Monday, January 21, 2008
Biggest Fall of Indian Stock Market
Sensex fell over 1300 points in a single biggest fall of the Indian Sensex Market. Most of the shares were in the negatives and were 10-30% down. Nifty closed at about 5250
Invest in commodities to maximise gains
Material Girl Madonna, may perhaps have been right in crooning that we are living in a material world, way back in 1985. With the prices of most commodities escalating in ’07, it looks like the lyrics have finally touched base.
“Commodities are so pervasive that you cannot be a successful investor in stocks, bonds or currencies without understanding commodities,” says Jim Rogers in his book ‘Hot Commodities’. And indeed, truth couldn’t have been any different. 2007 showed how wild gyrations in commodity prices can hit the bottomlines of companies, prompt governments to change trade policies and even make money for a truly diversified investor.
Several commodities like gold, crude oil, wheat, soya bean and palm oil hit all-time high price levels in ’07. Leading global commodity indices have generated faster returns (in some cases more than double) in the past one year, against gains made over the past five years.
For instance, the S&P Commodities index returned 32.5% last year, against a gain of only 11.7% over the past five years. In this edition, IG takes stock of the eventful year gone by and tries to peer into what ’08 holds for the hot commodity market.
The Agri Sector : The bullish performance in the past two years has ensured that agri-commodities won their due place in a fund manager’s portfolio. ’07 can clearly be called the year of agri-commodities, as prices of most commodities, including wheat, soya bean, corn, soya oil and palm oil, soared to more than 20-year highs. Barring sugar, most of the widely consumed commodities delivered handsome gains to their investors. Increased liquidity finally forced fund managers across the globe to discover undervalued assets in this sector.
Wheat: The prices of wheat — one the world’s most consumed grains — doubled to $10 per bushel in the past one year on the Chicago Board of Trade (CBOT). A fall in production in major producing countries, accompanied by rising demand, has been one of the major reasons for its meteoric rise. Besides the demand-supply mismatch, the role of hedge funds in pushing up prices cannot be undermined.
Global climate change has had an adverse effect on agri produce. Droughts in Australia and dry weather in the corn and wheat-growing belts of the US and South America have led to a fall in output of feed grains like wheat, corn and sorghum.
Economic prosperity in emerging economies gradually leads to increased consumption of starch-based items like breads and cakes due to the rise in purchasing power. Supply in these countries lags demand, fuelling the rally in wheat prices. To encourage production, countries like India have increased the minimum support price (or subsidy) of wheat to Rs 1,000 per quintal.
The situation isn’t likely to improve immediately, as it takes at least a couple of crop cycles for supply to catch up with the demand. Consequently, the rally in wheat is likely to continue this year.
Although trading in wheat futures has been banned in India, any rise in prices spells bad news for companies in the food industry, as wheat is an important raw material in most food products. Packaged food producers including Britannia, ITC and Nestle, for whom wheat and wheat-based products are the basic raw materials, face a direct hit on their bottomlines due to any big jump in wheat prices.
Source : Economic Times, 21 Jan 2008
“Commodities are so pervasive that you cannot be a successful investor in stocks, bonds or currencies without understanding commodities,” says Jim Rogers in his book ‘Hot Commodities’. And indeed, truth couldn’t have been any different. 2007 showed how wild gyrations in commodity prices can hit the bottomlines of companies, prompt governments to change trade policies and even make money for a truly diversified investor.
Several commodities like gold, crude oil, wheat, soya bean and palm oil hit all-time high price levels in ’07. Leading global commodity indices have generated faster returns (in some cases more than double) in the past one year, against gains made over the past five years.
For instance, the S&P Commodities index returned 32.5% last year, against a gain of only 11.7% over the past five years. In this edition, IG takes stock of the eventful year gone by and tries to peer into what ’08 holds for the hot commodity market.
The Agri Sector : The bullish performance in the past two years has ensured that agri-commodities won their due place in a fund manager’s portfolio. ’07 can clearly be called the year of agri-commodities, as prices of most commodities, including wheat, soya bean, corn, soya oil and palm oil, soared to more than 20-year highs. Barring sugar, most of the widely consumed commodities delivered handsome gains to their investors. Increased liquidity finally forced fund managers across the globe to discover undervalued assets in this sector.
