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T
I
M
E
S
A TIME COMMUNICATIONS PUBLICATION
VOL. XVII No. 34
Monday, July 7 - 13, 2008
Pages 22
Lower levels tested with ease
By Sanjay R. Bhatia
The markets continued their negative trend last week due to weak global cues, spike in crude oil prices and political
uncertainty. However, occasional bouts of flare up were seen on the back of short covering as Nifty Futures traded at a
large discount to Nifty Spot. Traders and speculators were seen building fresh short positions at high levels while short
covering at lower levels and booking profits at regular intervals. The volumes recorded remained marginally good,
amidst negative breadth. Incidentally, FIIs remained net
sellers in the cash segment but were net buyers in the
derivatives segment due to short covering. Mutual Funds,
too, remained net buyers during the week.
The global cues continued to remain negative. Crude oil
has once again spiked above the $145 per barrel due to
low inventory data and geopolitical concerns in the
Middle East. Crude looks in all likelihood to cross the $150
per barrel mark. The European Central Bank raised its key
interest rates by 25 bps in its attempt to control the rising
inflation. Global markets continued to react to mixed
economic signals from the US economy and the rising
crude prices.
The domestic markets continued to display a negative
trend as we have been indicating, in the last few sessions and has been regularly testing the lower levels with ease. The
current rise in crude prices, the rising inflation, concerns over further monetary tightening and the political turmoil due to
the nuclear stand-off, have all contributed to the negative sentiment. The fund flows have remained weak with regular
selling by FIIs.
Now it is important that markets consolidate at present levels and fund flows improve. The quarterly results to be
declared in the next few days is the only domestic trigger that could cheer the markets with positive surprises. In the
meanwhile, the markets would continue to take cues from global markets and crude prices. Updates on the progress of
the monsoon would also impact the market sentiment along with the inflation numbers.
The Sensex has support at the 12884 and 12300 levels. On the upside, the Sensex faces resistance at the 13779 and 13989
levels. Similarity, 3750 and 3550 are the important support levels for the Nifty. On the upside, the Nifty faces resistance at
the 4108 and 4482 levels.
Traders and speculators could sell Tata Steel, with a stop loss of Rs.660 with a target price of Rs.590-575.
1
Crucial test!
By Fakhri H. Sabuwala
The market amidst its wild swings of short selling and short-covering is undergoing some crucial tests and may be in the
final leg of its downward fall. The Sensex may have breached the 13000 mark but that seems to be restricted to the 30
Sensex scrips as the rest of the scrips have lost anywhere between 50% - 80% from their recent tops. 2008 may go down as
the year in which the differences in the scrips' high and low would be the maximum.
Amidst all this some die-hard optimists still find value and see a ray of hope at the end of the tunnel while the prophets of
doom see the worst coming. It's not only the market that is undergoing the crucial tests but it is also a test of our patience,
understanding and confidence. Fortune favours the brave. So let's see how and when. It's also a test of our trust in capital
market!
Value picks:
* Divis Lab – Its working remains ahead of estimates. Despite its high base in Q4FY07, its sales were up due to
increasing traction in Custom Chemical Services (CCS) segment, wherein it enjoys a healthy relationship with 20 of
the top 25 innovator companies. Its generic business, too, is strong with new product innovations and consolidation
of market share by its existing products, EBIDTA margins remain ahead of estimates at 41.5%.
Divis' mega capex of Rs.2.5 billion (Rs.250 cr.) is complete and will generate significant value during FY09. Capacity
expansion in CCS together with its focus on niche formulations has given it market leadership. Commissioning of
carotenoids is a US $1 billion (Rs.4300 cr.) opportunity and would be the new growth driver for the company. Its
profit after tax (PAT) is poised to rise from Rs.353 cr. in FY08 to Rs.608 cr. (FY10) a CAGR of 28%.The scrip seems to
be heading for Rs.1800 plus in the medium-term.
* Arvind Ltd. - Shifting its focus from denim to branded garments may keep the company's growth intact feels the
management and analysts. Decreasing its dependence an denim due to the slowdown in US and European markets
and its new thrust an joint ventures and tie-ups with Hartmarx Corporation to market its three brands Schaffner
Marx, Sansabelt and Pierre Cardin may raise its EPS from a meagre Rs.1.45 in FY08 to Rs.4.56 in FY10 and reward
investors amply in two years from now.
* Nucleus Software - The wealth management solution providers is focused on Japan and the Middle East to which it
provides customised solutions. Japan continues to be its key driver with the focus on large deals. The large
technology replacement opportunities exist for its nucleus Fin One Suite products in Japan. It has also launched
Islamic retail lending solutions for clients in the Middle East and Africa and expects to do well as these regions and
are growing faster than the company in the current petro boom.
Revenue from Rs.288 cr. (FY08) may rise to Rs.586 cr. (FY11) and net profit from Rs.61 cr. (FY08) to Rs.108 cr. (FY11)
maintaining ROCE around 28% average over the next three years.
* Indo Asian Fusegear - Projecting a four fold revenue rise from Rs.276 cr. (FY08) to over Rs.1000 cr. (FY011) despite
shrinkage in revenues and margin during FY08. The future depends on the company's efforts in working on large
contracts and renewing most of its contracts. The company is in the process of building three new facilities in the tax-
free zone at Haridwar for manufacturing switchgears, lighting equipment like compact fluorescent lamps (CFL) and
intelligent electrical equipments like automated lighting switches. Exports during the current year may touch Rs.100
cr. The promoters are increasing their stake at a hefty premium and are also planning an acquisition in Europe.
Intermediate reversal above 13872
TRADING ON TECHNICALS
By Hitendra Vasudeo
Last week we had indicated weakness in the market and the same was witnessed as the Sensex fell to a low of 12822.
The Sensex opened last week at 13791.02 attained a high at
13872.06 and fell to a low of 12822.75 to close the week at
13454 and thereby showed a net fall on 320 points on a
week-to-week basis.
Our expected range on the lower side was 12671-12344
against which we have seen Sensex attaining low of 12822.
The weekly pivot was placed at 12739 as well.
The Sensex showed a good recovery on Wednesday, 2 July
2008, when it recovered from low of 12822 to close at
13664. The high registered the same day was 13712. On
Thursday, we found that high level of 13712 was not to be
seen as the market opened gap down on Thursday to close
lower but it did not violate 12822. On Friday, it bounced
back without violating the low of Thursday. For this week,
the resistances will be at 13712 and last week's high of 13872.
2
The Sensex will now have to cross and close above 13872 in order to confirm the low of 12822 as the intermediate bottom
and also to end one leg of the corrective cycle. The next leg of the corrective cycle could be up for an overall pull-back of
the fall from 21206 to 12822. For this to happen, a breakout and weekly close above 13872 is required.
A fall and close below 12822 will take the Sensex to test the down range of 12671-12344 and could even violate it. The
Sensex must, therefore, cross and close the week above 13872. We may also find some kind of sideway moves between
13872 -12822.
Observation
Using Andrew's Pitchfork technique, taken from the top
of 21206, 14677 and 17735, we find that the centre trend
line support was witnessed in the market last week. It
recovered from the centre line of the downward
channeled move. As it has taken support of the centre
line and if it does not violate it, then we could find the
resistance of 13782 getting crossed. Later, we could find
price move towards the upper channel line. If it fails to
sustain and cracks the centre line, then expect a slide
down towards the lower channel line.
If we take the 1.27 downside retracements by
considering the points 21206, 14677 and 17735, then the
ratio level is placed at 10853. The 1.618 level would be at
8967.
Therefore, it is equally important for the market to sustain at the current level and move up. If this time, we see violation
of 12822 then it will not only test 12671-12344 but could also violate it and move down further towards 10853. The Sensex
has some leverage of 12671-12344 which can act as a buffer.
On the quarterly chart, Andrew's Pitchfork technique taken from the Sensex 2594, 3758 and 2828 on the log scale shows
that the entire rally from 2594 to 21206 has got channeled and the last rise to 21206 got extended above the upper parallel
line but fell in the next two quarters to a low of 12822. Now, the interesting thing is that we are at the lower channel line
of Andrew's Pitchfork technique. The lower channel line has not been violated as yet.
As a result of this observation and analysis, some interesting wave counts have developed. Firstly, it could be that the
downfall was terminated at Sensex 2828 and not at 2594. Secondly, if we assume that downfall was completed at 2594,
then we could also see the current move as the 4
th
Wave within a larger 3
rd
Wave and 5
th
Wave yet to come, which can
take the market back to 21206. But for this count to remain in contention, it must not fall substantially now. And even if it
falls, it must come back into the channel. The 0.500 and 0.618 levels of the rise from Sensex (interestingly this coincides
with the arrival of the UPA government at the Centre) 4227 to 21206 is placed at 12717 and 10713. If we take the following
wave count:
Sensex Wave Analysis
WEEKLY UP TREND STOCKS
Wave I- 2594 to 3758
Wave II- 3758 to 2828
Wave III- 2828 to 21206
(Not
yet
complete)
Internals of Wave III
Wave 1- 2828 to 6249
Wave 2- 6249 to 4227
Wave 3-4227 to 21206
Wave 4- 21206 to 12822
(Appears to be completed
but confirmation needed)
If we allow the liberty of
channel violation to test
the 0.500 and 0.618 levels
of 12717 and 10713, then it
must close back the
quarter that will end in September 2008 above and back in the channel. Alternatively, it must not fall and close below the
range of 12717-12344. If it falls, then hope of a recovery back above in the channel will be less.
Let the price move below Center Point or Level 2 and when it move back above Center Point or Level 2 then buy
with what ever low registered below Center Point or Level 2 as the stop loss. After buying if the price moves to
Level 3 or above then look to book profits as the opportunity arises. If the close is below Weekly Reversal Value
then the trend will change from Up Trend to Down Trend. Check on Friday after 3.pm to confirm weekly reversal
of the up Trend.
Last
Center
Relative
Weekly
Up
Close
Point
Strength Reversal Trend
Scrips
Level 1 Level 2
Level 3 Level 4
Value
Date
Stop
Loss
Buy
Price
Buy
Price
Book
Profit
Book
Profit
SPICE
COMMUNICATION
72.95 70.1
72.0
73.0
73.9
75.8
80.0
67.2
04/04/08
GLAXO
SMITHKLINE PHA
1139.00 973.0
1075.0
1113.0
1177.0
1279.0
78.4
1117.0
27/06/08
I-FLEX SOLUTIONS 1515.00 1076.7
1341.7
1433.3
1606.7
1871.7
74.5
1367.3
27/06/08
I.C.I. INDIA
544.60 504.7
529.7
539.9
554.7
579.7
70.1
535.3
04/07/08
GTL
234.30 178.2
212.3
224.3
246.3
280.4
66.6
225.0
04/07/08
3
This wave count is a
wishful and optimistic
count.
WEEKLY DOWN TREND STOCKS
Normal Count mentioned
last week
Wave I-2594 to 3758
Wave II-3758 to 2904
Wave III- Internals as
follows:
Wave 1- 2904 to 6249
Wave 2-6249 to 4227
Wave 3-4227 to 12671
Wave IV- 12671 to 8799
Wave V- 8799 to 21206
Wave W-21206 to 14677
Wave X-14677 to 17735
Wave Y- 17735 to 12822
(current ongoing move)
4
Internal of Wave Y
Let the price move above Center Point or Level 3 and when it move back below Center Point or Level 3 then sell
with what ever high registered above Center Point or Level 3 as the stop loss. After selling if the prices moves to
Level 2 or below then look to cover short positions as the opportunity arises. If the close is above Weekly Reversal
Value then the trend will change from Down Trend to Up Trend. Check on Friday after 3.pm to confirm weekly
reversal of the Down Trend.
