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Archive for April 2011

Suspense on under recovery sharing continues

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Q3FY11 witnessed the spectacle of the PSU OMCs (IOCL, BPCL, HPCL) postponing announcement of their quarterly results since the Govt. was taking its time in declaring its share of the gross under recovery burden for that quarter. As things stand now, our estimated gross under recovery for Q4FY11 is ~ Rs 31 bn, which is almost double the gross under recovery figure of ~ Rs 15.8 bn for Q3FY11. The sheer amount of the subsidy burden makes this quarter’s results particularly interesting!

The prevalent under recovery sharing pattern entails the upstream sector (ONGC, OIL India, GAIL) to bear 33% of the subsidy, the Govt. to bear 50% of the subsidy and the remaining 17% to be borne by the OMCs. However, due to the meteoric rise of crude during Jan – Mar 2011 and no revision in retail prices of petrol, diesel, kerosene & LPG, the under recoveries have ballooned to ~ Rs 31 bn.

There is a concern that the upstream sector, which benefits from rising crude prices, may be asked to bear a higher share of the subsidy. Such a move, if implemented, would be negative for the entire upstream sector. Moreover, it may result in very poor investor response to the upcoming FPO of ONGC. A higher subsidy burden would be particularly negative for GAIL as it is not an oil exploration company like ONGC & OIL India, and hence, doesn’t benefit from rising crude prices. Hence, while high crude prices and higher subsidy burden roughly balance each other out for ONGC and OIL India, it is not so for GAIL as it has no upside but only downside in such a scenario.

To assuage investor concerns on this front, the Petroleum Ministry has time and again insisted that it would not increase the burden on the upstream sector beyond 33% of the gross under recovery. Meanwhile, enough hints have been dropped about raising petrol and diesel prices after the state assembly elections conclude, as per our expectations. However, this will impact FY12 under recoveries, and not Q4FY11 under recoveries. We expect the Govt. to bear upto 55% of the subsidy burden so that the OMCs can report a minimum ROCE of 12%. This episode only serves to highlight the continued dependence of the OMCs on the Govt.

From the desk of Deepak Darisi

Written by Fundamental Side

April 29, 2011 at 2:16 pm

Posted in Fundamental Side

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Markets today

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Yesterday, the US markets were at their best levels since March 2009 but, locally our markets ended below the short support level of 5800 which is now a cause of concern for traders. The April F&O expiry started at 5860 & than made high of 5945 during the month, but then could not gain further & tapered down to make low of 5693.

Markets have seen good consolidation being range bound for April after the sharp rally from 5350 levels till the top formed in April. Market needs an immediate bounce above 5850 for regaining the lost uptrend that started in month of March. Based on technical chart  pattern & averages next support on Nifty at this point in time is 5750 & weakness will continue as long as Nifty remains below 5850. Further,  Intermediate trend could be at risk if Nifty sustains below 5700 and does not bounce back thereafter. The long term averages & charts suggest that dips should be bought as structurally the trend is bullish.

Written by Rakesh Gandhi

April 29, 2011 at 2:09 pm

Posted in Market Update, Market Watch

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Tight Lending Puts India’s Growth at Risk

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Earnings disappointment is a huge risk to the markets expectation from Indian companies.

Infosys may be the harbinger for not so good corporate news going forward.

Inflation, high interest rates, political challenges and one can continue the head winds that the Indian corporate will face going forward.

The crude oil prices are hovering well above the $100 mark, and with no indication of that cooling in the near term high Inflation would continue to worry the developing economies.

With the inflation numbers revised upwards from previous projection of 7% to 8% by the RBI, interest rates would continue to remain higher. In a regime of high interest rates the cost of credit for major Indian companies increases.

Also other factors such as political turmoil and other global challenges are getting tougher to grapple with.

FII Flows:

Even though flows into EM markets was positive, there is marginal outflow from India specific funds as reported by fund-tracker EPFR Global in the week ending April 13. So the picture from fund flows seems mixed.

Technical Picture:

The 5930 level on NIFTY has now become critical and today’s reversal keeps the bearishness of the market intact.

A break below 5730 will definitely open up test of the 5200 lows and potential break of that.

Only above 5950 and 6000 levels will we be comfortable that we are only in a range and not in a bear market.

Written by Sayanta Basu

April 21, 2011 at 4:38 pm

Posted in Market Watch

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Gold finance business – an exorbitant money lender or a liberator

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If you ever asked me to pawn my jewellery to meet a payment deadline or a short blip in a business cycle, I would frown at the thought. The picture that comes to mind is something from a Hindi movie, a fat man in traditional attire looking at me suspiciously while he pays me an unjust value of my most priced heirloom.

