be named Birla Jingwei Fibres Co. Ltd., and will acquire the existing assets of Hubei Jing Wei. While the Aditya Birla Group will have a majority stake in the JV, Grasim will have own a little over 30%. Speaking on the occasion, Kumar Mangalam Birla, Chairman, Aditya Birla Group, said, "In Viscose Staple Fibre, we are in a leadership position. Our intent is to grow even further globally in this sector. Our new JV, in which we have made a strategic investment, marks a major milestone in China. Furthermore, the Asian and Chinese markets offer enormous potential for commodity and speciality fibres, in both of which our Group has a strong foundation. We are expanding in both these segments." Separately, Grasim acquired 50,000 equity shares of Himachal Pradesh-based Harish Cement for Rs1mn. The company acquired the shares at Rs 20 per share, following which it has become a wholly-owned subsidiary of Grasim.
HLL to merge Modern Foods with itself
Hindustan Lever Ltd. (HLL) said that its Board has approved the proposal for the merger of Modern Food Industries Ltd. (MFIL) and its subsidiary Modern Food and Nutrition Industries Ltd. (MFNIL) with itself, with effect from October 1. In terms of the Scheme of Amalgamation, the entire shareholding of MFIL and MFNIL would stand cancelled. Accordingly, HLL has not undertaken any valuation exercise n or recommended any share exchange ratio. The FMCG giant also cleared the plan to demerge the non-functional factory land at Shamnagar and Jamnagar and the vacant leasehold land at Daverashola into three separate companies, being 100% subsidiaries, with effect from October 1. HLL will subscribe to the shares of the respective companies.
Separately, Capgemini extended its Finance and Accounting BPO capabilities by acquiring from HLL a 51% shareholding in Unilever India Shared Services Ltd. (Indigo). HLL has a put option to sell the rest 49% stake to Capgemini by 2008. The acquisition of Indigo is expected to be consummated in October. The specific terms of the agreement were not disclosed. At the same time, Capgemini and Unilever enter into a seven-year agreement to deliver the full range of BPO services to Unilever companies. Indigo is a provider of financial shared services and Sarbanes Oxley compliance services to Unilever throughout the world. It has operating centres in Bangalore and Chennai and has nearly 600 professionals. It currently serves Unilever companies in about 45 countries. Two of HLL's directors and three of Capgemini's directors would be on Indigo Board. Indigo reported a net profit of Rs14mn on a turnover of Rs223mn in 2005. In 2004, Indigo had reported a loss of Rs6.7mn on a turnover of about Rs 100mn.
Steel makers hike galvanised steel prices
Leading steel producers in the country announced an increase in galvanised steel prices by Rs 500-1,000 per ton. JSW Steel and Ispat Industries hiked galvanised steel prices by Rs500-750 per ton on the back of rising zinc prices. JSW Steel's price revision was with retrospective effect from September 1, the hike by Ispat was with immediate effect. Uttam Galva increased prices by Rs 500-1,000 per ton. Tata Steel, however, kept prices unchanged. A Tata Steel spokesman said galvanised corrugated sheet prices are reviewed on a quarterly basis. Zinc prices have rallied sharply over the last few days. Steel makers use 40 kg of zinc for every ton of galvanised steel. Zinc prices are now at a premium of $300 per ton. Zinc prices on the London Metal Exchange (LME), which were hovering around $3,100 per ton a couple of weeks back, were now hovering around $3,750 per ton. Ankit Miglani, Uttam Galva's Director (Commercial) said that the increase in spot prices was with immediate effect but the company anticipates another hike this month.
Spice Comm to raise up to US$300mn via IPO
Spice Communications Pvt. Ltd., which provides GSM-based cellular services in Punjab and Karnataka, is planning to raise up to $300mn through an IPO of its equity shares. The company, which is 49% owned by Telekom Malaysia Bhd., plans to sell up to 20% of its equity by December. The company plans to invest as much as $2.5bn to expand its network, Vice Chairman Dilip Modi said. The company may make a second public offer by December 2008 to raise $350mn, he said. Spice has more than 2mn mobile users out of a total market of more than 108mn GSM and CDMA customers in the world's fastest growing cellular services market. The pattern of the holding won't be altered by the share sale, Modi said. Spice posted revenue of Rs7.34bn and EBITDA of Rs2.24bn in the year ended March 31, 2006. The company expects revenue of Rs9.9bn and EBITDA at Rs3.2bn in FY07.