Last
Center
Relative
Weekly Down
Close
Point
Strength Reversal Trend
Scrips
Level 1 Level 2
Level 3 Level 4
Value
Date
Cover
Short
Cover
Short
Sell
Price
Sell
Price
Stop
Loss
SOBHA
DEVELOPERS
254.75
168.5
229.5
265.3
290.5
351.5
13.67
327.76
09/05/08
PARSVNATH
DEVELO
117.75
74.9
103.9
119.0
132.9
161.9
22.48
141.61
09/05/08
OMAXE
126.60
84.1
112.1
125.5
140.1
168.1
22.60
151.81
09/05/08
WOCKHARDT
181.50
144.8
169.4
182.0
194.1
218.7
23.59
212.81
30/05/08
RURAL
ELECTRIFICATIO
76.90
56.9
70.9
79.0
84.9
98.9
24.28
90.07
09/05/08
Wave i- 17735 to 16546
Wave ii-16546 to 17497
Wave iii- 17497 to 14645
Wave iv- 14645 to 15789
Wave v- 15789 to 12822
(current ongoing move)
The completion of W-X-Y can get translated on Wave A and the rise can be for Wave B or Wave X will once again emerge
for a Double Zig-Zag.
EXIT LIST
Scrip
Last Close Sell Price Sell Price Sell Price Stop loss Target
Monthly Relative
Strength (RS)
REI AGRO
1133.00 1226.97 1256.00
1285.03
1379.00 981.0
39.43
GLENMARK PHARMACEUTI
613.00
620.92
628.00
635.08
658.00 560.9
45.54
SUN PHARMACEUTICAL I
1326.00 1354.20 1366.00
1377.80
1416.00 1254.2
45.97
Weekly pivot support levels are placed at 12893 and 11844. Weekly resistance will be at 13713-13872-13943.
Conclusion
If the low of 12822 is not violated and we cross and close above 13872, then we are likely to terminate one leg of the
corrective cycle. The next leg of the corrective cycle can be for an upward bias.
Strategy for the week
For the time being, cut short positions at current level and on dip to 12822 as the opportunity arises. Sell further on fall
and close below 12822 with the high of the week as stop loss or 13872, whichever is higher at the point of breakdown.
* Anil and Mukesh Ambani may now have a common meeting ground at least politically thanks to the former's proximity
with the SP and the latter's to Congress (I). Even the MTN deal may be salvaged in this new marriage of sorts!
TOWER TALK
* GAIL with its new thrust on gas and petrochemicals and with a bonus issue on the sidelines is a bargain hunt for long-
term investors.
* Nitin Fire Protection's new CNG cylinder venture is going to be a mega profit centre. More so because it is in a tax-free
SEZ.
* Inflationary tendencies provide a tremendous opportunity for FMCG companies to raise prices of essentials whose
demand is inelastic to prices. Dabur, HUL, and Nestle are poised to gain a lot from this exercise.
* If you think pharma is a defensive segment in these trying times, think again as healthcare, especially hospitals, are
doing well too.
* Sterlite Technologies, a company with enhanced capacity in optical fibre cables may reward investors handsomely in
the near term thanks to the falling cost and rising demand.
* Apart from Rs.250 cr. order in hand, Tera Software has bagged some very long-term contracts worth Rs.45 cr. Buy at
every decline as its future revenue visibility is quite strong.
* Many midsize and small companies report encouraging numbers when the market is good. But their profits fall
drastically as the sentiment changes in the market, why?
* Kamat Hotel has become one third from its high in January 2008. At the current EV of Rs.400, its worth accumulating.
* Among the scrips hitting new 52-week lows, International Combustion, SEAMEC, Elgi Equipment, Greaves Cotton,
Easun Reyolle, Indo Asian Furegear, SKF India, HBL Power, Yuken India, Honda Siel & Spanco Tele have come down
to such mouth watering levels that they can be fearlessly bought at current levels.
* Ansal Buildwell has declared decent results and 20% dividend. At the current level of Rs.37, it offers good dividend
yield as well as a chance to pick up a good realty stock.
* Futura Polyester shareholders can rejoice the high court has approved the scheme of arrangement, which paves the way
for issue of 5 free shares of Innovassynth, a biotech and chemical company on 11 Futura Polyester shares.
* Despite the weak market, I-flex Solutions has got going with a series of new orders and possible delisting by Oracle in
the near future.
* The June 2008 quarterly results of Sandur Manganese give an indication of the direction where the stock is headed.
After the buzz of huge profits of Rs.600 cr. in FY09 reported by a business channel, the stock is oscillating between Rs.1040
and Rs.1200 range.
5
By Saarthi
BEST BETS
Sujana Towers Ltd. (Code: 532887)
Rs.73.55
Incorporated in 2006, Sujana Towers Ltd. (STL) was actually formed by the demerger of the tower division from Sujana
Metal Products Ltd. pursuant to the scheme of arrangement and amalgamation. It belongs to the well known Sujana
Group, which has diversified interest in steel, domestic appliances, engineering, transmission towers etc. Hence STL is
basically into designing and manufacturing of telecommunication and hi-tension transmission towers. Its main products
include power transmission line towers (from 11 KV to 400 KV) and telecom towers (self-supporting lattice towers upto
100 metres height, triangular/square cross-section, hybrid towers, angular/tubular towers, lattice Guyed masts and
monopoles). It is the only integrated tower manufacturer in South India having an in-house re-rolling facility for
structural steel & fabrication of tower and tower parts. Thus it has the capability to deliver ready-to-erect structures in
customer-specified sizes in the shortest time span. Notably, STL is India's largest galvanized steel tower manufacturer as
it has a galvanizing plant which makes only galvanized tower to impart strength, longevity and resistance against
atmospheric impact and peeling. Lately, to cash on its engineering skills and sound technical knowledge, STL has forayed
into providing services like Engineering & Consultation, Turnkey Installation and Inspection & Maintenance. Through a
joint venture with EPC companies like Deepak Cables, Annapurna Construction, the company is already executing
turnkey EPC projects in the power segment and aims to emerge as turnkey contractor in the next couple of years.
Presently, STL has a manufacturing plant at Hyderabad, Andhra Pradesh, with a galvanized tower manufacturing
capacity of 128,125 MTPA while its heavy structural steel product capacity stands at 70,000 TPA. The unit boasts of
manufacturing transmission towers on a turnkey basis (i.e. surveying, civil foundations, supply and erection of towers,
stringing of conductors, commissioning and charging of lines) to electricity boards of Andhra Pradesh, Karnataka and
Tamil Nadu and the Power Grid Corpn. Besides it has a huge clientele in the private sector including Reliance Energy,
BHEL, Subhash Projects and all telecom companies like Reliance Communications, Bharti, Idea, BSNL, GTL, Essar, Tata
Tele, Erricson etc. India currently has about 200,000 telecom towers and is estimated to need about 350,000 more towers in
the next five years. On the other hand, power sector is undergoing massive expansion coupled with rural electrification to
achieve power for all by 2012. Hence to cater to the rapidly increasing demand, the company is in the midst of setting up
a greenfield plant in Chennai with an installed galvanized tower manufacturing capacity of 100,000 MTPA. This plant
will also have the facility to manufacture high mast light poles, railway electrification structures etc and will also cater to
export requirements. The project has been fully funded and is expected to start operation by end of this calendar year
thereby taking the company's total capacity to 228,000 MTPA.
For future, STL is looking to put up a new
plant in Gujarat to produce galvanized steel
parts with a capacity of 75,000 MTPA. The
company is also contemplating to acquire a
company in China for manufacturing tower
parts and set up a subsidiary in Hong Kong
for sourcing cheaper raw materials. Recently,
STL has acquired 51% shareholding in
Telesuprecon Ltd., a Mauritius based
company, undertaking telecom infrastructure
contracts in various cast/central African
countries. Earlier in October 2007, the
company made a preferential allotment of 80
lakh warrants to be converted at Rs.135 per
share to fund its Chennai expansion plan.
Presently, STL has a healthy order book
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position and is expected to report sales of Rs.575 cr. with PAT of Rs.45 cr. for the financial year ending 30
th
June 2008. This
works out to an EPS of Rs.11 on its current equity of Rs.20.80 cr. with a face value of Rs.5 per share. However, the
company has recently taken extension to end the financial year in September 2008 with 15 months performance. As nine
months of FY09 will include the sales from its Chennai unit, it may report sales of more than Rs.800 cr. with PAT of
roughly around Rs.60 cr. To fund its future plans, the company is looking to aggressively raise nearly Rs.300 cr. through
the equity route and may dilute equity by more than 50%. Investors are recommended to buy the scrip at current levels as
it can easily appreciate 50% within 15 months.
W S Industries Ltd. (Code: 504220)
Rs.49.05
Incorporated in 1961, WS Industries Ltd. (WSIL) is a leading manufacturer of high voltage electro-porcelain transmission
insulators and sub-station insulators. Insulators being non-conductors are basically protective tools, which subdue the
current and are used in transmission and distribution (T&D) of electric power. Ranging from 220 KV to 1200 KV, the
company produces only high-end insulators in various types such as suspension insulators, pin insulators, solid core
insulators, hollow porcelain insulators, shackle & stay insulators etc. Besides, it also deals in other products like dropout
fuses, isolators, lightning arresters, coupling capacitors, capacity voltage transformers, instrument transformers, line
traps and reactors. Of late, the company has also ventured into turnkey project execution i.e. designing, execution and
construction of insulators and transmission lines below 220 KV. Currently, WSIL derives 15% revenue from this segment
while the balance 85% comes from the sale of insulators.
WSIL has an installed capacity to manufacture 16000 tonnes of insulators with 8000 tonnes for substation insulators and
the balance 8000 tonnes for transmission insulators. Power Grid Corporation, NTPC, State Electricity Boards are among
its domestic customers whereas ABB, Siemens, Areva etc. are a few of its international clients. Interestingly, 95% of
transmission insulators are sold domestically whereas the majority of the substation insulators are exported. Hence to
cater to the domestic demand for substation insulators, WSIL is setting up a greenfield plant with a capacity of 8000
tonnes in Visakhapatnam, Andhra Pradesh. In short, the company is doubling the manufacturing capacity of substation
insulators. The new plant is expected to become operational in the next couple of months. Meanwhile, it is looking to
scale up its capacity for executing turnkey projects and is even scouting for a strategic alliance for this business.
