CLSA maintains 'Buy' rating on HDFC

RESEARCH: CLSA
RATING: BUY
CMP: RS 1589

CLSA maintains 'Buy' rating on HDFC with a price target of Rs 1,675. HDFC’s volume growth in FY10 is likely to be lower than the management guidance of 20% due to: a) a 20% fall in property prices, b) loss of market share and c) HDFC Bank retaining higher proportion of loans it originates.

However, margins are likely to surprise on the upside as the recent RBI guidelines on priority sector lending would lower funding costs for HDFC by 25-50 bps. HDFC’s FY10 loan growth would be ~15-17 %, lower than the management guidance of 20%, as even though the volumes in low and mid-housing segments have marginally improved, average property prices are down 15-20 %.
Source: ET

Sunidhi Securities recommends ‘BUY’ on Yes Bank for TP Rs 60

Given the high quality assets, comfortable capital adequacy, robust other income and strong growth in advances in the current challenging scenario, Sunidhi Securities has recommended ‘buy’ on Yes Bank for a target price of Rs 60 in the medium term.

Yes Bank is aggressively foraying into retail banking for deposits, while retail advances are not the focus. Its loan book is divided between corporate (57%) and small and medium enterprises (41%).

The bank also plans a foray into asset reconstruction business by the end of this year; this can boost its ‘other income’. The bank intended to increase its SME clientele to 1,000 by FY09 and plans to add 5,000 customers under its Urban-Micro Finance programme.

Sunidhi Securities expects Yes Bank’s capital adequacy ratio continues to remain healthy at 15%. Further, the bank has raised hybrid tier-1 capital (innovative perpetual debt) of INR 1.6 billion recently and expects release of 80bps when it reports in Basel 2 by FY09. Yes Bank’s NPA on Dec 31, 2008 stood at 0.15% and capital adequacy ratio at 14.6%.

Yes Bank’s balance-sheet and advances have grown by 130 per cent (compounded annually) in the last four years ended March 2008, whereas the deposits grew at 170 per cent (annualized rate) in the same period.

During Q3FY09, total income rose 64% to Rs 726 crore and net profit by 95% to Rs 106 crore. NIM and NP margin stood at 2.8% % 14.6% respectively. NPA to net advances stood at 0.15% and capital adequacy ratio at 14.6%. Its balance sheet grew by 31% to Rs 19, 747 crore (Y-o-Y).

YBL also plans a foray into asset reconstruction business by the end of this year; this can boost its ‘other income’. The bank intended to increase its SME clientele to 1, 000 by FY09 and plans to add 5,000 customers under its Urban-Micro Finance programme.

Fee income growth will continue with focus on transactional banking. The bank is not witnessing any incremental issues on derivative transactions sold and has replaced this business by normal Forex fees. Debt syndication (part of financial advisory) is witnessing increased activity as closure of equity related transactions are getting elongated despite a healthy pipeline.

Segments such as transaction banking, financial advisory and third-party product distribution have grown at a good pace to boost ‘other income’. YBL intends to grow at a rate superior to its peers, given its aggressive moves in opening retail branches, targeting SMEs and also building corporate relationships.

Thursday on NSE the stock of Yes Bank was trading 7.12 per cent up at Rs 53.
Source: ET

Market's resilience will be put to test this week

The newly-found resilience in equities may be put to test this week, with investors showing reluctance to ride the recent bullish wave ahead of the March quarter results and general elections in April and May. After the 22% rally in benchmark indices in the past couple of weeks, investors fear whether there is any space to accommodate more upsides due to unpredictability about the outcomes of these upcoming events.

Also, with fears about the global economy and financial system far from over, the wider consensus is that a bull market is still some time away. But, market participants hope that the recent steps by the US government to revive the financial system is keeping the undertone positive for the moment.

“People were genuinely fed up of the market coming down again and again. Now they see a glimmer of hope in the US government’s plans to stabilise the financial system,” said George Moller, CEO of Dutch AMC, Robeco Group.

Mr Moller, however, warned that the execution of America’s package contains lot of risks. “As soon as there are indications that the US government’s auction process is going well, markets will rise,” he said.

Mr Moller expects the global economy to be back on its feet only in 2011, and sees the equity markets responding to it a year before . On Friday, US equity indices ended roughly 2% lower.

Back home, developments in political circles in the last few days have heightened the uncertainty about the results of the general elections. With chances of the coalition - consisting of the Left parties - coming to power increasing, analysts said investors are confused and are increasingly staying on the sidelines. It is feared that this coalition would introduce policies that are not marketfriendly .

“As there is now more than a reasonable chance of a third front government coming to power, the Left agenda is likely to play an important role,” said Credit Suisse in a recent report.

