Will the SENSEX Rally Hold ?
Thursday, March 26, 2009
India's strong 25%+ bounce from lows, +ve YTD performance, and recent peer market outperformance has been backed by - Near-trough valuations, Signs of growth revival and resilience in consumption demand, Rising monetary flexibility and rate reductions, Liquidity and stabilization of domestic credit market. FIIs have bought stocks more than Rs 3,000 cr in CASH in the current rally.
The summer will be the season of election and global risk pullback will have a more lingering effect. Will this Rally Sustain or was it just a spike ?
India's bear markets have historically lasted 30 months on average, been longer than regional markets (21-23 months), and longer than India’s bull markets (bar the last). Is this bounce the beginning of a bull run? We think not, given India's equity market lows are shallower, longer, and more in sync with its economic cycle. The market is more likely to crawl rather than spike out of its current trading band.
We expect the market to maintain a 9000-10500 (11x-12.5x) trading range and expect interest rate and rupee gains.
Yes its TRUE that we wrote about Elliot Wave's 15 year bull market yesterday but that is something which Data according to Elliot Wave Theory justifies the current scenario. The outcome of General Elections is crucial to markets and Economic Policies and a broader coalition than the previous one implies SENSEX to be range bound.
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Published by Webmaster @ 8:43 AM IST.
Sensex in 15 Year Bull Rally ? Elliot Wave
Wednesday, March 25, 2009
Elliott Wave International in a report released just a while ago saidPrices in India's Sensex have just broken above a downtrend line, imitating a pattern from 2004 that led a strong rallyThe Sensex rose in the past few days, on optimism U.S. plans to rid banks of toxic assets will help ease the credit crisis and revive global economic growth. This five-wave cycle will include three rallies, with each peak exceeding the previous one. The first wave started with gains between April 2003 and January 2008, Elliot Wave said, while the bear market in the past year marked the second.
According to the Graph Released by Elliott Wave - Click on it To Enlarge - Indian Sensex formed a similar pattern [breakout] as shown in 2004.
Detailed Analysis of the 2004 - Analog:
The Present Breakout Chart:
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Published by Webmaster @ 3:03 PM IST.
5.5% GDP Forecast for 2009-10 - ICRIER
Saturday, March 21, 2009
The first working paper by the newly established Macro Unit in ICRIER - Indian Council for Research on International Economic Relations released yesterday forecast the Indian GDP growth for FY 2009-10 at 5.5% [Moderated].
The scenario with "no shock" which is considered as a case that would have been possible in the absence of the financial crisis, provides a growth of 8.4 per cent, which implies a recovery that would have been possible in the absence of the external crisis.
The first case of full impact of the shock gives a GDP growth of 4.8 per cent for 2009-10. The second case which takes into account the impact of both monetary and fiscal stimuli gives a growth 5.5 per cent in 2009-10. The impact of the stimulus packages will occur only in 2009-10. It would be, therefore, realistic to say that the GDP growth rate for 2009-10 would be in the range of 4.8 to 5.5 per cent.
Finally, The global crisis has changed that outlook and instead will deepen and prolong Indian economy’s slowdown. It has dealt a severe blow to investment sentiments and consumer confidence in the economy. A major worry is the severe weakening of India's fiscal position and balance of payments during this crisis period.
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Published by Webmaster @ 12:45 PM IST.
Gems + Jewellery - Negative in Medium Term - Fitch
Friday, March 20, 2009
The Indian gems & jewellery industry is going through a difficult phase on the back of softer demand from key markets. This has resulted in significant inventory build‐up and a major postponement/cancellation of orders across the sector, and in turn has impacted liquidity.
Inventory Pileup:
Lower demand was evident in Christmas orders from the US and Europe, although the decline started towards the beginning of H208. Several developed markets - including the US, the UK, Japan and EU, which are India's major export destinations - are in recession, clearly resulting in poor retailer sales. The Indian domestic industry has mostly stopped fresh purchases of rough diamonds and cut back on ongoing production, and many diamond and jewellery units have closed down production for a period anywhere from 15‐40 days.
Good Quality Diamonds:
Access to good‐quality rough diamonds (roughs) remains a critical success factor for the sector. Companies with strong sourcing relationships with the Diamond Trading Corporation (DTC) and other large sources of roughs benefit from having access to better‐quality stones, especially in the current scenario of production cut‐backs from diamond mines.