Wheat: The prices of wheat — one the world’s most consumed grains — doubled to $10 per bushel in the past one year on the Chicago Board of Trade (CBOT). A fall in production in major producing countries, accompanied by rising demand, has been one of the major reasons for its meteoric rise. Besides the demand-supply mismatch, the role of hedge funds in pushing up prices cannot be undermined.
Global climate change has had an adverse effect on agri produce. Droughts in Australia and dry weather in the corn and wheat-growing belts of the US and South America have led to a fall in output of feed grains like wheat, corn and sorghum.
Economic prosperity in emerging economies gradually leads to increased consumption of starch-based items like breads and cakes due to the rise in purchasing power. Supply in these countries lags demand, fuelling the rally in wheat prices. To encourage production, countries like India have increased the minimum support price (or subsidy) of wheat to Rs 1,000 per quintal.
The situation isn’t likely to improve immediately, as it takes at least a couple of crop cycles for supply to catch up with the demand. Consequently, the rally in wheat is likely to continue this year.
Although trading in wheat futures has been banned in India, any rise in prices spells bad news for companies in the food industry, as wheat is an important raw material in most food products. Packaged food producers including Britannia, ITC and Nestle, for whom wheat and wheat-based products are the basic raw materials, face a direct hit on their bottomlines due to any big jump in wheat prices.
Source : Economic Times, 21 Jan 2008
TCS Update
Tata Consultancy Services
Research: Citigroup
Rating: Buy CMP:Rs 904
Tata Consultancy Services’ (TCS) third-quarter revenues of $1.5 billion were below the expectation of $1.53 billion, but net profit at Rs 1,330 crore was higher than the expectation of Rs 1,300 crore. The company’s EBIT margins were up 33 basis points (basis) q-o-q. Its revenue growth comprises 5.3% volume growth and 0.5% pricing increase q-o-q. TCS’ North American revenues increased 1% q-o-q. With a challenging macro-environment, this remains the key investor concern. Banking, financial services and insurance (BFSI) revenues increased 7% q-o-q — higher than the company average. BFSI revenues have grown better than the company average for both Infosys Technologies and TCS. TCS hired 8,000 employees in the quarter (lower than the indicated number of 9,000). However, the management maintained its earlier guidance for full-year hiring at 32,500 and indicated that budget discussions with clients do not indicate any weakness in demand. TCS is pursuing around 25 large deals. However, given the negative macro news, it continues to monitor its outlook and has a cautiously positive view on demand. The slowing US economy and its impact on demand for IT services continue to pose concerns for investors. Citigroup continues to believe that Tier-1s are better-placed. TCS stock trades at 15x FY09E.
Research: Citigroup
Rating: Buy CMP:Rs 904
Tata Consultancy Services’ (TCS) third-quarter revenues of $1.5 billion were below the expectation of $1.53 billion, but net profit at Rs 1,330 crore was higher than the expectation of Rs 1,300 crore. The company’s EBIT margins were up 33 basis points (basis) q-o-q. Its revenue growth comprises 5.3% volume growth and 0.5% pricing increase q-o-q. TCS’ North American revenues increased 1% q-o-q. With a challenging macro-environment, this remains the key investor concern. Banking, financial services and insurance (BFSI) revenues increased 7% q-o-q — higher than the company average. BFSI revenues have grown better than the company average for both Infosys Technologies and TCS. TCS hired 8,000 employees in the quarter (lower than the indicated number of 9,000). However, the management maintained its earlier guidance for full-year hiring at 32,500 and indicated that budget discussions with clients do not indicate any weakness in demand. TCS is pursuing around 25 large deals. However, given the negative macro news, it continues to monitor its outlook and has a cautiously positive view on demand. The slowing US economy and its impact on demand for IT services continue to pose concerns for investors. Citigroup continues to believe that Tier-1s are better-placed. TCS stock trades at 15x FY09E.