Incidentally, WSIL had around 14 acres of surplus land, which it transferred to its subsidiary, WS Electric, which in turn
is developing that property into a 16 lakh sq. ft. IT park through a joint venture. Phase I of 3 lakh sq. ft. is expected to be
completed in this fiscal from which WSIL may start earning a lease/rental income of around Rs.3 cr. per year. The
balance three phases will get completed in the next four years. Given the huge expansion and modernisation in the power
sector, WSIL's core business is witnessing one the best times in its history. For Q4FY08, sales shot up 50% to Rs.66 cr.
whereas PBT almost doubled to Rs.5.60 cr. Due to high tax provisioning its net profit registered only 40% growth to Rs.3
cr. But for full FY08, it reported 100% growth in its bottomline to Rs.13.70 cr. on 40% higher sales of Rs.227 cr. Thus it
posted an EPS of Rs.7 on its current equity of Rs.21.10 cr. Almost after a decade, the company has returned to the
dividend list by declaring 5% interim dividend for FY08. To fund its higher working capital requirement, the company is
planning to make a preferential allotment of 9.25 lakh warrants to the promoters at Rs.107 per warrant. But looking at the
current market sentiment, this may not materialise. However considering its new plant that is to go operational soon, it is
expected to clock a turnover of Rs.275 cr. and profit of Rs.16.50 cr. for FY09. This will lead to an EPS of Rs.8 on its current
equity. Investors are strongly recommended to buy at current levels with a price target of Rs.80 (i.e. 75% appreciation) in
12-15 months.
Pharma: The happening sector
INDUSTRY OUTLOOK
By Suryadevara
Most analysts consider the pharma sector as a defensive sector. However, this sector is growing at a fast pace and India
holds the lion's share of the CRAMS (Contract Research & Manufacturing Services) and generics space of the global
pharma pie. Things are really happening in a big way in this sector. Let us revisit the sector to review it in the light of the
recent developments. Taking stock of the prevailing market conditions will help bring about clarity on its prospects.
Global geo-political events of the past few years an the increasing flow of funds to commodity markets have sent the
prices of crude oil to alarming levels. Fearsome conditions of the market place due to the still unfolding US financial crisis
as well as the boiling crude oil prices are unnerving the authorities and the investing public across the globe. Global geo-
political conflicts are upping the ante. Inflationary pressures are haunting the authorities. Amidst these concerns, FIIs are
pressing sales and markets are dipping lower in most countries.
In India, in addition to the above, political bickering is casting clouds both on economics and governance. Inflation is
getting out of control with every passing week. Since inflation-fighting became a priority, interest rates are hardening. All
these factors hint at eating into our GDP growth. As the market is known for its excessive reaction to events and
6
7
perceptions, the BSE Sensex lost around 40% from its January 2008 high of 21206, when calls surpassing Sensex 25,000
were heard aloud. Now, talks of Sensex dipping below 10,000 level are doing rounds! Is it the end of the road to equity
investments? Should investors dump equities? Succumbing to such panic reactions is detrimental to the financial health of
investors. Profits can be had even in these painful conditions if cool reasoning is allowed to survive this mayhem.
It is true that all the above concerns are too real to be brushed aside. Equity markets lost ground because of massive funds
flow from equities to debt markets and commodity markets. With the hardening of interest rates, investments in
debt/bonds market are no longer appealing. In fact, now funds have to move from debt market to equities. With inflation
racing far ahead of the interest rate on deposits, real returns on savings have turned distinctly negative. Higher interest
rates are a matter of concern for the real estate sector as a whole. Looking at the painful consequences of the excessive
investment into the US hybrid instruments of lending, a similar experience in commodities play cannot be afforded.
Players may be a bit cautious here, irrespective of the authorities' actions/inaction on this front. Hence, fund flows into
commodities play may taper off as the crude oil price is likely to peak out soon. However, equity investments can offer
inflation-beating returns, especially from the current market lows for those who believe in the long-term and in
investment logic. It has been proved many a time that funds gravitate towards regions of higher growth from the regions
of negative/lower growth. Even in the regions of higher growth, funds flock to the sectors which offer higher growth.
Going by this, I believe that the Indian pharma sector has the potential of attracting huge investments in the evolving
conditions. Is it not convincing? Please read on.
The US economy is still faced with the unfolding financial crisis and stagflation. Even in the best case scenario hint at a
growth rate of around 1% for USA. Japan is unlikely to move past its dismal growth rate. Euro Zone growth rates are
likely to be well below 3%. Higher crude oil prices augur well only for Russia and Brazil apart from the OPEC nations.
Taking account of high inflation and interest rate hikes, Standard & Poor had recently forecast a GDP growth rate of 7.8%
for India against RBI's estimate of 8% to 8.50% and CMIE's estimate of 9.5%. In fact, China and India will continue to lead
the global growth rates. Hence, global funds cannot abandon the advantage of 'BRIC' nations for their investments while
their occasional profit booking/panic sales cannot be ruled out. Even among the BRIC nations, China has enjoyed
unexpected massive inflows for more than a decade. Hence, Russia, Brazil and India are likely to appeal in view of the
potential returns unless our politicians spoil the party for India. Moreover, both domestic and global funds have raised
the cash components of holdings in the last few months with domestic mutual funds themselves sitting on cash balances
of beyond Rs.20,350 cr. R-ADAG group's 'Reliance Money' is reportedly raising Rs.230 cr. in the Middle East and
promoting a financial services firm 'Riyada Reliance Money' in Saudi Arabia. Though this amount is not impressive, it
can be a catalyst for the flow of petro-funds into India. All these, signal the probability of funds returning to the Indian
market.
Sectorwise, although realty overshadowed other sectors in the past few years, the pharma sector is likely to emerge a
winner in the next market revival as even at a much higher crude oil price level cannot negate/contract the demand for
pharma drugs.
Sector Potential: India has marked its place under the sun with its low cost services, high technical skills and the better
creative output of its people, especially in the IT sector. The competitive advantage of India in the IT sector is well
recognised and well acknowledged. India is certainly blessed with equal, if not better, competitive strengths in the global
pharma sector. But while the IT sector is reasonably discounted on the bourses, more is yet to be heard or seen as far as
the potential of the Indian pharma sector is concerned.
With the largest number of FDA approved plants outside the USA on its soil, India has not only emerged as one of the
lowest cost drug producer but also highly respected for its contract research and product development abilities. Presently,
ranked 4
th
in terms of volume and 13
th
in terms of value, India is all set to move up the value chain looking at the ongoing
developments: foreign collaborations, licensing deals, contract manufacturing and contract research & development deals
and mergers and acquisitions as well. Due to its inherent strengths in IT, Pharmaceuticals and Biotechnology the Indian
pharma sector has the potential to grow 5 fold over the next 10 years.
The global pharma business, which was $534 billion in 2005-06, is expected to grow to $767 billion by 2010.The domestic
pharma market, which is currently around $4.50 billion, is expected to cross $25 billion in the next few years. Thus
investment guru, Marc Faber's statement - "The Indian pharma sector offers great scope in view of the strong research
driven facilities" is very relevant even today as it was a few years back when it was originally expressed. With the
continued patronage to the pharma research in the last union budget, the sector is expected to be on the growth path.
However, research costs in India too have risen from one-tenth of that in the USA in 2000 to the current one fourth of the
research costs of USA. Even then, the US based 'Ewing Marion Kauffman Foundation' recently noted that India is a more
mature place for drug discovery activities than China in view of the rising research and development initiatives in the
pharma sector. This analyst believes that India is surely emerging as the pharmacist to the globe and its R&D hub as well.
Past trends and present developments: From being a mere formulations base for MNC based pharma companies in 1950,
India has come a long way on the global pharma sector. While the MNC pharma companies are recording profit-
pressures, Indian pharma companies are recording increasing volumes and profits. IDPL's (Indian Drugs &
Pharmaceuticals Ltd.) contribution to the Indian pharma Research is indelible, although political leadership ensured its
demise. IDPL honed the research skills of Dr. Anji Reddy of Dr. Reddy's Labs and the late K. S. Sharma of Jupiter
Biosciences Ltd. (JBL) Dr. Reddy's Labs really brought respect to the Indian pharma industry by offering drugs at one
tenth the price of the then MNC pharma company prices. It was the first Indian pharma company to license out a new
experimental drug to Denmark's Novo-Nordisk. Taking inspiration from this, Glenmark has developed and licensed
three molecules to global pharma giants, with its first licensing to Eli Lilly bringing it an upfront payment of $45 million.
Other Indian pharma companies like Sun Pharma, Cipla, Orchid Chemicals, Suven Pharma, too, have made impressive
progress in pharma Research. Although the Bio-pharma company, JBL, invested heavily into pharma research, its results
are yet to be visible to the industry. It has recently entered into licencing agreement with California based 'GI Logics Inc'
for development and sales of 'Diamox' for eradication of H.pylori. JBL has also acquired a facility of Merck in
Switzerland and forged a 5-year agreement for its peptide products with the pharma giant's biosciences company.
Novartis India's M.D., Ranjit Shahani's following expression aptly reflects the present conditions - "India is tipped to play
a pivotal role in the global pharmaceutical industry, both as being a provider of an authorised generic drugs as well as
being a seat of pharmaceutical research".
Mergers & Alliances: Increasing competition and decreasing margins in generic drugs even in developed markets, is
driving the industry towards mergers and acquisitions. In June 2007, Astra Zeneca acquired biotechnology firm
MedImmune at a final purchase price of $15.6 billion. Pfizer became the largest pharma company of the world after
acquiring Warner Lambert. Just look at some important deals in the global pharma space:
This information does not reflect the increasing
valuations in the pharma space. Recent Daiichi
Sankyos deal on Ranbaxy gave Valuation of 21
times its earnings (EBITDA) Which is costlier
than Mylan Labs deal on Merck Generics
(which was at 14 times EBITDA) and on Matrix
Lab (which was at 18 times EBITDA). The largest
Japanese pharma company, Takeda Pharma's
buyout of Millenium Pharma was at a premium
of 53% on its last traded price on NYSE.
Ranbaxy was even reportedly offered such high
premium by Pfizer, but the issues of
management control resulted in the current deal
with Daiichi at a slightly lower premium. And if the Japanese company walks its talk by not dislodging the present
management, it can be real win-win situation for both the companies given the mutually complementary strengths they
both possess.
Performance Review: Buoyed by its overseas acquisitions, the pharma sector has posted strong numbers over the past
couple of years.
Acquirer
Target/Sold Out Company
Deal Size (US $)
Sandoz
Hexol And Eon
US $8.30 bn
Teva
Ivax
US $7.40 bn
Barr Lab
Pliva
US $2.40 bn
Actavis
Apharmas Generic
US $810 mn
Mylan Lab
Matrix
US $736 mn
Dr Reddys Lab
Beta Pharm
US $571 mn
Ranbaxy Lab
Terapia
US $324 mn
Mylan Lab
Merck Generic
US $6.00 bn
Dr Reddys Lab
Dow Pharmas Uk Unit
US $30 mn
Dr Reddys Lab
Basfs Us Unit
US $40 mn
Jubilant Organosys
Hollister Stier
US $125 mn
Jubilant Organosys
Draxis Health
US $255 mn
Takeda Pharma
Millenium pharma Inc.
US $8.60 bn
Daiichi Sankyo
Ranbaxy Lab
As expressed earlier,
pharma scrips are likely
to be fancied in the next
market revival. Divis
Lab,
Aurobindo
Pharma, Cipla, Orchid
Chemicals,
Jupiter
Biosciences can be
watched. Though Divis
Lab appears to be the
costliest pharma share,
its stupendous success
in the CRAMS segment and its likely foray into nutraceuticals gives it ample scope for wealth addition. Although pharma
majors are well researched and well-owned by the funds, lesser studied and lesser owned scrips like Jupiter Biosciences
Ltd can spring surprising returns. Its tie-up with global pharma research giant - Mercks Biosciences, as well as its links
with Daiichi Sankyo through Ranbaxy Lab can work wonders for this bio-pharma company. Its past market price of
Rs.171 as on 31
st
March 2003 at the then Sensex level of 5839 points to its growth potential from the current level. And
while the market perception about the management of the Ind-Swift Group is not good, the fundamentals of Ind-Swift
Ltd. provide ample scope of growth from current levels.