Brokers said investors may need to gear up for some disappointments in the March quarter results of Indian companies, especially with the economic data hardly signalling any improvement in business activities. There are concerns about sharp write-downs , especially for small companies, which may precipitate losses in the quarter.
Source: ET

Punj Lloyd (Rs 90.35): Buy

We recommend a buy in Punj Lloyd stock from a short-term trading perspective. It is apparent from the charts of Punj Lloyd that it was on an intermediate-term downtrend from a significant resistance level of Rs 310 encountered in late September 2008 to March low of Rs 66.

The March low is also a 52-week low for the stock. However, the stock reversed its trend triggered by the positive divergence displayed in the daily relative strength index (RSI) and the daily moving average convergence and divergence. The stock breached its intermediate-term down trend-line in the recent time and has been on a short-term uptrend since its 52-week low.

While trending up, the stock crossed over the 21 and 50-day moving averages. On March 27, the stock gained 10 per cent, accompanied with heavy volume. The daily RSI has entered in the bullish zone and the weekly RSI is rising in the bearish zone towards the neutral region. From a short-term perspective we are bullish on the stock.

We expect it to rally further until it hits our price target of Rs 100 in the upcoming sessions. Traders with short-term perspective can buy the stock while maintaining a stop-loss at Rs 85.

Source: HBL

JSW Steel: Hold

Increasing domestic exposure, aggressive retail expansion plans and steps to reduce interest costs may help improve performance.

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JSW Steel shareholders can hold on to the stock, as the coming quarters may bring improved financial performance, on the back of volumes from newly-commissioned capacities and lower input prices. At Rs 231, a trailing price-earnings multiple of five times, the stock’s valuation is at a discount to steel sector peers.

However, the company’s relatively high overseas exposure, the vulnerability of its US operations to recessionary trends and the debt on its consolidated balance-sheet leading to losses in the recent quarter, appear to justify a valuation discount to peers such as SAIL.

The company’s moves to increase its domestic exposure, aggressive retail expansion plans and steps to reduce interest costs may help improve performance, with a lag of a few quarters. The debt-to-equity ratio stands at a high 1.75 (as against 0.18 of SAIL).

Business overview

With steel plants in Karnataka and Tamil Nadu, JSW Steel produces around 6.8 million tonnes of steel per annum. The company produces hot and cold rolled steel products with galvanised sheets, plates and pipes. The company’s market is concentrated in India with 85 per cent of revenues coming from West and South India.

Even as JSW Steel shifts focus to the domestic market, steel demand has been showing signs of improvement in recent months. CMIE sees steel production growing by 6.5 per cent in 2009-10 as falling interest rates stoke growth in the construction sector, thus increasing demand for long steel products.

An improvement in the passenger vehicle numbers also augur well for steel demand. JSW Steel is looking to capitalise on these trends by turning to value-added products, aggressively expanding its retail presence. The company plans to open another 50 outlets across the country and have a pan-India presence.

The improvement in sales for JSW Steel in the ongoing March quarter (relative to December) may be quite sharp, given the plant shutdowns in the preceding quarter and the commissioning of expanded capacity at Vijayanagar. The company expects its March quarter 2009 sales to expand to 1.2 million tonnes from 0.7 million tonnes recorded in December quarter of 2008. The re-opening of two blast furnaces that were temporarily shut in November and December and the commencement of production at the Vijayanagar works in February may aid volumes.

The new Vijayanagar facility has expanded the production capacity of the steel maker to 6.8 million tpa from 3.8 mtpa earlier. JSW Steel is further looking to expand the capacity to 10 mtpa by 2011.

Subsidiary drags profits

In 2007, the company acquired three plate and pipe mills in the US for a consideration of $940 million. These companies had a capacity of producing 1.2 million tonne of plates, 0.55 million tonne of pipes and 0.35 million of double jointing and coating lines and are under JSW Steel (US). The strategy behind the acquisition was to ship the excess one million tonne of slab produced in the Indian facilities to the acquired US operations for value-addition and subsequent marketing in that region. It was also hoped that the acquisition would be a stepping stone to catering to the oil and gas sector in North America, a key driver of plate and pipe demand.

But recessionary trends in the US markets and the collapse in oil prices have hit the subsidiary’s operations. In the December quarter alone, the company saw sales volume of plates decline by 53.6 per cent and that of pipes by 20.5 per cent sequentially in the December 2008 quarter; the subsidiary reported a net loss of $2.8 million for the quarter.

As demand may take time to recover in North America, the US subsidiary may continue to weigh on numbers for some more time.

JSW Steel has substantial debt outstanding in its book, with long-term loans at Rs 14,153 crore as at end-December 2008. This takes the debt-to-equity ratio of the company to a high 1.75. With the company eyeing another expansion of capacity to 10 mtpa by March 2011, there remains a risk of further addition to these borrowings.