Petronet LNG Research:Credit
Petronet LNG Research:Credit suisse
RAting:Underperform
CMP:Rs 102
Credit Suisse maintains ‘underperform’ rating on Petronet LNG. The company’s third-quarter earnings were ahead of expectations due to income on sales to Ratnagiri Gas and Power (RGPPL, erstwhile Dabhol). While Petronet LNG imposes re-gasification tariff on the 5 million tones (mt) from RasGas, it has a fixed price contract for the supply of 1.5 mt of re-gasified LNG to RGPPL till December ’08, with the ability to keep any upside due to lower procurement costs and efficiency. Of the 1.5 mt committed, 1.25 mt will be sourced from RasGas, while the rest will be sourced on spot — this 0.25 mt is where Petronet LNG sees benefits of lower sourcing costs. Total regasified volumes declined 3.5% quarter-on-quarter (q-o-q), but earnings per share (EPS) increased by 13%. The momentum in earnings is likely to continue. Increase in regasification capacity at Dahej and the new facility at Kochi are likely to contribute to growth in earnings. However, with significant new domestic gas discoveries, utilisation levels may fall, without which, current valuations seem stretched. Petronet LNG aims to diversify into power generation, but this has not been finalised as yet.
RAting:Underperform
CMP:Rs 102
Credit Suisse maintains ‘underperform’ rating on Petronet LNG. The company’s third-quarter earnings were ahead of expectations due to income on sales to Ratnagiri Gas and Power (RGPPL, erstwhile Dabhol). While Petronet LNG imposes re-gasification tariff on the 5 million tones (mt) from RasGas, it has a fixed price contract for the supply of 1.5 mt of re-gasified LNG to RGPPL till December ’08, with the ability to keep any upside due to lower procurement costs and efficiency. Of the 1.5 mt committed, 1.25 mt will be sourced from RasGas, while the rest will be sourced on spot — this 0.25 mt is where Petronet LNG sees benefits of lower sourcing costs. Total regasified volumes declined 3.5% quarter-on-quarter (q-o-q), but earnings per share (EPS) increased by 13%. The momentum in earnings is likely to continue. Increase in regasification capacity at Dahej and the new facility at Kochi are likely to contribute to growth in earnings. However, with significant new domestic gas discoveries, utilisation levels may fall, without which, current valuations seem stretched. Petronet LNG aims to diversify into power generation, but this has not been finalised as yet.
Tata Steel Update
Tata Steel
Research:Merrill lynch
RAting:buy
CMP:Rs 782
Merrill Lynch estimates that Tata Steel is trading at 7.8x FY09E. This is at a 38% discount to Steel Authority of India (SAIL), its closest Indian peer, and in line with Arcelor Mittal, its closest European peer. Tata Steel’s stock price already discounts Corus’ lack of raw material integration, but it ignores the potential upside from synergy benefits which will unfold over the next 12-18 months. Steel prices are likely to rise 6-7% in FY09 in India and Europe.
This will be just about adequate to pass on the higher iron ore and coking coal costs. Notwithstanding fears of a US slowdown, recent positives such as inventory restocking in the US, expectations of higher export taxes in China and continuing strong demand in China and India may boost steel price outlook. Merrill Lynch estimates that a 1% change in steel price may increase Tata Steel’s EPS by 9%. Tata Steel’s high risk profile (owing to lack of raw material integration) is cushioned by potential synergies to some extent. Merrill Lynch has built in synergy benefits of $150 million in FY09E.
This amounts to 3% of the group EBITDA. The management has indicated synergy benefits of over $450 million over the next three years. There is potential for upside on the synergy benefit. However, the key risk is that steel prices may increase less than Merrill Lynch’s forecast of 6-7%. In addition, recent media reports indicate that iron ore prices may increase by 70%.
Research:Merrill lynch
RAting:buy
CMP:Rs 782
Merrill Lynch estimates that Tata Steel is trading at 7.8x FY09E. This is at a 38% discount to Steel Authority of India (SAIL), its closest Indian peer, and in line with Arcelor Mittal, its closest European peer. Tata Steel’s stock price already discounts Corus’ lack of raw material integration, but it ignores the potential upside from synergy benefits which will unfold over the next 12-18 months. Steel prices are likely to rise 6-7% in FY09 in India and Europe.
This will be just about adequate to pass on the higher iron ore and coking coal costs. Notwithstanding fears of a US slowdown, recent positives such as inventory restocking in the US, expectations of higher export taxes in China and continuing strong demand in China and India may boost steel price outlook. Merrill Lynch estimates that a 1% change in steel price may increase Tata Steel’s EPS by 9%. Tata Steel’s high risk profile (owing to lack of raw material integration) is cushioned by potential synergies to some extent. Merrill Lynch has built in synergy benefits of $150 million in FY09E.