US $4.60 bn
Name
Equity (Rs.)
Book Value (Rs.)
Revenues (Rs.)
Net Profit (Rs.)
Ranbaxy Lab
186.54
68.00
6965
790.10
Dr Reddys Lab
84.09
286.10
3330.66
475.22
Sunh Pharma
103.56
203.10
2365.64
1014.04
Cipla
155.46
48.50
4226.81
700.48
Lupin Lab
82.08
2609.86
443.38
Piramal Health Care
41.80
1930.02
301.48
Divis Lab
12.91
135.20
1033.19
353.56
Glenmark
24.87
41.30
1372.69
389.02
Biocon
50.00
132.70
876.93
434.92
Aurovindo Pharma
26.88
176.70
2234.73
225.30
Jupiter Bio
18.13
164.40
129.33
30.72
Indswift Ltd
7.44
47.10
503.00
28.00
Suven Pha
11.57
10.20
119.96
8.26
8
Hind Rectifiers Ltd.: Buy for the medium-term
By Devdas Mogili
Hind Rectifies Ltd., also known as Hirect, is a 50-year old Mumbai based company established in 1958 engaged in
developing, designing, manufacturing and marketing semiconductors, electronic equipments and railway transportation
equipments. The company operates in two segments viz. equipments and electronic components. Mr. S. K. Nevatia is the
chairman & managing director of the company.
Hirect is a leading manufacturer of rectifier equipments and semi-conductor devices. It also manufacturers a wide range
of products used by the railways, AC electric locomotives and AC electrical multiple units (EMUs). The company's
manufacturing facilities are located at Bhandup, near Mumbai; Nasik, Maharashtra and two plants at Dehradun,
Uttarakhand, one of which has recently started commercial production.
ANALYSIS
Technical Collaboration: The company has a technical collaboration with Friem, Italy, to manufacture water-cooling
rectifiers for electrochemical applications, with Electrical Research & Development Centre, Kerala, to manufacture
transistorised PWM AC drives and with Powersem, Germany, for isopack bridges. Future plans include signing a new
technical collaboration agreement with Chittaranjan Locomotive Works (CLW) for transfer of technology for auxiliary
converters, which the railways will acquire from ABB after importing 30 locomotives from them.
Clientele: The company has a list of reputed clientele, which includes ABB, ACC, Alstom, Ambuja Cement, Amara Raja
Batteries, Ballarpur Industries, Bajaj Group, BEML, BHEL, Crompton Greaves, Grasim Industries, Hindalco, HBL Nife,
Jaiprakash Industries, L&T, Siemens, Thermax and Sterlite Industries. Among government organisations, Defence
Organisations like the Indian Navy, Air Force, Ordnance Factories, CLW, Integral Coach Factory, BARC, ISRO, SAIL,
BHEL, NTPC etc are its clients.
Exports: Hirect exports its products to Australia, Bangladesh, Canada, Colombia, Italy, Malaysia, Middle East, Pakistan,
South Africa, South Korea, Spain, Sri Lanka, Thailand, UK and USA.
R&D: Hirect has its own R&D department, recognised by the Department of Science & Technology, Government of India.
Based on its in-house R&D, efforts are being made to develop traction rectifiers for diesel locomotives and 5400-KVA loco
transformers for the railways.
Performance: For FY08, sales increased by 16.82% to Rs.102.01 cr. as against Rs.87.32 cr. in FY07 and net profit was up by
9.44% at Rs.12.29 cr. in FY08 against Rs.11.23 cr. in FY07. The company posted an EPS of Rs.16.32 for FY08.
Financial Highlights:
(Rs. in million)
Latest Results: In Q4FY08, sales have risen by 26.92%
to Rs.34.37 cr. and net profit shot up by 32.26% to
Rs.4.10 cr. as against Rs.3.10 cr. in Q4FY07. The
basic/diluted EPS works out to Rs.5.45 on its Rs.2
paid-up per share. Going forward, the annualised
EPS works out to over Rs.21.80.
9
Financials: The company has a tiny equity base of
Rs.1.5 cr. and the book value of its share is Rs.48.75.
The company has a low debt:equity ratio of 0.4. Its
RoCE is 59.29% and RoNW of 51.97%.
Share Profile: The company's shares are listed and
traded on the BSE under the B group. Its share price
touched a 52-week high/low of Rs.285/113. At its
current market price of Rs.134.90, it has a market
capitalisation of R.113 cr. It has a beta value of 0.9.
Particulars
Q4FY08
Q4FY07
FY08
Gross Operational Income
396.47
314.36
1175.87
Less: Excise Duty
52.82
43.61
155.76
Net Sales/Income
343.65
270.75
1020.11
Other Income
0.76
5.35
1.48
Total Income
344.41
276.10
1021.59
Total Expenditure
278.39
226.49
824.18
Int. & Financial Charges
2.81
2.21
8.39
Profit Before Tax
63.21
47.40
189.02
Tax Expenses - Current
23.75
16.10
66.75
Deferred
(1.83)
(0.02)
(1.83)
FBT
0.27
0.27
1.19
Net Profit after Tax
41.02
31.05
122.91
Earlier Year Adjustments
(0.34)
2.94
(0.34)
Paid up equity capital (FV: Rs.2)
15.06
15.03
15.06
Reserves Ex Rev Reserves
-
-
350.60
Basic/Diluted EPS (Rs)
5.45
4.12
16.32
Dividends: The company announced a dividend of 100% for 2007-08. It also announced a 1:1 bonus issue. The dividend
track record of the company is as shown below:
FY08 - 100%, FY07 - 100%, FY06 - 70%, FY05 - 40%, FY04 - 25%, FY03 - 20%, FY02 - 10%.
The bonus track record of the company is shown below: 2008 – 1:1, 2005 – 1:2, 1995 – 1:1.
Shareholding Pattern: The promoters holding in the company is to the tune of 43.26% while the balance of 56.74% is held
by non-corporate promoters, institutions and the Indian public.
Prospects: The growth prospects of power electronics is linked with the Indian economy in general and manufacturing,
capital goods and power sector in particular. Hirect is a leader in almost all large product categories like Power
Semiconductors, Rectifiers, Invertors, Converters, Reactors, Transformers etc. With the economy expected to maintain a
growth rate of 8% and above, the prospects for the power electronics sector appear to be promising. The company expects
to maintain good growth rate based on its healthy order book in the face of stiff competition.
Conclusion: Hirect has an excellent track record and expertise of over 50 years in delivering latest power electronics and
transformers technology to its domestic and overseas customers at very competitive rates.
At its current market price of Rs.134.90, the share is discounted less than 10 times its FY08 earnings against the industry
average P/E multiple of about 20. Going forward, the share is discounted even less than 7 times its FY09 estimated P/E,
which implies that the share is attractively priced, and is cum bonus. The share may be accumulated for decent gains in
the medium-to-long-term.
Sensex closes lower for 7
th
week in a row
MARKET REVIEW
By Ashok D. Singh
The political rift over the nuclear deal, soaring crude oil prices, high inflation and sustained selling by FIIs depressed the
market sentiment to a great deal last week. A number of stocks and sectoral indices tumbled to their 52-week low. The
Sensex lost 348.22 points or 2.52% to 13,454 for the week ended Friday, 4 July 2008. The NSE Nifty lost 120.65 points or
2.91% to 4,016 in the week. From its record high of 21,206.77 on 10 January 2008, the Sensex has lost 7752.77 points or
36.55%. It has shed 6832.99 points or 33.68% in calendar year 2008 thus far from its close of 20286.99 on 31 December 2007.
The BSE Mid-Cap index declined 280.51 points or 5.04% to 5,278.24 in the week. The BSE Small-Cap index slumped 488.40
points or 7.03% to 6,449.67 in the week. The BSE Mid-Cap and BSE Small-Cap indices slumped to 52-week lows of 4970.47
and 6938.07 respectively during the week.
The wholesale price index (WPI) rose 11.63% in the 12 months to 21 June 2008, above the previous week's annual rise of
11.42%, government data released on 4 July 2008 showed.
As per reports, the monsoon has been 21% above average so far this season. A normal monsoon may lift farm production,
which accounts for a fifth of the economy and cool the nation's fastest inflation rate in 13 years.
On the political front, communist parties on 4 July 2008 have asked the UPA government to tell them by Monday, 7 July
2008, if it plans to press ahead with the next step in the controversial civilian nuclear deal with the United States. They
have threatened to end their backing to the government if it seeks approval for the deal from the International Atomic
Energy Agency (IAEA) - the next international move needed to operationalise the pact. The government is seeking
support from the Samajwadi Party, a key regional party in Uttar Pradesh to retain power at a time when Left parties are
on the verge of withdrawing support.
FII outflow in calendar year 2008 totalled Rs.26571 cr. till 3 July 2008. Mutual funds bought shares worth a net Rs.347.49
cr. in the first three days of this month and have pumped Rs.3179.20 cr. in Indian equity markets in June 2008.
Trading for the week started on bearish note as high inflation, rising interest rates, record high oil prices and political
concerns haunted the markets. The Sensex plunged 340.62 points or 2.47% at 13,461.60 and the broader based Nifty was
down 96.1 points or 2.32% at 4,040.55 on Monday 30 June 2008.
Sell-off on the bourses continued on Tuesday, 1 July 2008, pulling key benchmark indices below psychological levels - the
Sensex fell below 13,000 mark and the Nifty fell below 4,000. The Sensex plunged 499.92 points or 3.71% at 12,961.68 and
the broader based Nifty was down 158.8 points
or 3.56% at 3,896.75, on that day.
The market staged a solid rebound on
Wednesday, 2 July 2008 with the BSE Sensex
clocking its biggest intra-day gain since 25
March 2008. The BSE Sensex surged 702.94
points or 5.42% at 13,664.62 and the broader
based Nifty rose 196.6 points or 5.05% at
4,093.35 on that day. Both the niche indices had
struck 15-month low in intra-day trades on that
day. The Sensex hit a low of 12,822.75 and the
Nifty had hit a low of 3,848.25.
A surge in crude oil price to a record high above
$144 a barrel and the overnight fall in US stocks
weighed on the investor sentiment on Thursday,
3 July 2008. The Sensex slumped 570.51 points
or 4.18% at 13,094.11 and the broader based
Nifty was down 167.6 points or 4.09% at
3,925.75, on that day.
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10
The market rallied on Friday, 4 July 2008, shrugging off higher inflation on hopes a political turmoil arising from Indo-US
nuclear deal may be averted. The Sensex rose 359.89 points or 2.75% at 13,454 and the broader based Nifty was up 90.25
points or 2.30% at 4016, on that day.
Tata Motors plunged 10.74% to Rs.400.85. The stock hit a 52-week low of Rs.383 during the week. The company said high
input costs, rising interest rates and slowing demand would dent sales of commercial and passenger vehicles in the year
to March 2009.
Banking and financial stocks were in action during the week. HDFC said on Monday, 30 June 2008, its prime lending rate
would go up by 50 basis points (bps) from Tuesday, 1 July 2008. The stock rose 0.13% to Rs.2055.45 in the week. It struck a
52-week low of Rs.1750.15 during the week. ICICI Bank said rates on consumer loans would rise by 75 bps. The stock lost
8.03% to Rs.600.65 in the week. The stock hit a 52-week low of Rs.551.30 during the week. Both HDFC and ICICI Bank also
raised deposit rates between 50-100 bps.