JSW Steel’s consolidated performance in the December quarter of 2008 was hit by interest costs (Rs 330.19 crore) which more than doubled and from forex losses of over Rs 181 crore on FCCBs with the rupee depreciating sharply against foreign currencies.

Last week the company made an announcement stating that it had repurchased its FCCBs to the extent of US $ 47.80 million. However this is only a small amount when compared to the total outstanding dues in the balance sheet.

Relief on input costs

Though factors such as leverage and challenges for overseas operations remain, the company may see substantial relief in input costs.

The company has recently succeeded in negotiating the prices on long-term coking coal contracts downward to $175 per tonne from $300 per tonne, which may provide substantial margin relief in the coming quarters. (Coking coal prices had shot up to $300 in 2008 from $98 in 2007). The company has also locked into lower prices by taking delivery of 2,00,000 tonnes of coal at the negotiated price.

Overall, while JSW Steel’s efforts to increase its domestic presence may pay off only over time, the March and June quarter numbers may see improvement with the prospect of higher sales and lower input costs.

Source: HBL

Housing Development & Infrastructure: Buy

We recommend buying the Housing Development and Infrastructure stock at current levels. The stock spiralled downward from its life-time high of Rs 1,112 recorded in January 2008 to Rs 69 in December 2008. Though the stock encountered selling pressure close to Rs 200, the decline is tapering in the zone between Rs 60 and Rs 70, leading to the expectation that a long-term trough is possible in this zone. Positive divergence in the monthly relative strength index supports this view. The range for the stock over the next 12 months is likely to be between Rs 70 and Rs 200. Investors can buy the stock as it moves closer to the lower boundary and book profits near the upper boundary.

The short-term view for this stock has turned positive since it has moved above its 50-day moving average as well as the previous trough at Rs 75. Investors with a greater penchant for risk can buy at current levels with a stop loss at Rs 74 and with the target of Rs 108.

Source: HBL

Corporation Bank: Buy

Superior asset quality, high proportion of non-operating income and better operating efficiencies are key positives.

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Leveraging on its first-mover advantage in implementing CBS at all its branches.

M. V. S. Santosh Kumar

Investors with a two-three year horizon can buy the Corporation Bank stock as it trades at a low valuation, though the bank has clocked a higher rate of earnings growth than most of its PSU peers, over the past five years. At the current market price of Rs 174, the stock trades at a trailing one-year PEM of 3 and at just half its December 2008 book value.

At this valuation (P/BV), the stock trades at a discount to most of its peers. The dividend yield for the stock is 6 per cent. The large valuation discount already factors in the possibility of moderation in profits in future (likely due to rising credit costs and falling advances growth). The bank’s earnings may, however, outperform peers beyond CY09.

The South-based Corporation Bank, with 67 per cent of its branches in South India and Maharasthra, was the first PSU bank to completely implement core banking solutions (CBS) at all its branches. Superior asset quality, high proportion of non-operating income (54 per cent of net revenues), high loan-loss provision coverage (73 per cent), higher operating efficiencies (cost-income ratio of 40 per cent) are key positives on the business.

Corporation Bank’s advances book grew at 26 per cent compounded annually in the last four years. In the same period, the net profit grew by 22 per cent annually. Corporation Bank’s advances continued to grow, recording 30 per cent growth for the period ended December, 2008.

The bank’s loan book is well-diversified and comprises of corporate loans (30.6 per cent), retail loans (20 per cent), SMEs (10.4 per cent) and agricultural loans (9.2 per cent) as of December. High growth in the past year was contributed by corporate advances (46 per cent year-on-year) and agricultural advances (39 per cent year-on-year).

Financials

For the nine months ended December 2008, the bank’s net profit grew by 19.44 per cent primarily boosted by a 33 per cent growth in non-interest income. The net interest income growth of 18 per cent is on the low side due to contraction in net interest margin (NIM) from 2.81 to 2.53 per cent over a year; pressured by higher cost of deposits. Corporation Bank’s CASA ratio has tended to be much lower than other PSU peers at 25.2 per cent and actually fell from 30 per cent last year.

Corporation Bank has leveraged on its first-mover advantage in being CBS-enabled, by generating fee-based income; non-interest income contributed 32 per cent of total income (16 per cent of total income comes from core non-interest income). Core non-interest income grew by 34 per cent year-on-year boosting the total income. Cost-income ratio of the bank stands at 40 per cent though higher provisions were provided for AS-15 and employee wage revision.