But that just means that I am one of those metro stereo types who can approach a bank, or draw over on my credit card bill or better still ask daddy of a bit of help. For the semi urban- rural dweller who relies on daily wages, that is as constant as my morning cup of tea,  for no fault of his is not termed as  ‘pre approved for a personal loan’ this money lender who is willing to trust him, at the stake of his jewellery is  sort of a God sent.

This is the concept that a NBFCs such as Muthoot Finance Ltd. (MFL) or a Manappurram Finance have drawn inspiration from.  You won’t understand the business if you don’t understand the nature of the need. It is not just lack of 20-20 vision that you and I would not notice an MFL outlet and walk right past it – it is the vision that arises from the need.  These companies have built a careful and strong network right through regions where the business would thrive. The testimonial – over 30 years in the business, over 2,000 operational branches, over 15,000 employees, serve over 60,000 customers on a daily basis  and all this culminating to an RoE of over 30% with quality of assets that might put most well managed banks to shame. Makes you wonder whether all the migrant financial institutions, which come to India to capture the underpenetrated financial services market, have been looking at the wrong customer demographic. Well of course I do understand that they have to play their strength which is usually selling credit cards to the affluent metro and urban population with 20% default rates.

Managements of gold loan NBFCs have spent years not just building full proof models risk measurement models but building the trust of the customer that walks through the door. They seem to have addressed a need which a very few financial institution have managed to capture- quick response time.

If you happen to speak to any of these managements and ask them the one most prized question, ‘how are the NPA’s so low, they will tell you that it’s not just the risk mechanism of assessing a collateral or a 15-30% margin but a mere emotional sentiment to the piece of jewellery that causes the customer to walk back into the outlet and repay his debt. It just re- affirms my faith that Credit, is the only enduring testimonial to man’s confidence in man.

From the desk of Chaitra Bhat

Written by Fundamental Side

April 19, 2011 at 6:17 pm

Turbulence ahead of result season

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Last week was truncated to a 3 day trading week, but we witnessed huge volatility as markets made a low of 5735 & high of 5930 within a day, a decline once again towards the weekend to close at the 5824 level. After the sharp rally from 5350 markets has closed around the 5800 level for the last three weeks. The  short term trend will be at risk once nifty futures sustain below the 5800 level and the medium term trend could be at risk only if Nifty futures break the 5700 level.

Wild stock specific movement can be expected in next few days and hence caution is advised, as markets experience high turbulence ahead of the of result season. Long term averages are in favor of bulls though very short term indicators point towards a downward move.


Written by Rakesh Gandhi

April 18, 2011 at 2:07 pm

Posted in Market Update

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Silver: Solving the mystery of this rally

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Getting to the point , Look at the chart below and it gives a compelling chart observation, something which is frightening and something which at first sight is just unbelievable.

Just check the Mirror line, and the subsequent points such as (A,a) : (B,b) : (C,c) : (D,d?)

The steep rally we are seeing currently is similar to the ones we saw in late 70’s and early 80’s.

Another observation indicates that the chart has a tendency to be extremely volatile, with almost a V-shaped price trends of strong rallies and subsequent thrashing of prices.

Chart below shows the 4 trend lines which are almost parallel in nature, and joining the key points for Silver, comparing its current phase/points with the historical data points.

Quick Fundamentals on Silver:

In 1900 there were 12 billion oz of silver in the world. By 1990, estimates say that figure had been reduced to around 2.2 billion ounces of silver. Today, that figure has fallen to less than 1 billion ounces in above ground refined silver. It is estimated more than 90% of all the silver that has ever been mined has been consumed by the global photography, technology, medical, defence and electronic industries.

On current supply/demand trends, the amount of above ground refined silver is projected to shrink to even lower levels in the coming years. Industrial demand has been outstripping mining supply for most of the last 20 years, driving above ground supply to historically low levels. Few in the investment world are aware of this important fact.

Silver production has been flat in recent years while demand has been increasing. This hasn’t resulted in significantly higher prices yet because the world has been able to fill the gap from inventories and official government stockpiles.

However, today the U.S. government’s stockpile is all but gone, and sales from other official sources, such as China, Russia and India, are declining, too. The decline in refined silver stocks, from around 2.2 billion ounces in 1990 to around 300 million ounces today means that silver stocks are near an all time low.

Silver is unusual as its supply is inelastic.

This means that silver production will not ramp up significantly if the silver price goes up.  Supply didn’t increase significantly in the 1970’s when silver rose more than 35 fold in price – from $1.40/oz in 1971 to a high of nearly $50/oz in 1980. Importantly, silver is a byproduct metal and some 80% of mined silver is a byproduct of base metals. Higher prices for silver will not cause copper, nickel, zinc, lead or other base metal miners to increase their production. In the event of a global stagflationary or deflationary slowdown, demand for base metals would likely fall thus further decreasing the supply of mined silver.