State Bank of India fell 2.88% to Rs.1127.50. The stock hit a 52-week low of Rs.1007 during the week. On 26 June 2008, the
bank raised its benchmark prime lending rate by 50 bps to 12.75% after the central bank aggressively tightened policy in
the face of surging inflation.
ONGC gained 5.56% to Rs.876.30. The company has reportedly discovered a new oil field in the Farsi oil bloc of the
Persian Gulf. ONGC will undertake the development of the newly discovered field upon determining that its
development is economically feasible.
Capital goods stocks advanced on fresh buying. Larsen & Toubro rose 4.97% to Rs.2379.85. The stock hit a 52-week low of
Rs.2100 during the week. The company received an order wroth Rs.1,557 cr. from Andhra Pradesh Power Development
Company for the supply of steam turbine generators. Bharat Heavy Electricals Ltd. (BHEL) advanced 8.68% to Rs.1500.30
after securing an order exceeding Rs.2080 cr. for a 400-megawatt thermal power project in Syria.
IT stocks were mixed. Satyam Computer Services (up 5.08% to Rs.462.15), and Infosys (up 2.80% to Rs.1755.40), gained.
However Wipro (down 3.05% to Rs.429.10), and Tata Consultancy Services (down 2.48% to Rs.843.75) edged lower.
Sejal Architectural Glass, a glass processing house in India, settled at Rs.81.50 on 1 July 2008, a discount of 29.13% over the
issue price of Rs.115 per share.
On 3 July 2008, Avon Weighing Systems, maker of platform scales and weighbridges, settled at Rs.11.90, a 19% premium
over its issue price of Rs.10.
On 4 July 2008, Archidply Industries, engaged in the business of wooden interior products, settled at Rs.50.45, a discount
of 31.82% over the initial public offer price of Rs.74.
The Sensex lost 348.22 points to close at 13,454 last week. Tough macro economic environment comprising high inflation,
record high global crude oil prices and rising interest rates will continue to weigh on the sentiment in near term. The
earnings season will also start with Infosys Technologies announcing its June 2008 quarterly results on Friday, 11 July
2008.
11
Market is nervous
MARKET
By G. S. Roongta
The stock market has finally lost its strength and glamour to rule high as the bears have succeeded in breaching the CNX
Nifty's psychological level of 4000 on Tuesday, 1 July 2008 by a clear margin exceeding 140 points and the BSE Sensex
breaking the 13000 support level. With the Nifty closing at 3896.75 after shedding 143.8 points and the Sensex losing 500
points to close at 12961.68, the markets closed not only lower than the previous day but even lower than the previous
week when the Sensex had closed at 13982.22 and the Nifty at 4186.63.
In view of this severe drubbing received by the bull, the bears have every reason to celebrate as they have thrashed the
bulls in just 5 months as against the 3-year long innings enjoyed by the bulls after they had wrested the market from the
bears.
G.S. Roongta
With the Nifty breaking the 4000 level and the Sensex up by 1000 points above its strong bottom of 12000,
fears of further gloom have intensified in the minds of investors. And the more damage it creates, greater
the problem for investors who are sitting on the sidelines and observing the market quite unsure which
side it is headed. The value of their stocks in hand has already depreciated and the value of their
portfolio sharply reduced. Mutual funds, too, are on tenterhooks as investors might go in for
redemptions in the near future. If that happens, it will destabilise their future plans and prospects with
the deteriorating rate of return.
The rise in crude oil prices is further fueling inflation each passing day, which is bound to affect the working of industries
and create difficulties for individuals. The hardening interest rates will add to the woes of corporates and could even lead
to a recession. This is the picture being painted all over and is the hot subject on every investor's lips.
Yet, despite the bleak future and the gloomy atmosphere mainly on account of double digit inflation and runaway crude
oil prices at US $145 on the back weak Asian markets, why did the stock market bounce back on Wednesday, 2 July 2008
gaining over 700 points, which is the highest Sensex gain in 2008 after the freefall of 21 January 2008. The Sensex gained
703 points or 5.43%, which was higher than the 5.17% gain on 23 January 2008 or 4.82% gain on 14 February 2008.
Surprisingly, the sharp gain was recorded in the second half near closing time and was inspite of FIIs remaining net
sellers by over Rs.500 cr. as per the provisional figures released by SEBI.
The popular TV channels and the pink papers have identified the reason for the bounce back as short covering since the
market had been oversold. But this is the second bounce back, which proved short lived as the market again drifted the
next day on Thursday, 3 July 2008 and wiping out almost all that it had gained the previous day. In fact, it had lost more
in intra-day trading but recovered marginally at close to close the day lower at 13094.11 losing 570.51 points on the Sensex
and 167.6 points on the Nifty to close at 3925.75.
The question that arises is: Why did the bears go in for short covering despite the heavy FII selling? And even if they
covered their short position the earlier day, 2 July, why did they again resort to further selling the very next day without
waiting for a proper reaction?
This is indeed very strange and surprising that a rally of such a magnitude can be reversed the very next day. This is very
perplexing and not so easy to digest. It calls for foolproof investigation.
One thing, however, is now crystal clear: the bulls have lost their strength to fight as all their efforts to pull up the market
have failed after the bears acquired the controlling rights with the help of FIIs.
The market capitalization is steadily declining on a monthly basis as mutual funds' NAVs alone have drifted in value by
over Rs.5,00,000 cr. If losses suffered by individuals is added to the loss encountered by the mutual funds, it may exceed
Rs.50,00,000 cr.
If promoters, corporates, HNIs and banks are added to the list, the massive loss in market capitalization will be even more
horrendous.
The FIIs have taken back home funds worth over Rs.30,000 cr. as per the official figures. This is almost equal to what they
had invested in the last full year of 2007 considering that they have withdrawn a similar amount in just 6 months of 2008;
the future prospects are indeed alarming. Besides, the FIIs have been short selling in the F&O market continuously since
October 2007. The gains on expiry of contracts are reported to be higher than the actual delivery reported.
Thus the Indian stock markets, which were celebrating the huge FII inflows are now repenting the outflow of funds with
such intensity creating fears of destabilization.
There does not appear to be any remedy or chance of revival for the market in the near term nor does there appear to be a
silver lining in the present circumstances. The growing political uncertainty at the Centre and the prospects of elections
will only add to the woes of the market.
In such a complex situation, the only trigger I foresee is the monsoon but its impact will not be known till late August or
early September. Under these circumstances, investors should wait and watch the emerging situation and undertake
bottom-fishing of fundamentally strong shares.
Despite all these factors, the rampant speculation in Nifty Futures with heavy short positions, about which I have been
writing, is bound to be exposed whenever the bulls get a chance. That the bull sentiment is not totally dead was evident by
the sharp rise of 359.89 points to close the week at 13454 on Friday, 4 July 2008. This may lead to a short-term change in
sentiment.
By Nayan Patel
TECHNO FUNDA
The '8-year itch' phenomenon
Don't expect a quick recovery. That's the conclusion from our '8-year' equity cycle model. Supporting this conclusion are
the weakening fundamental and economic factors, which suggest that a quick recovery in the Indian equity market is a
far dream. The equity cycle is a lead indicator that digs into the past data and throws up a likely trend. Having depicted a
crash in 2008 after the Sensex peaked at around 21,000 level, the model now indicates some pain before consolidation. For
small retail investors, it's a boon. Such investors can now get an opportunity to accumulate at regular intervals for the
next boom in the Indian equity markets.
History: The 8-year itch phenomenon
When I first proposed the 8-year cycle in December 2007, there were absolutely no takers for the theory. The reasons were
valid. The equity markets were in strong hands and in the midst of a terrific Bull Run. There was reasoning for every
irrational behaviour. Little wonder, a model that showcased a sharp correction was completely ignored. Also, there were
just three cycles before 2008 (for which data was computed) and it was marked by home grown scams. That could have
put off some investors. What was however ignored was the fact that these three 40%+ corrections occurred over 28 years
(although the Sensex was officially launched in 1986, it has a base of 1978/79 and the back data is computed). These data
12
points appeared strong enough to base a theory and confidence sparked from the fact that trend lines were replicated
every eighth year, though the band inched higher every cycle. So, in all probability, the correction had to happen.
The 40% Plus Corrections
1984 - Riots, Assassination, Bhopal Gas Tragedy, Economic Crisis
1992 - Harshad Mehta Scam
2000 - Ketan Parekh Scam/Dot com bubble bust
2008 - Sub prime meltdown
And then, one fine day in January 2008, it all came raining down. The Sensex tanked and within a few trading sessions
and lost over 25%. Since then a lot has changed. Fundamentals have deteriorated and economic events worsened. The
Sensex is struggling to regain its lost glory. If the cycle is to be believed, the recovery may not happen as yet. There's still
some pain left.
The First Hit
Year
Sensex High
Sensex Low
Decline
Time
1984
410
242
-41%
NA
1992
4467
2476
-45%
8 months
2000
5934
3590
-40%
8 months
2008
21207
13809
-39%
6 months
Recovery from the Lowest Point during the Correction Cycle
Note: The Sensex level is
on a closing basis.
Decline may be higher if
calculations are based on
intra-day high/low of
Sensex.
Year
High
Lowest point
Decline
Time to Lowest Point
Recovery to Old Top
1984
410
NA
NA
NA
1992
4467
2084
-53%
12 months
27 months
2000
5934
2617
-56%
19 months
46 months
2008
21200
??
??
??
??
As evident from the above, the corrections in every cycle were steep and fast. This was followed by a long cooling period,
which could be 15-25 months. Once the base is built, the benchmark index swiftly moved up to achieve the earlier top that
took 27-46 months. At these levels, bouts of profit booking occurred from investors who believed that a healthy correction
was needed for markets to smoothly sail ahead. Eventually, the underlying momentum on the back of strong
fundamentals came into play and the index zoomed ahead to make new highs.
The Current Phase
The 2008 cycle, in all probability, is the latest cycle. The benchmark index has corrected 30% odd and has witnessed some
bounce back. If the cycle is to be believed, we may see some more pain in the offing - 10% or more. The bounce back lacks
strength. If you observe any Sensex chart closely you will see that once the correction started, the Sensex has made lower
tops and lower bottoms. These are signs of weakness in the equity market. Weakness in the current equity market is
evident - oil issues, MTM losses, inflation concerns, fiscal deficits, and US sub prime concerns among others. There is no
escaping this fact. The market knows all these factors and seems to have factored them in. FIIs have already pulled out
$5.6 billion out of India and are reducing India Inc. ownership. The other element one could consider is the US
Presidential cycle. According to the theory, the US equity market bottoms out 1.8 years into the Presidential term. And
recently, we have seen that the Indian equity market is not decoupled with the US market.
The Future
India's long term infra led growth story stays. However, we need to go through the current pain in order to witness the
new Bull Run. As of now, Sensex EPS is expected to slow down. A 10-15% range would take Sensex EPS to Rs.950 valuing
the market at 14 times FY09 earnings.