Though the bank has one of the lowest net non-performing assets (NNPA) proportions in the banking space, it is exposed to higher slippages due to its exposure to slowdown-sensitive sectors such as commercial real estate, exports, SMEs and textile sector. The retail side of the loan book may also see higher slippages. In terms of asset quality, the bank’s provisions for bad loans remained flat for the first nine months of this year. Provision coverage fell from 80 per cent last year to 73 per cent, but remains healthy enough to shield the bank from any slippages in the coming quarters.

Gross NPAs of the bank stood at 1.24 per cent of the total advances and the net NPA remained flat at 0.33 per cent of the total advances. The bank may not need re-capitalisation from the government in the near future as it has a capital adequacy ratio of a comfortable 12.76 per cent. The Government of India holds 57 per cent in the bank. Though the bank is raising Tier-2 capital to maintain its capital adequacy, with Tier-1 capital of 9.68 per cent, there is no urgency for the bank to raise money from equity markets.

Outlook

The credit-deposit ratio of the bank stands at 72 per cent and is expected to come down due to moderation in the credit offtake. Given the low CASA ratio, margin pressures for the bank may continue for a few quarters. Deposit rates may not fall as sharply as lending rates over the next few quarters. On the asset quality front, the current slippages from rate sectors may show up in the coming quarters, but restructuring measures and interest rate cuts may alleviate these concerns over the medium term.

The bank’s presence in rural areas and branchless banking provide opportunities to access untapped potential customers. The bank’s tie-up with automobile manufacturers for vehicle financing may aid growth in the loan book in the secured mode.

Source: HBL

Praj Industries: Buy

We recommend a buy on the Praj Industries stock. Praj Industries is in a structural bear market since the lifetime high of Rs 273 recorded in late-2007. This long-term downtrend has, however, lost momentum since October 2008 and the stock is attempting to consolidate sideways since then. The lower end of this consolidation range is around Rs 50 that corresponds with the trough formed in February 2006. A falling wedge pattern, which is a bullish reversal pattern, is also apparent in the daily charts.

Investors with a three-month horizon can buy this stock with a stop-loss at Rs 49. The medium-term outlook is encouraging and an up move to Rs 70 levels is possible in this period. Long-term investors can also consider investing in this stock, while retaining the stop-loss at Rs 44. Following a likely sideways consolidation in the range between Rs 55 and Rs 70, the stock has potential to reach Rs 110 over a longer time horizon.

Source: HBL

Daily News Roundup - March 20 2009

Shell's India unit and IOC are in race to pick up 50% stake in RIL's new venture that will house its loss-making fuel retailing business. (ET)

RIL is in talks with Essar Oil to source petroleum products from the latter's refinery in Vadinar in Gujarat in a bid to restart its retail outlets. (BS)

ONGC has finalised tenders and awarded contracts for hiring 11 vessels in a record time of about one month, as part of its preparations for the forthcoming bidding for NELP-8. (BL)

Satyam Computer is set to lower its reported revenues over the past 7-years by at least 10-15%. (ET)

HUL and ITC Foods to extend its presence in the branded health foods sector. (FE)

Tech Mahindra bags Rs15bn credit line to back in Satyam EoI. (ET)

Satyam Computer has lost Coca-Cola's ERP contract to HP. (ET)

Maytas Infra to fully divest its stakes in some projects that it will not be able to execute. (ET)

RIL will commission all secondary units of its new refinery in a few weeks. (ET)

The consortium of IL&FS group company ITNL ENSO Rail Systems Ltd (IERS) and real estate major DLF emerged as the sole bidder for the 3.2-km Rs10bn Gurgaon Metro rail project. (BS)

Dr Reddy's to exit small generic drug markets abroad. (BL)

Unitech plans to launch mid-segment residential projects in the range of Rs0.5-1mn in metro and suburban cities like Gurgaon, Chennai and Kolkata over the next few months. (BS)

Grasim and L&T are close to settling their 7-year old legal dispute over Grasim's 0.62% stake in L&T and the latter's 11.49% stake in UltraTech. (ET)

Fitch downgrades credit rating assigned to Pantaloon Retail's short-term debt instruments from F1 to F2 +. (FE)

Dabur India puts its wellness retail chain 'new-u' on the block just two years after announcing its launch in March 2007. (ET)

The Essar Group has got back highly prospective oil block in Nigeria. (FE)

Adani Power may light the first boiler for the 330MW of the proposed 4,620MW thermal power plant at Mundra next week. (BL)

Prozone, the mall development joint venture between apparel retailer Provogue and the UK's Liberty International, is scaling down its projects. (BS)

Binani Cement, part of the Rs25bn Braj Binani group is planning to get listed on the London Stock Exchange. (BS)

