Reliance Industries: We have reduced our target price for Reliance by Rs850/share to Rs2550/share by cutting valuation estimates across the core business (Rs188/share), investments (Rs422/share) and E&P (Rs240/share). We are also changing EPS estimates for FY08-10CL. Even after the downgrade, our target price builds in Rs653/share in E&P upside implying that new discoveries will justify rather than add to valuations. The stock's 32% correction from its peak has now pushed earnings based valuations, however, to within 5% of the peer group range. O-PF.
IT Services: IT companies under our coverage have ~US$5bn+ of net cash assets. Infosys at US$2bn and Satyam at nearly US$1bn lead the absolute scales, while Patni and Hexaware (both beaten down massively off late) top net cash as a share of market capitalization. Why is the market not biting the bait? In our view, Indian IT companies have shown scant interest in elevated dividend payouts and buy-backs, even as some announced buybacks are yet to commence. Meanwhile, the "risk" of cash backed inorganic growth moves remains alive. Deteriorating fundamentals on demand have pushed aside the cash buffer further, and while a revival in cash rich stocks can be swift, this will first need a fundamental kicker.
6th Pay Commission- modest increases recommended: The 6th Pay Commission has submitted its report to the Finance Minister. The government will consider the recommendations and we expect the implementation of revised pay scales to happen during FY09. The Commission's recommendations imply a modest 10% rise in the central government's annual outgo on salaries and pensions. The impact of the revised pay scales will be contained at 0.35% of FY09 GDP, even accounting for arrears due from 1 Jan 2006. If the government were to adopt the Commission's recommendations in toto, it will send out a positive signal on fiscal discipline.
India Morning Headlines
q ICICI Bank has entered into a Rs11.5bn equity-cum-debt deal with Jaypee Infratech which will be building the Taj Expressway (ET)
q Reliance Industries has decided to shut down all petroleum retail outlets owned by it directly, because of surging crude prices and absence of government subsidies (ET)
q Tata Motors is likely to sign the Jaguar –Land Rover deal with Ford on March 26th (ET)
q GMR has sought government permission to develop 60 acres of land available at the site of old Hyderabad airport (ET)
q Reliance Industries is reportedly evaluating a plan to setup its third refinery at Jamnagar (BS)
q Tata Motors –Fiat JV, is planning to invest Rs23.41bn to expand its Pune facility (ET)
q US Food and Drugs Administration (USFDA) has asked Caraco Pharmaceuticals Laboratories, subsidiary of Sun Pharmaceuticals to withdraw many batches of its generic Metformin Hydrochloride tablets used for treating diabetes, citing efficacy and quality issues (BS)
q Welspun Gujarat has bagged Rs10.75bn order for pipes from North Africa taking (BS)
q Ranbaxy Laboratories , Cipla and Aurobindo Pharmaceuticals are likely to submit bids for US$200m tender floated by South African government to supply anti-HIV drugs (ET)
q SEBI has passed an order warning Zee Telefilms and its promoters after discovering that Ketan Parekh entities indulged in manipulative trading in various scrips by using funds given by the Essel group. (BS)
q BPCL and GAIL will be floating a JV –Go Gas, for marketing compressed natural gas (CNG) and piped gas in Kerala and Karnataka (BS)
q Aurobindo Pharma has taken over Italian operations of TAD Pharmaceuticals (DNA Money)
q 6th Pay Commission has recommended pay hikes in the range of 20-40% for central government employees at various levels with effect from January 1st, 2006 (ET)
q Bombay High Court in an order has held that developments on more than 1,000 acres of land in the suburbs of Mumbai as illegal, being located on declared forest land (BS)
q Steel makers have indicated that they are willing to reduce the steel prices if the government reduces the excise duty from existing 12% to 6% (ET)
q Mumbai Income Tax Appellate Tribunal has held that the amount received on redemption of stock appreciation rights (SAR) by an individual is taxable as salary (ET)
q NHAI has projected an expenditure of Rs280bn for 2008-09 to complete its ongoing projects and the new projects announced under NHDP (BS)
q Ministry of Civil Aviation has asked the developers of Hyderabad airport to ensure that user development fees (UDF) being levied on international passengers does not exceed Rs1,000 (BL)
q Government is considering abolition of import duty on all grades of steel (FE)
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