"Take advantage of the weakness and invest for the long-term"
INTERVIEW
- Pradeep Kumar, Fund Manager - Equity, Lotus India Mutual Fund
Lotus India AMC is a Joint Venture between the Fullerton Fund Management Group (Fullerton) and
Sabre Capital Worldwide (Sabre). Both Fullerton and Sabre have been recognised for their knowledge and
expertise in emerging markets in Asia. Alexandra Fund Management (AFM) is the sponsor of Lotus India
AMC. AFM is an affiliate of Fullerton. Both Fullerton and AFM are wholly owned by Temasek Holdings
(Pte) Ltd., Singapore. Having received approval from SEBI to launch an AMC in July 2006, the company
launched its first product – Lotus India Liquid Fund in November 2006. The fund manages over US $2
billion of assets.
13
Speaking to India Infoline, Pradeep Kumar says, "There is a misconception that banking is a rate
sensitive sector." Excerpts from the interview:
With oil prices rising, what impact do you see?
Oil prices have been driven more by financial interests of various participants rather than demand–supply equations. I
don't think that the world has changed to such an extent that oil prices should double in a short span of time! A lot of
speculation is taking place. It would be foolhardy to hazard a guess on oil prices with expectations ranging from US $100
to US $200. We believe that oil prices cannot last higher for long because ultimately demand-supply equations will
prevail.
India sure faces a problem due to high oil prices. Being a net importer, our financials will deteriorate to that extent. The
current account deficit is widening and the inflationary pressures are already here for all to see. If oil price goes to the
feared levels of $200, it would obviously be negative for the Indian economy. At the same time, you must remember that
with India expected to grow at 7-8%, it remains one of highest growing economies as compared to the world economy,
which is growing at 2-3%. We can't look at India as a three to 6-month old story. There are structural changes happening
in India as a whole. There will be negative headwinds for some time and there will be phases when most sectors are firing
on all cylinders. The economy has the potential to grow at the rate of 7-8% for a long time. Some serious reform measures
will accelerate the growth further for the Indian economy.
Given the political situation, what kind of expectations do you have on the reforms' front?
For the last 10 years, most political parties have indicated that reforms would be there. The speed of reforms may be faster
or lower than expectation. So the bottom-line is that reforms are here to stay, pace may vary.
Which are the sectors you are bullish and bearish?
We are bullish on Banking & Finance, FMCG, Media and Telecom. We continue to remain bullish on sectors that are
domestic demand-driven. We are bearish on commodities and metals. On IT services, we are negative. There may be
some spurts due to the rupee depreciation. We think business strength counts more than mere currency fluctuations,
which are still not clear.
Banking stocks have got pounded and you are still overweight on the sector?
There is a misconception that banking is a rate sensitive sector. We do not subscribe to this view. In the last fifteen years,
the banking sector has grown in multiples of real GDP growth. This includes loan growth, deposit growth, bottom-line
growth, net income growth and net interest income growth. The other misconception is that the banking sector will be
affected as Net Interest Margins may take a hit. Here, one has to understand that banking is a pass through sector. If there
is any increase in cost of funds, banks increase the lending rates. The valuations too are very attractive. PSU banks are
available below book value. Private sector banks are available at less than two times price to book ratio. The sector's ROE
ranges from 14-22% and stock price movements in recent times is a knee jerk reaction.
You have a banking fund too.
Recently, we have launched Lotus India Banking Fund. The investment objective of the scheme is to generate long-term
capital growth from a portfolio of equity and equity-related securities of companies engaged in the business of banking
and financial services.
What kind of cash levels are you sitting on?
We don't believe in holding cash. The cash levels maintained are more to handle redemptions, if any, and some small
churns in the portfolio. We maintain cash levels of 3-5%. We believe our investors have already made their asset
allocation and taken a decision to invest the amount given to us in equities. We don't have to take any asset allocation call.
Our expertise is to invest in stocks that we expect to do well.
By when do you see inflation coming down?
Inflation is much higher as it is close to 11.5%. We believe inflation would remain in double digit for the next 3-4 months.
What are your expectations from the first quarter numbers?
I think quarterly numbers will be better than expectations. In the last two to three months, expectations have scaled down
so corporate performance would be better than what people now expect.
What are the changing trends as far as investing in MF is concerned?
As an industry we are in for better times. From what we speak to others in the industry too, redemptions have not been
much this time round. In the last 5-6 years, investors have a lot of choices to invest across funds.
What is your advice for retail investors?
The volatility and uncertainty in the stock market is a part and parcel of the game. This painful situation is unlikely to
remain for long. Retail investors should take advantage of the weakness and invest with a longer term view.
(Courtesy: www.indiainfoline.com)
By Saarthi
STOCK WATCH
Within a matter of six months, the share price of KLG Systel Ltd. (Code: 531269) (Rs.359.55) has fallen one third from its
high in January 2008 despite posting a robust performance. For Q4FY08, its topline doubled to Rs.76.50 cr. and net profit
shot up 75% to Rs.14 cr. For full FY08, the figures are far more impressive as it registered 120% and 140% increase in
14
revenue and profit to Rs.269 cr. and Rs.52 cr. respectively. Thus it posted an EPS of Rs.45 on its current equity of Rs.11.70
cr. but declared only 27.50% dividend for FY08 against 25% last year. The company specialises in offering technological
solutions for the entire business lifecycle i.e. right from concept and creation, through plant design, project execution and
management operations & optimisation to expansion/ revamp. It also provides on-line IT solutions to distribution
utilities, using its self-developed software Vidushi, SG61 Technology and solution for determining the transmission &
distribution losses, fixing the areas of power theft, on-the spot billing & cheque collection, enhancing revenue collection
efficiency of the utilities and addressing consumer grievances. On the other hand, to capitalise on its Engineering Services
Outsourcing (ESO) potential, the company has gained engineering design domain-expertise in various industry verticals
and has ventured into planning, design and erection of large scale infrastructure projects. For FY09, it is expected to clock
a turnover of Rs.325 cr. and profit of Rs.60 cr. i.e. an EPS of Rs.45 on estimated diluted equity of around Rs.13.25 cr.
******
As per the experts, the real estate cycle has peaked out and the property prices are poised to correct substantially in the
near future. Coupled with rising input costs, some of the companies are even excepted to slip into red. However, Ansal
Housing & Construction Ltd. (Code: 507828) (Rs.96) being into construction of integrated township in smaller cities may
continue to perform well. For Q4FY08, on a standalone basis, its revenue grew by 20% to Rs.65 cr. but its EBIDTA jumped
up 50% to Rs.24 cr. But due to higher interest and tax, its net profit remained flat at Rs.13.25 cr. For FY08, its total revenue
was up 25% to Rs.250 cr. and PAT increased by 30% to Rs.55 cr. posting an EPS of Rs.31 on its current equity of Rs.17.70
cr. This is among the few companies making full tax provisioning, which ensures that its profits are for real. For future
growth, it has lined up gigantic 56.10 million sq. ft of development (80% in the residential segment) spread over 22 cities
in the next five years. It has a rich land bank of 2500 acres with about 50% in its own name while the rest is under firm
collaborators' agreement. Earlier the company had made a preferential allotment of 17 lakh warrants to the promoters at
Rs.208 and 29.50 lakh warrants at Rs.225 to others, which may not get converted into shares considering the low CMP. For
FY09, it can report a topline of Rs.300 cr. with PAT of Rs.60 cr., which translates into an EPS of Rs.34 on its current equity
whereas the diluted EPS of Rs.28 on its fully diluted equity of around Rs.21.50 cr. A good contrarian bet.
******
The rising crude oil price is hurting most manufacturers but is indiretly benefiting India Glycols Ltd. (Code: 500201)
(Rs.233.50) since it is engaged in production of ethylene oxide (EO)/mono ethyl glycol (MEG) from molasses against the
conventional route of making it through distillation of crude. Thus while the price of the final product is shooting up its
raw material cost remains the same thereby boosting its profit margin. It reported stellar performance for Q4FY08 as sales
jumped up 60% to Rs.339 cr. and net profit stood at Rs.27 cr. against the net loss of Rs.1.90 last year. For FY08, its sales
was up 50% to Rs.1304 cr. whereas PAT has more than quadrupled to Rs.178.50 cr. thereby registering an EPS of Rs.64 on
its equity of Rs.27.90 cr. As a measure of backward integration, the company has set up a new distillery with an annual
production capacity of 66,000 KBL at Gorakhpur in Eastern U.P and has also taken over a sugar company called M/s.
Shakumbari Sugar. Moreover, it is adding an Extra Natural Alcohol (ENA) facility at Gorakhpur to meet the requirement
of domestic and international markets. On a conservative basis, it is expected to clock a turnover of Rs.1500 cr. with net
profit of Rs.165 cr. i.e. an EPS of Rs.59 on its current equity. It's a good opportunity to accumulate this scrip at every
decline.
******
NCL Industries Ltd. (Code: 502168) (Rs.37), the flagship company of the NCL group is engaged in four business
segments namely cement, cement bonded particle boards, prefab and hydel power. Presently, cement contributes 75% of
its revenue, board and prefabs contribute 20% and the balance comes from hydel power. On the back of aggressive
expansion, the company has doubled its cement manufacturing capacity to 630,000 TPA and is further looking to triple it
to 20 million TPA within a couple of years. It has also set up a new particle board manufacturing facility in Himachal
thereby taking its total capacity to 80,000 TPA. On the other hand, its prefabricated structures division is witnessing good
demand and has bagged a huge order worth Rs.50 cr. a few months back. Fundamentally, it recorded 30% growth in sales
to Rs.193 cr. whereas PBT grew by 45% to Rs.43 cr. Due to high tax provisioning, its net profit improved marginally by 7%
to Rs.29.50 cr. posting an EPS of Rs.9 on its current equity of Rs.32.50 cr. With rising input costs and the government
interference on cement prices, the company is estimated to report a topline of Rs.275 cr. and maintain its profit of around
Rs.30 cr. i.e. EPS of Rs.9 on its fully diluted equity of Rs.34.90 cr.
By Kukku
FIFTY FIFTY
The bull run that we saw in 2007 was more liquidity driven and many power related stocks shot up to unrealistic
valuations in order to market the Reliance Power issue at unjustified high premium. Speculation was so high that many
mid caps quoted at unexpected high valuations. Once the issue was sold, Reliance Power drifted to lower levels and
Reliance Energy, too, is available at more realistic valuations. But many investors got trapped at higher valuations. This
column had advised from time to time to avoid unjustified high premium issues having no proven track record.
15
While buying, investors should therefore not compare valuations from peak levels. It is better to compare valuations from
the average of 2006 level, which are a more reliable yard-stick for taking fresh investment decisions.
Many broking firms collected a huge premium for their IPO, which is not justified as there is no certainty or consistency
in this business and now we find many such stocks trading below the issue price. This column had repeatedly cautioned
investors against such IPOs.
For collecting premium, companies raising funds should have a strong track record of consistent performance of at least
three years, a good brand value and good credit rating.
Many innocent new investors were trapped by this game of unrealistic valuation.
Recovery in the market may take little longer. From here, it is better to be into safe and defensive stocks.
Results from the core sector may not be encouraging in view of the sharp rise in input costs. Investors can buy up to 25%
of the cash they have and another 25% after the Q1FY09 results are declared.
No situation is permanent and the high levels in crude oil prices may not sustain for long. Hence, this is the time to start
accumulating good stocks because many of the worst fears have been factored to the extent of 70% to 80% in the current
prices, which may not materialise.