The SPI Ports, a division of the Chennai based Rs13bn SPI group, has joined the race with Arcelor-Mittal and Adhunik Metaliks to set up a greenfield port at south Barunei Muhan in Kendarapara district of Orissa. (BS)

Software companies in India are anticipating a bonanza, with the country's defence forces expected to dish out ICT orders worth US$500mn (Rs25bn) in the next 24-36 months. (BL)

The government may stipulate a 7-year lock-in for foreign companies setting up manufacturing facilities for new generation power equipment. (ET)

Telecom companies are set to reduce SMS tariffs for roaming customers by up to 40% from May after a warning from TRAI. (ET)

India is mulling a proposal to let state-run trading companies import ready-to-eat refined sugar at zero duty. (ET)

India's total external financial assets declined by US$19.7bn to US$358.2bn as at end of September 2008 over the previous quarter. (FE)

The growth of mobile subscriber base in February was slower by 12.7% with addition of 13.44mn subscribers, compared to 15.41mn subscribers in January. (FE)

The gross fiscal deficit is expected to remain high in fiscal FY10, for the second consecutive year, says CMIE. (ET)

The Government has removed the 20% customs duty on crude soyabean oil imports in order to keep it on par with imported palm oil that is currently allowed duty free. (BL)

The National Insurance Company (NIC) may fall short of its target of collecting Rs45bn in premium by March this fiscal. (BL) 

LIVE BUSINESS NEWS

• BSE Sensex seen dropping; telecoms watched- Reuters
  
• Rupee at fresh 3-wk high on inflow hopes- Reuters
• Rupee seen clinging to 3-week peak- Reuters
• Distressed investor Ross sees more banking failures- Reuters
• Biz centres find going tough as slowdown bites- Indian Express Finance
• Fitch downgrades Pantaloon Retail- Indian Express Finance
• Sony fears fall in growth, to focus on entry-level products- Indian Express Finance
• Vegetable oil import to be over 6 lakh tonne in March- Indian Express Finance
• Oleoresin units to buy pepper from domestic mkt, demand to pick up- Indian Express Finance
• Yields up on RBI supports- Indian Express Finance

Buy Axis Bank, target of Rs 629: Karvy Stock Broking

Karvy Stock Broking has maintained its buy rating on Axis Bank with a target price of Rs 629 in its March 19, 2009 research report. "We have revised our Axis Bank earning estimates after a visit to the bank's senior management; we expect that the bank's credit growth would moderate to 31.5% (Y/Y) to Rs 1,146 billion from our earlier credit book estimate of Rs 1,226 billion in FY10. Net interest margin is estimated to shrink by 30 bps to 2.57% in FY10.The bank's core fee income growth momentum is expected to come down to 28% (Y/Y) in FY10 from 70% in FY08 and 50% in 9MFY09. The bank's management did not provide with any guidance or estimates on non-performing assets front; we expect 152% (Y/Y) rise in gross NPA in FY10 to Rs 21.5 billion and increased credit cost to 1.3% in FY10 from 0.71% in FY08 and 1.1% 9MFY09." "We increase our earning estimates for FY09 by 5.0% to Rs 17.7 billion and reduce for FY10 by 9.6% to Rs 15.5 billion and reduce our target price by 29% to Rs 629 per share.We estimate the bank to record RoAE of 18.8% and 14.4% in FY09 and FY10 respectively. We re-iterate our BUY rating on the stock with a target price of Rs 629 at 2.2x adjusted book value FY10," says Karvy Stock Broking's research report. Source: Moneycontrol

Stay away from midcap IT space: Sukhani

Technical Analyst, Sudarshan Sukhani is of the view that one should stay away from midcap IT space. Sukhani told CNBC-TV18, "My impression is that the same old story is getting repeated. There is a group of market participants whom we call operators, which is now managing the prices; we saw it happening with Polaris last month in February. Polaris jumped up from Rs 36 to Rs 55 and surprisingly it came back to Rs 35." He further added, "So, my impression is that NIIT, Firstsource and MindTree are not the stocks that we want to trade in and certainly not to buy. The idea is just stay away from this segment itself. There are a number of blue-chip stocks where buying opportunities are coming and will come, but this is not that area - smallcap should be avoided anyway." Source: Moneycontrol

Reduce NTPC, target of Rs 180: Prabhudas Lilladher

Prabhudas Lilladher has recommended a reduce rating on NTPC with a target price of Rs 180 in its March 17, 2009 research report. "On account of limited capacity addition in the startup years of the 11th Five Year Plan, we expect flat growth in revenues (CAGR of 8% FY08-FY11E) and PAT (CAGR of 6% FY08-FY11E) growth. We believe that the new tighter CERC norms will reduce NTPCs incentive earning capacity and thus, will further reduce the RoEs on core investments (13.8% in FY10E)." "We value NTPC on a Two-Stage model, where the explicit growth is discounted to equity (DCFE) for FY10E-FY14E (COE 12%), and the long-term growth (beyond FY14E) is valued on implied Price/Book value basis. Thus, we initiate coverage on NTPC with a Reduce rating, target price of Rs 180," says Prabhudas Lilladher's research report. Source: Moneycontrol