Videocon consortium to buy Daewoo Electronics
A consortium led by India’s Videocon Industries Ltd. and the US fund Ripplewood Holdings was selected as the primary bidder to buy Daewoo Electronics. The creditors declined to reveal the bidding price, but a local newspaper reported that the Videocon consortium offered from 670bn to 680bn won. If successful, it will be the largest foreign take over of a Korean manufacturing firm since Shanghai Auto’s acquisition of Ssangyong Motor in 2004. Videocon can become the new owner of Daewoo as early as December after two months of due diligence, said Park Ki-hoon of Woori Bank, one of Daewoo’s main creditors. Daewoo Electronics is a former unit of the Daewoo Group, which collapsed in 1999 under debts totaling $80bn. It is now the third-largest maker of consumer electronics in South Korea after Samsung Electronics and LG Electronics. Daewoo operates six plants in South Korea and 18 overseas units, including manufacturing facilities in Mexico, Poland, Vietnam and China. Its assets totaled 1.65 trillion won at the end of last year. Daewoo posted a net loss of 94bn won in 2005 on sales of 2.16 trillion won. For Videocon, the proposed acquisition will help it jump from a domestic brand to a global player. Last year, it acquired French firm Thomson’s color picture tube manufacturing business for $291mn, and the Indian unit of Swedish firm Electrolux for $76mn.
Oil hits five-month low
Crude oil dropped to a five-month low after supplies of gasoline and diesel in the US, the world's biggest energy market, rose unexpectedly. Separately, BP said it will restore full production at Prudhoe Bay in Alaska, the biggest US oilfield, as soon as work to bypass a corroded pipeline is done at the end of October. Crude oil for October delivery fell as much as 63 cents, or 0.9%, to $66.69 a barrel in after-hours electronic trading on the New York Mercantile Exchange. The contract traded at $66.92 at 9:56 a.m. in London. Brent crude oil for October settlement fell 42 cents to $66.11 a barrel on London's ICE Futures exchange. Oil futures in New York touched a record in July, fueled by concern that the fighting between Israeli and Hezbollah forces would spread to other parts of the Middle East. Supply disruptions in Nigeria and a dispute with Iran over its nuclear program also bolstered prices. Mounting demand from emerging economies such as China and India, besides developed nations like the US, has also been driving oil prices up. At the same time, spare production capacity has declined because OPEC isn't investing enough. Since hitting US$78.40 a barrel on July 14, oil has slipped about 14% after the fighting in Lebanon ended and concerns eased about disruptions from Iran, the world's fourth-biggest producer.
OPEC to keep output unchanged
The Organisation of Petroleum Exporting Countries (OPEC) is likely to leave production unchanged when its members gather for a meeting next week. OPEC, which pumps 40% of the world's annual oil requirement, is scheduled to meet on Sept. 11 in Vienna. Output for the 10 OPEC members, excluding Iraq, was 27.9mn bpd in August, below the planned 28mn a day. Members last surpassed the target in February. A two-day energy seminar in Vienna will follow the formal OPEC meeting, with ministers and executives from companies including Exxon Mobil, Royal Dutch Shell, Chevron Corp. and Saudi Aramco scheduled to attend. The OPEC meeting comes as high oil prices curb consumer spending from Australia to the US, prompting calls by politicians to reduce reliance on OPEC crude.Officials from Iran and Nigeria have said in the past three weeks that OPEC members, apart from Iraq, should keep their target of 28mn barrels per day (bpd). Iran, Venezuela, Nigeria and Indonesia are all failing to produce as much oil as planned. Some members, including Saudi Arabia, exceed their official quotas to make up for shortfalls by other nations. OPEC's largest producer produced 9.38mn bpd in August, surpassing its quota of about 9.1mn bpd. Saudi production peaked at 9.78mn bpd in October 2004. Algeria pumped 54% more than its quota in August, while Indonesia was 41% below. However, the quotas don't really reflect the potential of various countries.