This amounts to 3% of the group EBITDA. The management has indicated synergy benefits of over $450 million over the next three years. There is potential for upside on the synergy benefit. However, the key risk is that steel prices may increase less than Merrill Lynch’s forecast of 6-7%. In addition, recent media reports indicate that iron ore prices may increase by 70%.
Sensex Update - Caution
Weak hearted Please exit... as the market will see very heavy volatility.....
OPen hearted stay invested. All stop losses must be triggered, if not exited stay for atleast 2 months for this recovery to happen...
OPen hearted stay invested. All stop losses must be triggered, if not exited stay for atleast 2 months for this recovery to happen...
Cni Economist sets Sensex target 30 K in 2008
Endorsing our economists view that interest rate cut is really harmful for US currency, a Chinese finance official wrote in a commentary Thursday in an official newspaper that Further cuts in U.S. interest rates would have a "harmful effect" on the dollar and the international finance system.
The dollar's fall against many currencies has prompted investors to sell dollar-denominated assets, Hu Xiaolian, director of the State Administration of Foreign Exchange, wrote in the Financial News, a newspaper published by the central bank.
"If the (U.S.) federal funds rate continues to fall, this will certainly have a harmful effect on the U.S. dollar exchange rate and the international currency system," Hu wrote.
Financial markets closely watch official Chinese comments on the dollar because Beijing keeps a large portion of its $1.4 trillion in reserves in U.S. Treasury securities and any change in China's investment strategy could affect exchange rates.
Despite his warning, Hu wrote, "the U.S. dollar's dominant position in international currency markets is unlikely to change in the near term."
The U.S. Federal Reserve has lowered its federal funds rate, the interest that banks charge each other for overnight loans, to 4.25 percent, a full percentage point lower than it was in September, to ease a credit crunch in the U.S. financial system.
Chinese officials have said that cutting the rate could encourage investors to move money to Asia or elsewhere in search of better returns, which could depress the dollar.
We therefore continue to believe that Rupee is heading to 35 in next 12 months hence avoid going long in tech stocks. This view has now been echoed by a foreign broking house siting rupee peg rate at 33 in 12to 18 months. It is well known in the industry circles that Infosys, TSC and Wipro have fully geared up to tackle with rupee 33 levels which tosses the probability of in favour of at least 35.
This is more significant to assess the destination of Indian capital market. If rupee is slated to rise to 35 levels and foreign funds started to believe this then the flow of funds in the coming months will exceed 2007’s flow by at least 3 times.
The precise reasons for expecting huge inflow are ……
Thailand not doing well and the unrest in Pakistan gives rise to the oil tensions and as result there will be flight of capital from GULF regions which is cash flush.
US economy though for sure has bottomed out and heading for 16000 DOW in just next 3 to 6 months, will not give as much returns as India is giving and hence FII would pull in more money in India.
The FUND psychology is that invest in stock which has outperformed rather than performing one similarly invest in a country which has outperformed rather in performing one. India fits in that category. Though Sensex has performed smartly the individual stocks have really out numbered the performance of Sensex.
There will be first time departure of huge allocation to India which will be 50% higher than earlier years from the funds which were hugely affected by sub prime in US. The ROI in India is so great that the hopes of mitigating entire losses only from India is not ruled out.
Apart from the same, on domestic front 2 losses in Gujarat and Himachal Pradesh and a probable loss in Rajasthan makes Indian politics a good case of stability. Ruling party as well as LEFT would stay cool for the remainder period which offers a good platform for 2008.
The reflection of good monsoon will start visible from JAN and very soon the GDP projections of 10% will feel visible like the way the revenue targets set by the Indian Finance Minister. Farm growth is likely to exceed 5% by March 08 and Budget will find more provisions to target the same at 6% next year. The day is not far when we can see 7 to 8% farm growth. This will lead to more GDP re rating.
The huge inflow have opened the flood gates of infrastructure in India which will lead a massive rise in per capital income at macro level which in turn give boost to savings as well as domestic consumption cycle.
We have reasons to believe that funds expected to creep in this fiscal could be as high as 35 bn USD which is sufficient to take the Sensex to 30 K even on expanded base of 20 K.
The statistics suggest that only 1% of Indian population invest in equity so far which we think will rise to at least 3% by 2010 which means the savings will travel into capital market from every nook and corner. We had predicted 2 years back that daily turnover will ride over Rs 1 lac crs which has now become realty and we pledge on the volumes rising to 2 lac crs in another 2 years which is just not possible if the 3% criteria is not met. In fact, this is the reason the broking is getting huge valuations which is really unprecedented but fact remains. Investors should really look at investment opportunities portals such as travel, finance, marketing, retail, c to c and b to b which will give stunning returns in next 3 years.