The sector has also been affected by the volatility in the Indian rupee / US dollar exchange rate. Fitch believes that the smaller players are more impacted by the current downturn, which could lead to consolidation in the industry. Large players with a strong operating history and track record - along with high‐quality cutting/polishing operations and better liquidity - would likely be more resilient.
The sector will be under pressure in near to mid term. Larger players which are geographically diversified with conservative forex / liquidity management policy will likely overcome the crisis.
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Published by Webmaster @ 2:36 PM IST.
India Market Strategy - Dont' Buy Yet
Thursday, March 19, 2009
In a report Morgan Stanley disagrees with the current rally in the Indian market. It appears that investors are starting to build a bull case for India. In agreement with India's long-term story is intact but we do not see a reason to buy Indian equities at least until the elections. Recently developments in politics seem to be increasing the probability of very fragmented parliament, which could spoil chances for a post election recovery in markets as well with a likely downgrade of sovereign rating.
The Indian Financial / Banking sector is likely to have 6% non-performing loans. It is possible things turn for the worse. In that context, foreign investors still own over 30% of their portfolios in financials and are seemingly overweight.
Indian companies have built cost structures for 8-9% GDP growth. With growth likely to be 6% or less, a major cost-cutting initiative is needed to prevent a collapse in earnings. The pace and extent of corporate sector operational de-leveraging will likely determine how much earnings could fall. We expect broad market earnings to fall by 25% in F2010 with risks to the downside depending on global growth and election results.
Finally, a bad election result could therefore trigger a rating downgrade given the fiscal position and lead to further pressure on the currency.
Morgan is of the view to SELL the rally. We are not sure of SELL but don't BUY yet or selectively 10% of your investment capacity as bargain hunting :-)
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Published by Webmaster @ 9:49 AM IST.
Real Estate Companies still in a Risky Business Model
Tuesday, March 17, 2009
In the present credit crunch, investors seem to be more concerned about pressure on corporate balance sheets than on earnings. BNP Paribas has done an excellent research to estimate the risk to companies' debt servicing capabilities and the risk to companies' capex targets under various scenarios of revenue and cash flow decline (5% to 30% decline) from base case estimates.
Naturally, a company that faces risk to debt servicing under a scenario of 5% revenue decline from our estimates is more risky than a company that faces similar risk at 30% revenue decline scenario.
Companies facing potential risk to debt servicing: MOST RISKY In order of declining risk, HDIL [Highest], Unitech, Aban Offshore, DLF, JSW Steel and Tata Steel. Some of these companies turn into hypothetical defaulters under extreme assumptions though. For JSW and Tata Steel to become defaulters, revenue estimates in FY10 would have to decline 20% and 30% respectively.
In the second category - the risk of reducing capex - there are 12 companies. Naturally, the six companies facing debt servicing risk face the risk of cutting capex also. The additions are - IndiaBulls Real Estate, Tata Power, Punj Lloyd, Glenmark, GSPL and Great Offshore.
Finally, the report highlights 15 stocks that face the risk of breaching their debt covenants. We must reiterate, however, that except for Suzlon and Tata Steel, the judgement is based on "average industry standards" of debt covenants. new entrants in this list are - Reliance Power, GMR, Tata Communications, Hindustan Constructions and Shiv-bani oils.
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Published by Webmaster @ 9:01 PM IST.
IT Services Revenue decline more probable now - Morgan
Thursday, March 12, 2009
Investors have so far focused on risk to pricing, but a reset of volumes could surprise on the downside. Morgan Stanley says cases of banks resetting overall portfolio spending on offshore vendors, leading to significant cuts in offshore spending. Resetting business volumes with existing clients is the biggest concern for IT vendors. Lower budgets and rationalization of portfolios is on the cards of major FIs.
Although companies have been able to maintain pricing for contracts so far, rates could come under severe pressure if overall volumes were to contract. Vendor consolidation could benefit select companies.
While consensus still expects revenue growth for the sector in FY2010, the outlook is turning tougher than anticipated, and forecast an organic revenue decline of 5-20% yoy across the board. Cost analysis: Infosys as a benchmark to estimate the buffer due to lower costs.
Morgan is reducing earnings estimates for large caps and now forecast 4-5% US$ revenue decline for Infosys and TCS and 13-21% lower revenue for the small/mid-cap vendors in our coverage universe.
Overall, Morgan Stanley is downgrading TCS, Tech Mahindra, and Hexaware to UnderWeight and maintaining our Cautious industry view.
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Published by Webmaster @ 12:24 PM IST.