ADB ups Asia growth forecast for 2006
For the second time this year, the Asian Development Bank (ADB) raised its 2006 growth forecast for Asia (excluding Japan), citing strong performances in China and India. The Manila-based regional lender says that Asia's developing economies will expand by 7.7% this year, 0.5% higher than its forecast in April. It has raised its 2006 growth projection for China to 10.4% from 9.5% earlier, and for India to 7.8% from 7.6%. "Fast growth at a regional level is supported by strong performances by China and India," the ADB said in its Asian Development Outlook 2006 Update report. "Acceleration in growth in China, due to booming investment and exports, has significantly influenced this regional upward revision." Separately, the International Monetary Fund (IMF) said that China and India will help the global economy post healthy growth this year. Global economic growth is likely to reach 5% in 2006, IMF Managing Director Rodrigo Rato said. On the US economy, Rato said that growth in the world's largest economy should moderate to a more sustainable level, on account of the slowdown in the housing market and the impact from higher interest rates. "We expect next year to be another year of solid growth, with expansion in Europe and Japan supporting global demand, even if the US economy cools," he said.
BOJ leaves rates unchanged
The Bank of Japan (BOJ) decided to keep its benchmark interest rate unchanged at 0.25% amid a growing view that the world's second-largest economy is not expanding fast enough to warrant another rate increase in two months. BOJ Governor Toshihiko Fukui and his policy-making colleagues held the key interbank overnight lending rate unchanged for a second month after raising it from near zero percent in July, the first increase in almost six years. The decision was unanimous. The BOJ also kept the Lombard rate, or the rate at which it lends overnight loans directly to commercial banks, unchanged at 0.4%. Japanese borrowing costs are the lowest among Group of Seven (G7) nations. However, at a press conference Fukui said that consumer prices will keep rising, reinforcing speculation that the BOJ will increase interest rates before the end of the year. "Prices are basically on a positive trend," Fukui said. Last month's revision to the way consumer prices are measured won't prompt us to change our basic stance. Fukui said that the central bank maintains its view that interest rates should be adjusted gradually depending on the economy and prices.
Germany's industrial production rises in July
Industrial production in Germany, Europe's largest economy, rose more than expected in July, led by spending on household appliances and construction. Production expanded 1.2% from June, when it declined 0.4%. Economists expected an increase of 0.5%, according to the average economist forecast. From a year earlier, output jumped 4.7%. Germany's construction output rose 3.4% in July from a month earlier and production of goods such as refrigerators and washing machines climbed 3.2%, the German government said. Output of plants and machinery advanced 1.8%. The European Commission said that Germany's economy will grow by 2.2% in 2006, the fastest pace in six years. German factory orders rose a greater-than-expected 1.8% in July. Separately, German exports rose more than expected in July. Exports, adjusted for working days and seasonal changes, rose 2.3% from June, when they increased 1.4%. Economists had predicted a 0.6% increase.
Intel raises job cuts
Intel Corp. increased its previously announced job cut target to 10,500 jobs, or about 10% of its workforce, as it gears up to ward off competition from rival AMD. The world's largest chipmaker said that it would eliminate 7,500 jobs by the end of this year, and another 3,000 jobs by the middle of 2007. The reductions include some previously announced cuts, including the layoffs of 1,000 managers made in July and reductions related to the sale of its communications and media businesses. But, the move failed to satisfy Wall Street, which had been expecting bigger job cuts of 10,000 to 20,000 and the sale of loss-making businesses. Besides, only 5500 of the positions constituted new reductions.