Oracle Financial (Rs 692.85): Buy

We recommend a buy in Oracle Financial Services from a short-term trading perspective. It is evident from the charts of the stock that from the resistance level of Rs 1,500, it declined and found support at around Rs 405 in late October 2008. This is a 52-week low for the stock. We notice the formation of a double bottom pattern, a bottom reversal pattern spanning between October and January 2009.

In mid-February, the stock broke out of the resistance level at Rs 620, accompanied with good volume. Moreover, the stock made a pull back to Rs 620, which now turned into support. However, the stock bounced up taking support from this level recently.

On March 19, the stock gained 6 per cent accompanied with high volume, reinforcing the bullish momentum. The daily relative strength index is on the brink of entering into the bullish zone and the weekly RSI is rising towards this zone. We are bullish on the stock from a short-term trading perspective. We expect the stock to move up until it hits our price target of Rs 765 in the forthcoming sessions. Traders with short-term perspective can buy the stock while maintaining a stop-loss at Rs 657.

Source: HBL

Markets at a glance

Recovery of global markets supported the domestic indices in a truncated week. Sensex gained 431 points or 5.2 per cent to 8,757 and Nifty rose 99 points or 3.78 per cent to 2,719 in the week. The market gained in two out of three trading days in the week. Inflation at six-and-a-half year lows of 2.34 per cent also assisted a smart bounce back.

The market also shrugged off weak Industrial production numbers of a negative 0.5 per cent on the way up. Overall, FIIs who were net sellers this year have been net purchasers to the tune of Rs 27.43 crore during the week.

What to expect this week

Domestic indices could track global equity markets in the near term. Reassurances from Citigroup, Bank of America and J P Morgan could sustain positive sentiments. Lower inflation numbers over the last few months and its sharp fall recently has raised expectation of further rate cuts by central bank, which would be a positive.

On the agriculture front, there is an expectation that this year’s Rabi crop would be good. The fourth tranche of advance tax payments of corporate India is due today, which should also give direction to the market. However, the markets would be edgy as FIIs have been net sellers of Rs 2,276 crore till date.

 

Stock to watch Consolidated construction Last week's close (Rs) 47.67  Prev. week's close (Rs) 44.63  Week's high (Rs) 49.80  Week's low (Rs) 42.13  Last week's ave. daily turnover (Rs cr) 4.08  Prev. week's ave. daily turnover (Rs cr) 6.78  Number of up/down move 2/1 A acquisition of a 6 per cent stake in Gateway Distriparks (GDL) by Allcargo’s subsidiary would keep the interest in the GDL counter high. The stake at Rs 25-Rs 30 crore was acquired by Sealand Terminals, an Allcargo Global Logistics subsidiary, from Temasek. Though Allcargo has indicated that it is only a treasury investment, its synergies with Gateway, which is the largest player in the CFS business in JNPT, could help Allcargo if it chooses to increase its stake in GDL in the future. With a decline in cargo volumes on the export front, GDL has increased its focus on the domestic segment. The company is debt-free and is trading at 5.4x of its trailing 12-month EPS of around Rs 8.3. Source: ET

Dividend-paying equity schemes fall by over 50% in Jan-Mar

The decline in the stock market has taken its toll on the dividend payout of equity schemes. Only 36 equity-oriented schemes have declared dividends in the January-March period, compared to 85 schemes in 2008.

According to data from Mutual Funds India, a mutual fund research agency, only a few schemes of ICICI Prudential Mutual Fund, HDFC Mutual Fund and Franklin Templeton have been consistent in paying dividends between 2006 and 2009.

The data reflected that dividends declared by these schemes rose consistently in the boom period of 2006 -2008. But these schemes have been hit in the current market crash and, as a result, their dividend-paying ability has eroded substantially.
 

CREDIT CRUNCH Total number of schemes, which declared dividend
Quarter	'05-06	'06-07	'07-08	'08-09
April	3	11	8	8
May	3	9	14	12
June	3	4	13	17
July	2	4	9	6
Aug	6	11	9	9
Sep	4	4	20	11
Oct	5	11	12	8
Nov	4	15	20	3
Dec	13	12	21	15
Jan	15	16	15	8
Feb	17	20	23	13
Mar	40	30	47	15
Total	115	147	211	125
Source: Mutualfundsindia.com

For instance, Franklin India Blue-Chip Fund, which had declared dividend in the range of 30 per cent to 70 per cent during 2006-2008, has paid only 30 per cent in 2009. While HDFC Long Term Advantage Fund has pruned dividends from 60 per cent to 35 per cent, ICICI Dynamic Plan has reduced it from 20 per cent to 6 per cent.