Market Guidance
* Ashiana Housing (Rs.66.45) has come out with encouraging FY08 results. Sales went up by 154% from Rs.49.68 cr. to
123.34 cr. while net profit flared up by 309% from Rs.9.68 cr. to Rs.36.99 cr. Its full year FY08 EPS works out to around
Rs.19.75 and it has declared 15% dividend on the enlarged capital, which works out to around Rs.52.5% on its old capital.
The company has construction projects of 9 million sq. ft. to be completed over the next 3/4 four years. Profit margin per
sq. ft. is around Rs.350/ 375 per sq. ft. and it is a debt-free company. Investors can keep a watch on this stock to
accumulate on dips.
* Jetking Infotrain (Rs.284) has come out with encouraging FY08 results. Sales shot up to Rs.39.88 cr. while net profit was
Rs.9.84 cr. against Rs.5.39 cr. on its equity of Rs.3.93 cr. giving an attractive EPS of Rs.25.08.
The company has given 160% interim dividend for 2008-09 and has come out with a bonus issue of 1:2. The management
has rewarded shareholders very well over the last few years with good dividend payment and bonus issues. Its future
outlook is also encouraging.
Long-term investors can accumulate this debt-free stock on dips for good long-term growth. Seeing to the good dividend
yield the downside in the stock is limited.
* Revathi Equipments (Rs.945.65) has declared good results. Full year sales went up to Rs.118 cr. against Rs.87 cr. last
year while net profit shot up to Rs.21.90 cr. including extraordinary income of Rs.7.7 cr. against Rs.12.52 cr. last year. The
EPS works out Rs.71 including extraordinary income and Rs.46 without the extraordinary income. The company has
maintained the dividend at 100%.
Compared to other capital goods companies, the results of Revathi are good but it remains to be seen how the company
fares in the current year given the sharp rise in raw material costs. But its long-term outlook is said to be encouraging.
* RPG Cables (Rs.25.90) - There is a sharp jump in interest cost for FY08, which increased from Rs.16.4 cr. to Rs.26.85 cr.
as a part of restructuring. The company wants to sell its Thane unit land but in view of the prevailing sentiment in the real
estate market, it may not get a good price for the same. It is possible that the restructuring may get delayed. In the current
sentiment, it is better if investors think of other options in the same sector like Torrent Cables, which is a debt-free
company and the share has reacted from its high of Rs.440 to current levels of Rs.175. It has strong book value of around
Rs.125.
* Net profit of Impex Ferro Tech (Rs.24.30) rose 648.81% to Rs.6.29 cr. in Q4FY08 as against Rs.0.84 cr. during Q4FY07.
Sales rose 189.18% to Rs.91.64 cr. in Q4FY08 as against Rs.31.69 cr. during Q4FY07. For Q4FY08, its EPS is around Rs.2.5.
For FY08, its net profit rose 248.79% to Rs.10.08 cr. against Rs.2.89 cr. during FY07. Sales rose 59.54% to Rs.262.93 cr. in
FY08 against Rs.164.80 cr. during FY07. The EPS
works out to be around Rs.4 for the full year.
Since current prices of ferro alloys, ferro
manganese, silicon manganese are around 20%
higher compared to last quarter, it is likely to
improve its profit margins in the current year
when its EPS may jump to Rs.13/15 level.
Risk Factor: If product prices come down,
profits of the company may come down
sharply. Investors looking for risky gains
should enter this stock only on dips.
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* Andhra Sugar (Rs.84.20) has a strong book value of Rs.111 while it has paid 60%, 75% and 60% dividend respectively in
the last three years. The company is into sugar, caustic soda & power generation and the outlook for all these sectors is
16
encouraging since price realisation is said to have improved in the sugar & caustic soda industries. Dividend for FY08
may be around 45% to 50%. Thus at the current price level of Rs.80, the dividend yield too is good, which may not allow
stock to fall much. The scrip's 52-week high/low is Rs.165/73.
* Cords Cable (Rs.80.40) is trading at a P/E ratio of less than 5 on its projected EPS of around Rs.17/18 for FY09. Book
value is Rs.72; 52-week high is Rs.156. The stock looks attractive around Rs.80 level for good long-term growth.
* Cummins (Rs.236.40) is another growth oriented stock, which investors can think of slowly accumulating on dips as
good portfolio choice.
* Thermax/Hindustan Dorr Oliver (Rs.377.95/76.30) are other debt-free companies, which investors can think of
accumulating on dips.
* Net profit of Rishi Laser (Rs.58.70) rose by 64.86% to Rs.4.55 cr. in FY08 as against Rs.2.76 cr. during FY07. Sales rose
106.65% to Rs.104.73 cr. in FY08 against Rs.50.68 cr. during FY07. EPS works out to be around Rs.5.7. The company has
declared 20% dividend. The full benefit of the expansion will come in the current year. Accumulate on dips. Risk factor is
the rising raw material costs and the low promoter stake.
* Saregama India (Rs.99.05) will invest close to Rs.150 cr. over the next two years in producing seven movies. The
company is also in the process of picking up a minority stake in an event management company as part of its attempt to
manage and popularise its movies post-release. Investors are advised to take small exposure on dips in this stock.
17
By V. H. Dave
EXPERT EYE
For a growing economy like India, the economic value of natural resources like coal, iron and iron ore cannot be
overemphasised. Natural resources are the backbone of any economy. Prices of commodities like oil, natural gas and iron
ore have surged in recent years. Deep Industries Ltd. (DIL) (Code: 532760) (Rs.132.50) is one such company with sizeable
natural resources like Coal-bed methane (CBM). Incorporated in 1992, DIL is the largest private sector gas compression
company in India with an extensive rental fleet of compressor packages and the first Indian company to provide
compression services in USA. DIL provides various oil & gas field services such as supply and rental of compressors,
operation & maintenance and execution of turnkey projects. DIL has also tied up with Indrillco, an Indonesian company,
for technical know-how and collaboration in connection with work-over rigs. DIL had tapped the capital market in
September 2006 for expanding its business at a capex of Rs.60 cr. out of which Rs.41 cr. were raised through an IPO of 1.13
cr. shares of Rs.10 issued at Rs.36 each.
Having been allotted two blocks in the CBM-III round in 2006, namely Godavari (A.P) and Singrauli (M.P), the company
has forayed into exploration and production of oil & gas. Seeing the huge potential, Reliance Natural Resources Ltd.
(RNRL), has recently said that it too plans to kickstart several CBM projects in the future.
The primary energy source of natural gas is a substance called methane (CH
4
). CBM is simply methane found in coal
seams and it is a clean burning fuel for domestic and industrial uses and its extraction reduces explosion hazards in
underground coal mines.
DIL presently owns 14 compression sets and
provides comprehensive compression services on a
contract basis, which includes operation and
maintenance work. The compressor packages
owned by DIL are supplied by the most reputed
packagers known viz. The Hanover Company, USA,
Universal Compression
Inc., USA, Valerus
Compression Services, USA, Dresser-Rand (I) Pvt.
Ltd and Kirloskar Pneumatic. Presently, the
company's clients include ONGC, Indian Oil and
GACL in India.
DIL has purchased two engine-driven compressors
and has placed orders for eight more gas
compressors. It currently owns four work-over rigs
with capacities of 100 tonnes, 50 tonnes and 30
tonnes. The 100-tonne rig provides work-over
services up to depths of 4,200 metres below ground
level and can drill up to depths of 2,000 metres. It
has been deployed at ONGC's Rajahmundry
project, while the 30-tonne rig has been deployed at
ONGC's Ahmedabad project.
Meanwhile, DIL has received orders from ONGC
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18
and Assam Gas Company valued at Rs.16 cr. for compression of gas for a period of 10 years in addition to Rs.10.3 cr.
already bagged for a period of 2 years. DIL has also been roped in for development of Ghotaru, Kharatar and Bankia
fields in the Western Onshore Basin by ONGC.
It has been awarded a Rs.14.3 cr. contract by Reliance Industries for deployment of 500 HP Land rig for
completion/workover/testing of 13 wells. It has also received orders worth Rs.36 cr. from GSPL.
DIL has signed a MoU with IOC for exploring the possibility of JVs for two CBM blocks and three marginal gas fields and
for marketing of gas. It has also entered into a MoU with ONGC for CBM work in Rajasthan. DIL has been allotted three
gas marginal fields in Rajasthan. ONGC has already drilled 22 wells in those areas, of which nine wells are already
producing. The total reserves estimated by ONGC is 1.44 billion cubic metres.
Development of marginal fields is a strategic business pursuit by ONGC to increase production by unlocking small pools
of discovered hydrocarbon reserves. Out of the total 165 new and marginal fields, 44 have been monetised and about 90
fields are in the process of monetisation or being put into production.
During FY08, DIL recorded 142% increased income of Rs.20 cr. and posted 147% higher net profit of Rs.6.7 cr. yielding an
EPS of Rs.3.2. Its equity capital is Rs.20 cr. and with reserves of Rs.90 cr., the book value of the share works out to Rs.35.
The promoters hold 45.6% in the equity capital. Foreign holding is 5.3%, Institutions/mutual funds hold 14.5%, PCBs
hold 5.2% leaving 29.4% with the investing public.
The demand for air or natural gas compression services stems from the production of crude oil and natural gas and also
from the storage and transportation of natural gas. With the top three companies: Reliance Industries, ONGC and GSPL
having natural gas reserves of close to 23.2 trillion cubic feet (tcf), 21 tcf and 20 tcf respectively and with production
starting after July 2008, the demand for air and natural gas compressors along with work-over rigs is bound to increase.
CBM contracts are similar in principle to exploration and production concessions in the oil & gas industry. If recovery and
commercial exploitation of the CBM gas ultimately proves viable, the exploring firms will be free to construct pipelines
and sell the gas to consumers or they may set up gas-based power plants.
While DIL's core business looks inviting and adds tremendous value, the CBM blocks it won should provide an
enormous upside to the already positive business. The CBM blocks, if executed as per plan, could provide steady
revenues of Rs.150-200 cr. from 2010 to 2014 and Rs.300-400 cr. every year for 20 years from around 2014. The valuation of
its possible assets including above CBM is pegged at a whopping Rs.1100 cr. according to sources. This translates into a
value of whopping Rs.550 per share.
It recently allotted 20,00,000 convertible warrants of Rs.200 each to promoter/associates and non- promoter on a
preferential basis. On conversion, DIL's equity will go up by Rs.2 cr.
DIL's earning is bound to increase not only due to the enormous demand for oil & gas exploration services and work-over
rigs services but also from revenues and margins generated through the CBM blocks at current natural gas prices.
During FY09, DIL is likely to register a net profit of Rs.17 cr. on income of Rs.50 cr. During FY10, net profit is expected to
be Rs.28 cr. on income of Rs.80 cr. EPS would work out to Rs.8.5 and Rs.12.7 on enhanced equity of Rs.22 cr. for FY09 and
FY10 respectively.
The DIL share is traded at Rs.132.50 at a P/E of 14.9 on FY09E and 10 on FY10E is recommended with a target price of
Rs.160 in the medium-term.
******
The shares of Goa Carbon Ltd. (GCL) (Code: 509567) (Rs.72.55) are being accumulated by HNIs, operators and investors
in the wake of its excellent FY08 results. The buzz is that this calcined coke major is expected to perform even better in the
current year in view of the robust demand for its products as the user industries are in an expansion mode.
Calcined Petroleum Coke (CPC) is the product obtained by calcining petroleum coke. This coke is the product of the coker
unit in a crude oil refinery and is used to make anodes for the aluminium, steel and titanium smelting industry.