Ford names new CEO
Ford Motor named Alan Mulally, head of Boeing's commercial aircraft division, as new CEO. Mulally will take over from Bill Ford in a major shake-up at the world's third biggest carmaker. Ford, a great-grandson of Henry Ford, the company's founder, will remain as executive chairman. But he insisted that Mulally would have the responsibility and the freedom to do the job. The appointment comes just weeks before Ford is due to unveil a sweeping new plan aimed at reversing years of falling market share in its key north American market, missed financial targets and mediocre management. The carmaker reported a $1.3bn loss in the first half of this year. Its US market share slid to 16% last month from 18.1% a year earlier and a peak of over 25% in 1995. Ford said in a memo to employees that the company's turnaround required the additional skills of an executive who has led a major manufacturing enterprise through such challenges before. United Auto Workers union President Ron Gettelfinger said that Ford Bill Ford made a very smart move in naming a new chief executive. However, a few analysts said that Ford should have recruited a new CEO three or four years ago, when the automaker was in better shape.
FROM THE RESEARCH DESK
Cipla Ltd BUY CMP Rs257
Cipla Ltd. is India’s leading formulations and API manufacturer with a strong presence in both the domestic and international markets. In the domestic market, Cipla features amongst the top five domestic companies with strong presence in anti-asthmatics, anti-retroviral and anti-biotic/bacterial. In the international markets, Cipla has the most diversified business model with presence in both the regulated and semi regulated market. Cipla has adopted a partnership model for the regulated markets whereby it partners generic companies for formulations and API supply rather than setting up its own front end in those markets.
Cipla recorded strong growth for Q1 FY07 with net sales increasing by 30.2% to Rs8.6bn led by the export of formulations. Domestic sales witnessed a growth of 20% to Rs4.7bn. However, export of API witnessed a decline on a qoq basis to Rs752mn. Operating profit margin expanded by 390bps to 26.5% led by a better product mix and excise benefits generated out of Baddi. PBT increased by 55% to Rs2.22bn. PAT increased by 53% to Rs1.7bn, translating into an annualized EPS of Rs8.8. At Rs257, the stock is trading at 27.6x FY07E EPS of Rs9.3 and 22.7x FY08E EPS of Rs11.3.
Sasken Communications Ltd BUY CMP Rs321
Established in 1989, Sasken Communications Limited (Sasken) is an embedded telecom solutions company that helps businesses across the telecom value chain accelerate product development life cycles. Sasken is a specialist in communications software, particularly for the broadband and wireless segments. It also plans, deploys and manages wireless networks for network equipment manufacturers. Unlike other providers, Sasken helps clients speed product development through a unique combination of ready-to-use technology blocks and services along with unparalleled telecom experience. Some of the global Fortune 500 customers like Nortel, Nokia, Motorola etc. are part of Sasken's esteemed customer profile. Sasken employs over 2500 people at offices in India, Canada, China, Germany, Japan, Sweden, UK and the U.S.
Committed to innovation, Sasken works with terminal device manufacturers, network equipment manufacturers, semiconductor vendors and network operators to help them get to market ahead of the competition and stay focused on new product development and manufacturing. With deep understanding of the telecom industry, access to current and emerging technologies, mature development processes, global resources and a proven track record, Sasken creates complete solutions to help clients succeed. Supporting development of global wireless communications Sasken works with premier technology groups including the ITU, ETSI, GCF, PTCRB, ATM Forum, DSL Forum, OFDM Forum, UWCC and the SDR Forum.
Sasken has adopted a hybrid strategy of offering both services (embedded R&D outsourcing services) and products (software for mobile phones) to its customers. Though the contribution of products has decreased in recent years, this scenario is set to change as royalties from customer phone shipments start kicking in from Q4FY07. We foresee a huge potential for Sasken’s software products in the immediate future. At Rs321, the stock is trading at 18.1x FY07E EPS of Rs17.7 and 10.3x FY08E EPS of Rs31.1
Motherson Sumi Systems Ltd. NO RATING CMP Rs88
Motherson Sumi Systems Ltd (MSSL) is a leading integrated player in the Indian auto ancillary space with major presence in electrical distribution system, where it is the market leader for supplying integrated wiring harnesses with 65% market share. It is a major supplier to spectrum of OEMs in cars and 2-wheelers. The company also manufactures polymer products and elastomer components.