There were other equity schemes that had a great track record of dividend payment during financial year 2006-07 and 2007-08. But most of these have paid significantly lower in 2008-09.

Birla Sun Life Tax Relief 96, which had given a staggering 1,510 per cent dividend in 2006-07 and another 200 per cent in 2007-08, has paid a dividend of only 50 per cent in 2008-09.

Equity schemes have suffered greatly in the meltdown since the market scaled its all-time high on January 8, 2008. In fact, the fall was so sharp that fund houses were unable to exit stocks. With almost negligible chance of profit-booking, fund houses have found it extremely difficult to make dividend payouts this year.

Equity-oriented schemes have reported value erosion of Rs 81,307 crore in the 11 months of the current financial year.

The unaudited financial results of mutual funds for the period ended September 2008 showed that fund houses had booked Rs 3,858-crore loss on sale of investments. Even the reserves and surpluses declined by Rs 28,900 crore on account of value erosion.

Even investors have not been enthusiastic about investing in mutual funds. Only Rs 3,580 crore was invested in this financial year so far, compared to Rs 45,927 crore during the same period in 2007-08.

Source: BS

Stocks seen ranged; soft opening likely

Another day of consolidation is likely on Friday as global markets retreated as inflation concerns flared after the US Federal Reserve  Pick stocks on fundamentals Fiscal & revenue deficit Short-term plans are safe bets Five facts on stock falls Volatility: Bet on big guns unveiled plans to spend $300 billion on long-dated Treasuries.  US stocks fell on Thursday on concerns that the Federal Reserve's latest efforts to stem the US recession are too costly and untested, prompting investors to book profits on bank shares after the recent sharp rally.  Investor sentiment remained jittery on the implications of the Fed's action to pump another $1 trillion into the financial system and a plan to expand its consumer and small business lending program, fearing the moves could stir up inflation in the long  term.  The Dow Jones Industrial Average fell 85.78 points, or 1.15 per cent, to 7,400.80. The Standard & Poor's 500 Index lost 10.31 points, or 1.30 per cent, to 784.04 and the Nasdaq Composite Index shed 7.74 points, or 0.52 per cent, to 1,483.48.  Equities in the Asia-Pacific region were trading mixed as investors tried to digest the US Federal Reserve's decision to buy Treasury and mortgage-backed debt by printing money. Surging commodities and a weakening dollar could signal that investors worry the Fed's plan could spark inflation. The Shanghai fell 0.37 per cent, Hang Seng lost 1.19 per cent and Straits Times shed 0.21 per cent.  Back home, a session marked with high volatility Thursday finally ended in favour of the bulls with key indices closing above psychological levels. Alternate bouts of buying and selling kept the market buzzing with action through the day.  National Stock Exchange’s Nifty ended above the crucial level of 2800; at 2807.15, up 0.45 per cent or 12.85 points. The index moved in a range of 2822.25 and 2771.35.  Bombay Stock Exchange’s Sensex settled at 9,001.75, up 25.07 points or 0.28 per cent. The index swung in a 100-point band through the day. Source: ET

Heard on the Street

Local brokers feel heat of foreign broking peers 

Domestic broking firms, which dealwith institutional clients, are facing the toughest times in the past 5-6 years. If the overall fall in business from foreign clients was not bad enough, competition from foreign broking houses for a share of their pie in the business from local institutions has hit them harder. 

Deprived of business from overseas clients themselves, foreign institutions are now aggressively pitching withmutual funds and insurance companies for more work. 

The domestic broking houses, especially the smaller ones who have survived on relations with these institutions, are threatened by the sophistication and prowess in research of their foreign counterparts, especially in the field of futures and options. 

Against this backdrop, it remains to be seen as to how many of the smaller local broking houses can survive this onslaught and how many would slip into hibernation, till market conditions improve. 

No rush for ‘exclusive’ info in bearish times 

Exclusive information was considered critical by every fund manager in the bull run to have an edge over his competitor. 

Till December 2007, fund managers used to insist on exclusive meetings with companies to get that piece of information, which no one else had. 

And they got what they needed, with companies slicing and serving potential developments to them. With the bear market setting in, the fight for such exclusive information has died down, as nobody wants to hear about the negative information first. 

In fact, fund managers nowadays prefer to meet companies in groups. A fund manager said, “We do not know what information the company has given to each one of us exclusively when the times were good. So now, we choose to go in groups and get a sense of the company’s prospects together.” 