Written by Kunal Bothra

April 18, 2011 at 12:18 pm

Cement Monthly

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March 2011

January to March is generally a quarter of strong cement demand. However, the demand revival has not been to the extent of supporting a double-digit demand growth for the year 2011. The cement dispatches of the top four cement players witnessed a YoY growth of 10.8% in March v/s a robust 15.5% in February. The dispatch growth of top four cement majors in January stood at 6.3%.

The strict supply discipline maintained by the industry resulted in rise in cement prices by Rs.40-50 per 50 kg bag in the last 4-6 months. The YoY prices have risen by ~ 25-30% YoY, thus resulting in better and stronger Q4FY11E nos.

The strong Q4FY11 nos. is well factored in the prices of the cement stocks; however, demand revival remains a key challenge for the sector. We remain positive on the long-term prospects of the cement sector, however in near term we believe the sector will move sideways.

Written by Fundamental Side

April 15, 2011 at 5:40 pm

Posted in Cement

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Dips should be bought

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We have seen the markets in strong upward trend as it was anticipated after the breakout above 5550, it has already met with the target of 5950. There is flurry of activity noticed in midcap stocks & advancing stocks were far more than declining stocks. We anticipate stock specific activity to increase in coming days. Based on short term averages Nifty futures fall below 5850 will increase the downward momentum. On the upside 5950 remains as resistance which needs to be crossed for the next leg of upward momentum.

Looking to the current technical chart set up, medium & long term investors should use pullback as buying opportunity. It also looks like market is making base at 5650 hence from traders’ perspective risk for the current uptrend will increase if indices close below 5650 & short term reaction for the rise from 21st March could start if Nifty futures sustains below 5850 in this week.

Written by Rakesh Gandhi

April 6, 2011 at 5:34 pm

Posted in Market Watch

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Surpassing yearly targets!

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Key Observations:

March sales numbers were significantly above our expectations as all the auto companies posted outstanding sales in the month aided by the strong seasonality factor, wherein auto companies try hard to push their products before the financial year ends. This doesn’t mean that the sales momentum was purely because of the push at the dealers’ end, but it also confirms the continuation of the robust demand in the auto sector, thus enabling a few companies to not only meet their yearly guidance but also surpass them. Going forward, in FY 12, the growth rate of the auto sector will not be as robust as it was in FY 11 mainly due to the high base effect, interest rate hikes, higher fuel costs and inflation. We expect  approximately a mid teen digit growth in the auto segment, which may wary according to the sub sectors within the segment – PV(15-17%), 2W(12-13%) and CV(13-14%). However, companies which have a unique product portfolio(M&M), increasing market shares on account of new launches and scalability(Bajaj Auto), deeper penetration in the rural markets( M&M and Maruti Suzuki) and a strong international presence(Tata Motors) will have an edge over their competitors.

Hero Honda – (TP – Rs1,527, Underperform)

Hero Honda reported a 24.4% yoy strong growth to 5.15 lakh units in February, while it was a growth of 9% mom. With this strong growth, the company has surpassed its full year guidance of 5 mn selling 5.4mn units in FY 11. This was on the back of 7 new launches including variants and refreshes in FY 11. Going forward, with the Honda split done, the company will face strong competition from Honda, raising concerns regarding R&D and maintaining the brand name. Margins remain to get impacted on this account and also due to additional spending the company has done on advertising during Cricket World Cup in Q4 FY11 . New production plant, opportunities in export markets and new launches can provide a trigger to the stock price in the medium to long term.

Bajaj Auto – (TP – Rs 1,680, BUY)

Bajaj Auto reported a 12% yoy growth in total sales in March to post sales of 3.07 lakh units. The monthly sales were 6% down on mom basis, as the company’s exports took a hit on account of crisis in Middle East and North Africa region, but one should not read further into it, as 32,000 vehicles are in transit and will be accounted additionally in April sales. The company ended this year short of their guidance of 4mn units due to vendor constraints and export performance in March. In March, the company sold 75,000 Pulsars and 1,25,000 Discover units. In FY 12, the company expects to sell 4.6mn units which will be a growth of 20% over FY 11, out of which, 4.1mn will be two wheelers and 0.5mn will be 3 wheelers. Out of the two wheelers,  1.1-1.2 mn will be Pulsars, 1.7-1.8mn will be Discover, while the rest will be Platina and Boxer. The company has recently launched Discover 125cc bike and is expecting to bring its international bike Boxer in the Indian markets which will help boost its volumes. They are also increasing their dealer base by 130 from April. Also the company has enhanced its 3 wheeler capacity to 45,000 units per month, which will help the company to achieve its new year target.