Diminishing capital flow Implications on Economy
Wednesday, March 11, 2009
The spectacular rise in capital flows from FY05 (fiscal year ending March 2005) had significantly reinforced India's growth and asset price cycles. The termination of this episode of strong capital flows, a fall-out of the current global credit crisis, is unleashing a significantly more challenging macro environment characterised by lower growth, structural fiscal deterioration and constrained liquidity.
India's medium term potential growth rate should shift to a lower trajectory of 6.5% from the lofty 9% averaged during FY05-09. Tighter availability of external financing, greater pre-emption of domestic resources by the government and more normalised asset prices will constrain faster growth.
Subdued revenue collections coupled with recalcitrant expenditures imply a medium term fiscal deterioration and a higher level of borrowings. In the absence of sizeable capital flows, domestic bond yields are set to back up from the unusually low levels over the last five years.
Slower growth implies a more moderate earnings cycle while diminished excess liquidity will weigh on valuations. The era when Indian equities were acceptably the most expensive in emerging Asia is now behind us.
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Published by Webmaster @ 12:41 PM IST.
Sterlite - Asarco Deal - Analysis and Ratings
Monday, March 09, 2009
Sterlite announced that it has signed a revised agreement to acquire the operating assets of Asarco for US$1.7bn in cash, with US$1.1bn payable on conclusion of the transaction which the company expects in the next 4-5 months, and the balance US$600mn payable in installments over nine years. Sterlite had net cash of only Rs 44 bn (US$900 mn) at the standalone level at 3Q09 end.
The assets include three open-pit copper mines, a copper smelter and down stream units. In 2008, Asarco sold 237kt of refined copper and reported revenue of US$1.9 bn, and PBT of US$393mn.
Merger and Operations:
As per the Sterlite management, Asarco's production cost currently is about US$3,100/t, which it hopes to be able to cut by 15-20%. Sterlite also plans to enhance production from the current level of about 200kt to about 270kt. Asarco's copper reserves are estimated by the company to be about 5 mt.
Earnings Estimates:
Credit Suisse estimates EPS to be Rs 42.4 for FY10 and Rs 59 for FY11 with a OVERWEIGHT Rating driven mainly by zinc and the power divisions,and a Target price of Rs 500. [Post Asarco Acquisition, target price maybe cut by Rs 100]
Morgan Stanley estimates EPS to be Rs 37 for FY10 and Rs 52 for FY11 with a EQUALWEIGHT Rating and a Target price of Rs 275. [Excludes Asarco earnings]
Citi expects Copper Prices to Average less than $3,000 in FY09-10 and hence expects Sterlite's EPS to be Rs 28 and Rs 46 for FY10-11. Maintain a SELL Rating with a target price of Rs 235. [Excludes Asarco earnings]
Goldman Sachs previously has BUY ratings and maintains the same.
Our Views:
If you are holding the stock, you should continue to HOLD as Copper prices may FALL as expected by Citi, but China is a BIG BUYER and we don't expect them to crash below $3,000 levels. Long Term Investors can add the stock around Rs 200 or below as commodity demand will certainly come back in 3 years.
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Published by Webmaster @ 10:47 PM IST.
Jai Corp Scam - II Anand Jains Office + Residence - Raided
Friday, March 06, 2009
The Indian Income Tax Authorities have simultaneously raided the offices of Jai Corp Ltd and its Chairman - Anand Jain's residence as well. Various press reports indicate that the raid was conducted due to Large amounts of Land Dealings which are shady [Ofcourse Real Estate in India is nothing but a parallel black money economy]The Income Tax officials have recovered bills which, according to some sources, are bogus and created for the purpose of generating cash for making payments on land deals. The purpose of the investigation is to trace the origin of what I-T officials describe as the cash flow. Jai Corp investors feel cheated by such promoters in the driving seat where money is laundered openly and there is absolutely no corporate governance.
We had written in Jan-09 about the price rigging scam in Jai Corp Stock and don't you think that SEBI and the Govt lack the will to investigate this matter.
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Published by Webmaster @ 9:13 AM IST.
Impact of RBI Repo Rate Cut
Thursday, March 05, 2009
RBI has reduced the Repo and Reverse repo rate under LAF window by 50 bps each to 5.0% and 3.5%, respectively with immediate effect.
The cut in policy rates by 50 bps each is likely to signal the banks to reduce their lending rates. The reverse repo rate 3.5% would make it less attractive for banks to park money with the RBI.
Now question arises - Can we expect rates to come down dramatically?