Source: ET

Where to invest in deflation

The country is facing a negative inflation or deflation scenario with inflation touching near-zero level of 0.44% and expected to go Investing in volatile markets.

If negative inflation sustains for longer period of time, it will affect economic activities and in turn performance of most of the companies. 

In the current scenario, prices are falling not because of improved productivity but because of fall in demand. If deflation sustains for longer period of time, it will have a more adverse impact on demand. "Deflation results in less demand, lower production and weak economic growth," said Citibank in a report "India Macroscope''. 

A negative inflation discourages investments in the economy. The real interest rate difference between nominal interest rate and inflation becomes very high, making funds costlier. As demand goes down, capacity utilization of manufacturing units declines. This discourages investment in capacity expansion. 

As performances of companies will be hit, the Citibank report said investors should be selective while making decisions in deflationary environment. It said invest in those companies whose products or services are not much affected by fall in demand. So, companies operating in health care, telecommunication and utilities like electricity distribution could be good bet to invest. Services of these companies will remain in demand even if the economy slows down. 

Investors also need to identify those companies where decline in prices lead to increase demand for their products, prompting them to produce more value-added products with greater economies of scale. In this category, companies operating in sectors like snacks and beverages, health care, utilities and telecommunications can be included. 

Companies with strong balance sheets, which do not have much debt on their books, can also be considered for investment. As debt servicing would become difficult in the deflationary time, one should stick to companies (mainly in IT, health care and energy sectors), which are less leveraged, the report added. 

The report pointed out that total investment in the economy may decline by 2 percentage points of GDP by 2010 to 35.7% from 37.1% in the current financial year. 

At the same time, companies operating in capital goods sector should be avoided. Capital goods are required when companies are investing in either new projects or expanding existing facilities. But, as companies are avoiding both, the performance of capital goods companies may further dip. 

The real estate companies should also be avoided. In deflation, the general perception is that the prices will further fall. So, home buyers will further postpone their purchasing decisions, which will further increase the suffering of the cash-starved real estate sector.

Source: ET

Indian economy staring at deflation. Is it good news?

India is staring at deflation, or negative inflation, with the official inflation rate this week falling to 0.44% — the lowest since  Financial crisis Competitive economies Ghosts of 1929 US mortgage crisis Five facts on stock falls 1977. Food prices, however, continued to be high, with food grains roughly 9% costlier than a year ago, reinforcing a cruel paradox for consumers that they hear about zero inflation but face high prices when they buy their groceries.  With the wholesale price index (WPI) falling by one point to 226.7 for the week ending March 7, 2009 — the same level at which the index was on March 29, 2008 — it now means the year-on-year inflation rate will become zero by the last week of March even if the index for the current year falls no further. TOI had pointed this out last Friday.  As most commodities are becoming cheaper with every successive week in the recent past, deflation is expected to set in even before that. The rabi harvest should see a drop in foodgrain prices too, and that will only accentuate the trend.  If deflation lasts for some time, as seems possible, it would be a new experience for India. Japan went through a decade-long deflation in the 1990s, termed as the ``lost decade'' for that country. At present, most major economies are witnessing disinflation — a lowering of the inflation rate — and some have also seen deflation kicking in. Japan and China have already reported negative inflation rates in the latest data and there are signs that the US, too, could be heading the same way.  While a fall in prices may sound like good news to most laymen, economists see this as an ominous sign of a collapse in demand in the economy. A recent Citibank report echoed this concern in the Indian context saying that the present trend of decline in inflation was not because of any improved efficiency in the economy but because of falling demand. The report warned that this trend would weaken economic activity and discourage investments, which would affect the economy in the longer term.  The fear about investments not materializing is aggravated by the fact that nominal interest rates are at relatively high levels. When prices are falling, this means the real interest rates — the difference between the nominal rate and the rate of inflation — are becoming very high for producers, making it unviable for them to raise funds.  Demands for the RBI to intervene to induce a further round of cuts in interest rates are bound to mount in the face of the latest data. However, planning commission deputy chairman Montek Singh Ahluwalia on Thursday said that the inflation rate would rebound from its present level. While not ruling out the possibility that inflation could go into negative territory, he maintained that it would last for only a few weeks. Hence, he said, it should not be termed as deflation, a term that implies sustained negative inflation.  From the aam admi's point of view, what makes the situation worse is that prices of essential commodities like foodgrains are stubbornly refuse to come down. According to the latest data, the index for foodgrains rose by 9.3% in the week ending March 7 as against 10.06% in the previous week. Under the ``food articles'' head, inflation fell to 7.4% after having been stable at 8.3% in the previous two weeks. Source: ET