Mahindra and Mahindra – (TP- Rs 861, BUY)

M&M reported a strong 18% yoy growth in its auto segment to 37,522 units, with passenger UV sales growing 14%yoy and the 4W pick-up segment which includes Gio and Maxximo posting a 15% growth yoy. Maxximo now has 23% market share in the geographies where it is launched. Logan has posed yet another month of improved sales performance with a growth of 190% yoy will sales recorded at 1,018 units. This has been a very consistent performance from Logan which is expected to get a further lift in performance post M&M  brand getting associated with it shortly. LCV and MHCV sales declined  by 11% yoy, as the Navistar JV is at its initial stage and will take some time to enter strongly in the higher tonnage market with a stronger product portfolio. Farm Equipment Segment(FES) posted a very robust growth of 23% yoy to 19,848 units, while sequentially they were up by 4%. In the year FY 11, the Auto and the FES segments have grown by 26% and 22% respectively. M&M is setting up a new Tractor plant at Zaheerabad, AP, with a capacity of 1,00,000 units for an investment of Rs3bn, the production of which is expected to start in FY 2012.

Maruti Suzuki – (TP – Rs 1589, BUY)

Maruti Suzuki (MSIL) reported their highest ever sales by selling ~1,21,952 units in March, a growth of 28% yoy and 10% mom, thus taking their full year volumes beyond their target of 1.2mn at 1.27mn. The company for the first time in this year showed a growth in the A1 segment (M800) of 5.5% yoy, which we believe is a temporary phenomenon. However, it has reported a whopping 43% and 33% growths in A2 and A3 segments. The higher sales of A3 can be attributed to the launch of SX4 diesel in March, which would mean higher margins for Maruti.  The newly launched premium segment car Kizashi which falls under the A4 segment sold 103 units in March. This will not only add to the top line, but will also add up to the margins as it is a highly priced model, however its demand is yet to be gauged in India where the demand is primarily for the hatch back low cost cars. The C segment which includes the Eeco continued to show a good expansion of 32% rise on a yoy basis as Eeco also finds demand from public transportation i.e. the taxis (20% demand). Exports continued to slide down by 26% as non Western European markets are yet to show signs of pick up and it also reflects the crisis in West Asia, North Africa and Japan upto some extent. The company has missed its full year export target of a flat growth in FY 11 as the company has posted a 6% fall this year . However, the boom in the domestic PV market was strong enough for the company to surpass its overall sales target for FY 11 which was 1.2 mn. The capacity expansion coming up in the next 1.5 years will lead to significant jump in the company’s volumes and topline, however in the short term, the company will struggle maintaining its margins against appreciating yen leading to higher royalty payouts, vendor issues rising from Japanese crisis, increasing fuel costs, inflation  and rising commodity prices.

Tata Motors – (TP – Rs 1650, BUY)

March sales for the company were extremely strong with a 7% mom growth and a 11% yoy growth to 83,363 units, the highest ever sales for the company defying macro concerns like interest rate hikes and inflation worries. CV growth again gained pace after a subdued February, as they grew by 15% yoy, while  M&HCV grew by 12% yoy and LCV grew by 18% yoy. PV segment sales declined by 1% yoy to 29,543 units while utility segment sales grew by 24% yoy on the success of newly launched Aria.  Indica range continued to see a de-growth of 40% yoy as competition in the hatch back segment continued to intensify with the market leaders Maruti and Hyundai continuing their solid run. Indigo range sales were also low by 5% yoy. Nano sales were higher m-o-m at 8,707 units vis-à-vis 8,202 units in February (on strong marketing initiatives) and the low hit in November performance of just 500 units. Cumulative sales of Nano are ~71,000 way below their expected full year target of >100,000 units. In India, JLR sold 891 units v/s 242 sold In FY 10. In FY 11, Tata Motors sold 803,322 units, a growth of  25% yoy.

TVS Motors – (TP – Rs86, BUY)

TVS sold 191,208 units in March, a growth of 28% yoy, while on a mom basis it showed a 7.9% growth. Consistent performance from the 2 wheeler and 3 wheeler segments led to such a strong performance from TVS leading the company to surpass its full year target of 2mn to 2.04mn. In March, three wheeler sales were at 4,427, up on mom basis. Scooter sales were 50% up to 42,655 units, while motorcycles were up 24% yoy to 79,462 units. The company has also showed good traction in the exports business(14% of volumes). Management is expecting export volumes to pick up in the coming months while domestic volumes to get slightly impacted by interest rate hike, but will get support from the higher utilization rates post capacity expansion happened in FY 11.

From the desk of : Ashwin Patil

Written by Fundamental Side

April 4, 2011 at 3:40 pm