We don't think so! The reduction in lending rate has to be accompanied by the reduction in deposit rates. The deposit rates are less likely to come down unless yields on Gsec would also come down from here-on. However, higher government borrowing program is increasing the supply of government paper and thus pushing the yield higher (i.e. prices of bond going lower). In the environment where other avenues like small saving schemes and PPF are offering higher rate, it would be difficult for the banks to reduce the deposit rates.
The banks have also become risk-averse and are going slow on lending to mid-size corporate on fear of defaults and increasing bad loans. This has made the corporates raise money by means of deposit where rates are way too higher compared to Government backed security / instrument yields.
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Published by Webmaster @ 9:58 AM IST.
Indian Auto - February sales a short-term boost - poor visibility
Wednesday, March 04, 2009
Strong farming income, especially in northern India, and the ongoing wedding season boosted "two-wheeler" (motorcycles, scooters) sales. Hero Honda was the key beneficiary - sales volumes in February were up 24% y-o-y. We expect sales to be aided by elections, which will be held during April-May. However, the outlook remains bleak on exports; Bajaj Auto saw its exports decline 20% y-o-y.
Car makers also benefited from implementation of the Sixth Pay Commission recommendations in October 2008. Maruti Suzuki was the key gainer; the central government employees' contribution doubled to 15% of its sales in January 2009. However, as the initial euphoria fades, maintaining growth will be difficult, we believe, especially as macro factors remain uncertain.
Truck sales were hit by the non-availability of cargo. Medium and heavy truck sales fell 48% at Tata Motors. We may see marginal recovery in truck sales in March, as some operators may buy trucks to claim benefits from the accelerated depreciation scheme.
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Published by Webmaster @ 7:58 AM IST.
India's Budget + Current Account Deficit Problems
Monday, March 02, 2009
India's Current Account Deficit
Based on data for the first half of 2008/09, India's current account looks to be heading for a fiscal year deficit of more than 3% of GDP. This would match
the highest ever shortfall since the data began in 1950/51.
During India's Balance of Payments crisis, the peak full year deficit was 3% of GDP in 1990/91. The recent deterioration reflects the previous period of above-trend growth as well as the earlier oil price surge. The good news is that the external deficit is now significantly better covered by foreign exchange reserves. In 2008/09 we expect FX reserves to be equivalent to 10-11 months of imports, while in 1990/91 it averaged 1.9 months with an low of just three weeks.
Budget Deficit:
India’s other deficit, the government budget, is likely to prove a bigger problem. In 08/09, we expect the central government deficit to hit 6.3% of GDP, with the state deficit at 3.5% of GDP, giving an overall figure of 9.8%. Such high deficits are threatening India's sovereign credit rating, which is only one notch above non-investment grade, and it will be left to the next government to bring the deficit to sustainable levels. In so doing, the 9% of GDP infrastructure spending objective is likely to be missed by a wide margin.
Lastly, GDP surprised hugely on the downside in fiscal Q3, with year-on-year growth slowing to 5.3% (the weakest since Jan-March 2003.
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Published by Webmaster @ 4:45 PM IST.
Reliance - RPL Merger Deal Analysis
FreePress broke the news this morning about 1:16 swap ratio for RPL merger into RIL. RIL will extinguish the treasury stock from the merger and issue additional 69 mn (4.4% of current RIL share base) for minorities in RPL.
Analysis of the Deal:
It gives RIL access to about US$1.5 bn-US$1.8 bn of RPL's annual cash flows (on full ramp up) for its various planned projects. Further, the consolidated entity, with 1.24 mn b/d of refining capacity, would have more leverage in crude sourcing, exporting products and also managing refinery utilization during the cyclical downturn without governance issues.
Chevron's exit will give RIL's promoters full control of the future direction of the company. The merger will aalso see, operational synergies, saving of indirect taxes and potential dividend distribution tax (contingent upon the structure of Petroleum Trust) from the amalgamation are likely to offset the marginal dilutive impact.
Post-merger, RIL's consolidated EPS is expected to be Rs 109 for FY10 and Rs 128 for FY11. With a forward valuation of 10x its earnings, the stock appears to be fully priced as there are better bargains available in the market today. Citi expects RIL's consolidated EPS to be Rs 130 and Rs 160 for FY10 and FY11 which is extremely optimistic in our view considering the GRMs and crude oil prices.
[Will shortly unveil a separate Research Section, with all the updates to help you make your own decision.]
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Published by Webmaster @ 1:29 PM IST.