The level of domestic consumption is becoming aristocrat tipping point which is making all MNC especially US and Japanese to go ahead and sign with Indian partner however small he is because they have learn only one thing that there is no way to capture Indian market on its own in the shortest possible time and hence enter through vehicles.
This is boosting the confidence level of Indian industrialists which is visible from huge capex lined up in various sectors. The impact of the capex is yet to be felt.
The bottom line is if 20 K was the answer of 2007 30 K could be of 2008 and the sectors will be capital goods, power, power equipments, civil aviation, auto, auto ancillary, metal, mining, media, print media, research firms, insurance , internet content firms , realty, glass, education, gas distribution, road and port logistics, seeds, fertiliser, sugar etc
Sectors to avoid are cement, tech, textile, only export dependent cos.
Pros and cons of RELP issue.....
Saturday, January 19, 2008
REL Power subscribed 72 times as per official records till yesterday though the final call could be 80 times after the upcountry collections are counted. This has garnered close to never seen before historical Rs 10 lac crores. The issue was for Rs 11900 crs and the issue price as Rs 450 per share.
The equity capital as on March 2007 was Rs 200 crs as on Sept 2007 was Rs 2000 crs and post IPO will be Rs 2260 crs.
What is interesting to note that the corporate action will require 26 days whereas the funds garnered will vest with banks on behalf of the co for at least 21 days which is entitled for short term interest. Assuming that the short term interest rate is 7% co will get close to 3000 crs only as interest which is Rs 13 per share.
The premium in the gray market collapsed from Rs 450 pre IPO to Rs 290 yesterday which is giving an indication of listing price of Rs 825 to 850 band. Those who have heavily traded in the gray market will have to report all the trades on the first day of listing. The listing day can’t generally favour the traders in gray market and therefore even at Rs 825 levels they will lose money.
Alternatively the costing of IPO too comes very close to Rs 800 and hence most of the investors in the IPO will be looking for a desperate exit on listing day between Rs 825 to Rs 850 which given a return of 3 to 5%.
Though this is the flip side, there is also a big positive.
Apart from interest factor, the refund of close to 9 lac crores will be redeployed in the market either for buying RELP shares or any other value shares which is available to FII due recent crash of over 10% in the Sensex.
Even if it is assumed that fresh new money has entered for this issue, this simply represents the fresh allocation for India through back door. This hot money will go back and will remain for the disposal of the capital market. This will also help the immediate issues lined up such as SBI in FED plus accumulation through open market route.
We had seen this happening in ONGC the then biggest issue then in DLF where nobody even believed that it would touch Rs 600 and the stock price went on to touch Rs 1200 due to the hot money allocated by FII.
In all fairness the correction is a welcome sign and if market falls by another 500 points it could more ideals but it seems it never happens in market.
To time the market is the most unpredictable job and when market falls like this all wait for further fall which never happens. The liquidity is fairly large and as seen the RELP refund could add 150 to 180 bn USD liquidity to the capital market which is sufficient to take SENSEX past 30K. This will mitigate partially the losses of sub prime written down overseas.
The study of past three years suggests, FII could enter markets at the bottoms because of the mental block and human psychology. They tried at 8900 but failed, they tried at 12300 again failed they tried at 14000 again failed the only lesson they learn after 15000 from where they took it t0 18000 in shortest possible time.
This time too if they do not come of caves and take a bold call on stocks of their choice, we are sure they will come back at 22000 to invest heavily in this very market.
Facts and figures in derivatives suggest that nothing serious has happened for investors and barring profit booking in bits and pieces, they exit has been made from India. It is also unlikely for next couple of years and hence this correction is similar to all previous corrections ( V shaped ) which require not to boil your blood in haste.
If you have digested the pain of 2000 odd points, be prepared for another 500 points at the most and then see the BRIGHT sun shine coming back to fore. This is the best time smart investors who take huge call on select stocks should come out in open without waiting actions from FII and start calling their shots.
This is the first severe correction of 2008. There could be many more which suggest investors should go overboard to the extent of only 50% in normal markets and 100% in times like this.
Subscribe to:
Comments (Atom)