GCL posted excellent Q4FY08 results on sustained demand and firm prices. The surge in profits can be attributed to the
demand for CPC at over $500 per tonne, which used to be as low as $300 per tonne till Q3FY08. The company expects this
trend to continue.
GCL was promoted by the Dempo Group. The main business activities of the group are iron ore mining and exports. Its
other lines of business are pig iron manufacture, barge building, ship repairs and civil construction besides
manufacturing and marketing of paints and varnishes, extruded foods and breakfast cereals, publication of newspapers
and marketing of reputed brands of consumer durables and commercial vehicles.
The calcination plant of 75,000 TPA capacity was set up with technical assistance from Great Lakes Carbon Corporation,
USA, and is located in southern Goa, 40 kms away from the Mormugao port. It has a well equipped laboratory and
quality control systems and procedures. The plant is ISO 9001:2000 certified by Bureau Veritas. It is also 14001:2004
certified.
GCL also has two other plants, one located at Bilaspur in Chattisgarh and the other at Paradeep in Orissa, which were
acquired in 1999 and 2001 respectively. The installed capacity of the Bilaspur plant is 40,000 TPA and that of the Paradeep
plant is 1,25,000 TPA. Thus, the total CPC manufacturing capacity of GCL is 2,40,000 TPA.
CPC is used in aluminium smelters to process alumina. GCL has integrated all its acquisitions by merger of both its
erstwhile subsidiaries to realize maximum operational efficiency and to meet buyer's requirement of CPC on all India
basis.
GCL exports CPC to Australia, Russia, Iran, Saudi Arabia, Indonesia and UAE. The company is continuously exploring
opportunities in global markets for exporting its products.
Exports constitute almost 30% of sales and its state-of-the-art manufacturing facilities have attracted global aluminium
smelters to outsource their requirements from GCL.
GCL has achieved all round improvement in results through cost effectiveness, operational efficiency, increase in market
share and optimum utilisation of production capacity.
GCL has already turned around in Q4FY08, and posted excellent results beating street expectations as it posted a net
profit of Rs.13 cr. on sales of Rs.68 cr. as against a net loss of Rs.9 lakh on sales of Rs.72 cr. in Q4FY07.
For FY08, it earned 4430% higher net profit of Rs.15.5 cr. (Rs.28.5 lakh) on sales of Rs.208 cr. (Rs.185 cr.). The EPS works
out to Rs.16.9 and it declared a dividend of 30%.
Its equity capital is Rs.9.2 cr. and with reserves of Rs.51.4 cr., the book value of the share works out to Rs.66. The
promoters hold 56.4% in the equity capital, PCBs hold 6.3% leaving 37.3% with the investing public.
GCL is now firmly established as a leading Indian petcoke calciner. It is a regular supplier to aluminium smelters,
graphite electrodes, titanium dioxide manufacturers and other users in the metallurgical and chemical industries. Close to
70% of the CPC demand comes from the aluminium sector. Due to the rising demand, CPC prices have been firming up.
The growth of petroleum coke business is linked to the growth of basic aluminium metal production, steel industry and
the manufacture of titanium dioxide. The growth of aluminium metal production is expected to be in the range of 6% to
9%. Globally, the steel industry is looking positive. There are number of brownfield expansions happening and some of
them are at the completion stage. Considering these factors, the petroleum coke business is really promising in the long-
term.
GCL is likely to register sales of Rs.250 cr. in FY09 with a net profit of Rs.22 cr. This would give an EPS of Rs.24. The share
is currently available at Rs.72.55 discounting its current EPS of Rs.16.9 by just 4.3 times and FY09 projected EPS of Rs.24
by only 3.1 times. At a reasonable P/E of 6 will take the share price to Rs.144 in the medium-to-long-term. The 52-week
high/low of the share has been Rs.123/38.
******
-97.
The shares of Cummins India Ltd. (CIL) (Code: 500480) (Rs.236.40) are being recommended for decent appreciation in
the long-term. Incorporated in 1962 as a joint venture (JV) with Cummins Engine Company, USA, to manufacture internal
combustion diesel engines, the name of the company was changed to Cummins India Ltd. subsequent to Cummins
Engines, USA, hiking its stake from
50% to 51% in 1996
19
CIL manufactures diesel engines in the
200-2000 horse power (HP) range and
filtration equipments. Its diesel engines
have applications covering a wide
range of market segments such as
power generation, construction and
mining, oil fields, marine, locomotive
and automotive. The company derives
a major chunk of its revenue from the
power sector. CIL also manufactures
turbochargers in collaboration with
Holset
Engineering,
UK,
and
flameproof diesel engines used in
hazardous industries in collaboration
with Pyroban, UK. Cummins Doese,
Cummins Infotek, Cummins Turbo
Technology and Cummins Power
Solutions are the four subsidiaries of
CIL.
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CIL was appointed the sole global manufacturer and supplier for the new Quantum-60 HP engines. It is also the sole
supplier of K-50 and K-38 natural gas engines to Cummins' North American markets and other countries. In FY06, CIL
launched its 38 litre marine engine for the export market.
During FY08, the company recorded 25% higher consolidated sales of Rs.2655 cr. and earned 21% higher net profit of
Rs.324.9 cr. Its EPS was Rs.16.4 on its share of face value of Rs.2 and it paid a dividend of 230%.
CIL's equity capital is Rs.39.6 cr. and with reserves of Rs.1063 cr., the book value of the share works out to Rs.55.7. The
value of its gross block is Rs.493 cr. The value of its investments in bonds/debentures, shares and unquoted units is
Rs.249 cr.
The US parent, Cummins, holds 51% in the equity capital, domestic institutions hold 17.4%, foreign institutional holding
is 15.7%, mutual funds hold 5.7% leaving 10.2% with the investing public.
CIL recently inaugurated its $2 million manufacturing facility at its Kothrud plant in Pune in March 2008. This expanded
facility has commenced commercial production of mechanical and electronic KV series of engines ranging from 750 HP to
2250 HP to meet the demands of power generation, marine, construction, mining and locomotive applications.
Its also specialises in assembling, testing and up-fit of high horsepower engines as per customer requirements. These will
be exported worldwide and over time, capacities within Cummins' global locations could consolidate, whereafter
production from the UK could move to India for the 7.5-50 KVA range of gensets. In a structured roll-out this year,
Cummins power generation business will launch a new design genset in the 7.5-45 KVA range, called the X range, from
this greenfield plant.
CIL will invest Rs.850 cr. and set up three plants at Phaltan in Satara district for manufacturing truck and bus engines,
diesel and gas gensets and diesel engines. The unit for manufacturing 'B' series of bus and truck engines will be a JV
between the Tatas and CIL and will be known as Tata Cummins Ltd. (TCL). TCL will invest Rs.400 cr. in the plant and the
first engine is expected to roll out by the mid-2009. A plant for diesel and gas gensets is likely to be set up at an
investment of Rs.250 cr. CIL wholly-owned subsidiary, Cummins Turbo Technologies, will start a diesel engine
production unit at a cost of Rs.200 cr.
CIL has been working with the Indian Institute of Science (IISc), Bangalore, to develop engines running on bio-mass using
locally available fuel like wood or rice husk or corn husk. These are engines in the 150-200 KVA range, which can be used
by rural industry for powergen applications. CIL has launched them as pilot products in India where it can prove the
technology and then take them to China, Africa and Latin America.
The massive investments lined up in the power sector by the private generation companies augurs well for the future
growth of CIL.
Based on the going so far and its future growth prospects, CIL is likely to post an EPS of Rs.20 in FY09. The shares of CIL
are traded at Rs.236.40, at a forward P/E of 12. In view of the strong fundamentals of CIL, its expansion plans and the
improved prospects for the user industries, the shares of CIL can be bought for long-term gains. Investment in this share
is likely to fetch a decent appreciation of about 33% in about one year. The 52-week high/low of the share has been
Rs.463/265.
Kohinoor Broadcasting to sign MoU with Kaybee of London
MARKET FOLIO
Kohinoor Broadcasting Corporation Ltd. plans to sign a MoU with Kaybee Ltd., London, a company engaged into TV
production and film content for Hollywood and Bollywood, for engaging it to obtain the license for broadcasting of TV
channel and Teleshopping in UK and setting up play-out station and production studio in UK.
The company plans to invest Rs.200 cr. in equity shares of the wholly owned subsidiaries viz. Kohinoor Broadcasting
Corporation FZE and other subsidiaries to be incorporated worldwide. The company plans further raising of funds to the
tune of Rs.130 cr. by way of GDR issue. The company also plans investment in subsidiary companies to the extent of Rs.50
cr. and has decided to increase the authorized share capital from Rs.116 cr. to Rs.220 cr.
C. Mahendra Exports Ltd. plans IPO
C. Mahendra Exports Ltd., the flagship company of C. Mahendra Group, proposes to enter the capital markets with a
public issue of 13,000,000 equity shares of Rs.10 each through 100% book building process to raise capital.
The Group is an integrated diamond and diamond jewellery player encompassing sourcing of rough diamonds, trading
of rough and polished diamonds, processing of diamonds and manufacture of diamond jewellery.
Soma Textiles for soft, flat finishing of denim fabrics
Soma Textiles and Ind. Ltd., a $40 million textile company with integrated manufacturing facilities, has embarked on a
major expansion whereby it will introduce soft and flat finishing range for denim fabrics.
The company is planning to install a polymerizer for developing specialty finishes on fabrics. The company is going to
focus on continuous length dyeing of shirting and bottom weight fabrics. The company's product range includes cotton-
20
combed yarns, polyester-cotton and polyester-viscose yarns, shirting and bottom-wear categories in 100 percent cotton,
polyester cotton blends and polycottons, silky denims, slub and streaky denims, polydenim, stretch denim, exotic denims,
etc.
Maars Software for infrastructure development
Maars Software International Ltd. will enter into joint venture for infrastructure development for developing residential
and commercial complexes across India worth Rs.2000 cr. It is also setting up of subsidiary, Maars International Pvt. Ltd.,
to foray into media, entertainment and film distribution business with total project outlay of approximately up to Rs.100
cr.
Cybermate Infotek to adopt biz plan for SBU
Cybermate Infotek Ltd. plans to adopt a business plan for a strategic business unit (SBU) for providing RFID solutions in
the mobile computing space in accordance with the reseller agreement entered with Motorola. The company also plans
for networking as well as software services to be provided to Andhra Pradesh Power Generation Corporation Ltd.
(APGENCO), Hyderabad and adopt the terms and conditions of contract of services entered with Ariston Tek Inc., USA.
K Sera Sera's Sarkar Raj is a success
K Sera Sera Productions' 'Sarkar Raj' has turned out to be a success at the box office with over Rs.23 cr. coming in the first
week. This means that Sarkar Raj would prove to be an average success at the box office at the least. The movie released
on June 6, 2008.
The company expects to jointly produce six films with Sahara Motion Pictures valued at Rs.100 cr.
Disclaimer: Investment recommendations made in Money Times are for information purposes only and derived from sources
that are deemed to be reliable but their accuracy and completeness are not guaranteed. Money Times or the analyst/writer does
not accept any liability for the use of this column for the buying or selling of securities. Readers of this column who buy or sell
securities based on the information in this column are solely responsible for their actions. The author, his company or his
acquaintances may/may not have positions in the above mentioned scrip.
21
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