Basic Investment Thesis:
During FY06, MSSL spent Rs1.7bn on capital expenditure and is expected to incur additional Rs1.5bn on capital expenditure in FY07 which shall be financed through FCCB money raised in FY06. It has also been expanding inorganically through 3 acquisitions over the last couple of years. The rest of the proceeds from the FCCB issue are expected to be spent over further acquisitions.
Exports formed 31.5% of its total revenues in FY06, substantially higher from 25% in FY03. The company plans to increase the contribution further in future. This reduces the risk of slowdown in the domestic auto market which and will also will help to conquer a larger share of the increasing demand from global players who are slowly developing India as their outsourcing hub for ancillary products.
The company has been diversifying its product portfolio, which has led to increased content of MSSL per car. Existing tie-ups with various OEM players creates a ready market and acceptance for the new products.
Indo Tech Transformers BUY CMP Rs170
Indo Tech Transformers Ltd is in the process of more than more than doubling its existing capacity from 2,450MVA to 6,100MVA, including both planned and unplanned expansions. This will enable it to expand its reach coupled with newer and wider range of products. We expect the company to benefit from the ongoing investments in the power generation and transmission and distribution space by public and private sector. This should translate into stronger demand for transformers which will help the company’s bottomline grow at 35.1% CAGR over FY06-08E. The stock is currently trading at 11.6x and 8.9x FY07E and FY08E earnings of Rs14.6 and Rs19 respectively. We maintain a BUY on the stock with a long term perspective.
Allsec Technology BUY CMP242
Post successful completion of the upcoming (Oct 23rd-Nov 11th 2006) Carlyle’s open offer, the group would hold 38.5% stake in Allsec, more than promoter’s holding of 30.2%. We strongly believe that association with Carlyle would increase business prospects of Allsec with the group having sufficient motivation (majority stake) to help the company win business especially from its large investee companies. First Carlyle Ventures, Mauritius, (part of Carlyle Asia Growth Partners III), recently subscribed to 3.02mn equity shares and 0.16mn convertible warrants of the company at Rs260 per share/warrant, ~9% premium to market price. Further, the Carlyle Group has made an open offer to the remaining shareholders to acquire further 3.05mn shares at the same price.
The growth momentum is expected to continue as CompuCredit, its anchor client, is growing fast in its business, opportunity for cross selling remains robust within other established relationships (especially the 2nd to 5th largest customers) and the new clients added (four in the last 15 months) are expected to start contributing materially soon. Further, with the recent 1000-seat expansion, the company has infrastructure in place to manage growth. From 2,578 people at the end of Q1 FY07, company plans to add about 800 in Q2-Q4 FY07 and 750 in H1 FY08. Inorganic initiatives to further catalyze growth and help achieve essential scale Allsec acquired B2K Corp, a 600-seat Bangalore based Technical Support call centre in January 2006 for about Rs120mn. B2K clocked revenues of Rs132mn and net loss of Rs46mn in FY06. Presently, company operates at best-of-the-breed margins in the BPO industry. Strong cost discipline within the company has given it a frugal cost structure. Even at current seat utilization of 1.1x (2,578 people on 2,300 seats), Allsec earns 27.7% OPM and 24.5% NPM. We believe that these levels would be more or less sustained going ahead. The company targets utilization of 1.6x by end FY07 and 1.8x by mid FY08. Utilization improvement is expected to come from growing daytime services (Quality Assurance and HR Processing) and client acquisition in non-US geographies.
We estimate revenue CAGR of 49.1% and earnings CAGR of 48.3% on consolidated basis over the next two years. We have not factored any further inorganic growth (except B2K) due to difficulty in ascertaining the same and have rather preferred to value cash allocated towards it.
WEEKLY SUPPORT & RESISTANCE LEVEL
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posted by Yemkays at 10:38 PM
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