Stock You can buy for decent gains - LIC Housing Finance Ltd

LIC Housing Finance Ltd has strong fundamentals. Long-term investors can accumulate the stock at its current level.

The company is one of the best-managed non-banking finance companies (NBFCs) in the country and longterm investors can accumulate the stock at its current level.

BUSINESS:

LIC Housing Finance provides housing loans mainly to individuals. It is the second-largest housing finance company in the country after Housing Development Finance Corp (HDFC). Its balance sheet size has nearly trebled in the five years from FY03-08. During this period, it has been one of the fastest growing NBFCs. This is due to the strong economic growth seen in India and the rising level of disposable incomes, which has fuelled the demand for housing loans.

 

Also, since last year, LIC Housing Finance has stepped up its promotional activities, which has improved its share in housing loans from 5% to 7%. This is commendable as much larger players like HDFC and commercial banks, which have a significant presence in housing loans, dominate this market. Since the beginning of the current financial year, the financial sector has been facing the brunt of rising interest rates and slow disbursements. LIC Housing Finance has been able to weather the storm, which is visible from its growth in interest income. The company’s interest income grew by more than 30% year-on-year for the six months ended September ’08. In fact, even its disbursements were up 30% during this period, which is in line with its performance last year.

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NBFCs typically face delinquency risks, which surface during times of a slowdown, when borrowers are not able to make the interest payments (EMIs) on their loans. LIC Housing Finance’s net non-performing assets (NPAs) stood at less than 1% of its net advances as of end-September ’08, compared to 1.65% a year ago. This shows that the company’s quality of loan book has improved tremendously in the past one year and it has been efficient in managing delinquency risks.

The company is also efficient in managing liquidity risks. This is evident as the proportion of assets maturing in one year is similar to the proportion of liabilities maturing within one year. This aspect is extremely vital as NBFCs which have financed long-term assets through short-term sources of finance face tremendous pressure in a scenario of tightening liquidity. Hence, it is clear that LIC Housing Finance has been able to efficiently manage all kinds of risks during testing times.

VALUATIONS:

The stock is trading at a price-to-earnings (P/E) multiple of 3.9 times. Hence, the stock appears to be cheap considering its high earnings growth, as its net profit in the past 12 months has grown by more than 40%. Though it is a known fact that in the case of finance companies, the stock trades at a lesser multiple than earnings growth, we feel this is overdone in the case of LIC Housing Finance, as the P/E multiple is just a fraction of its earnings growth.

The market has already factored in a worst-case scenario for all NBFCs, including LIC Housing Finance. The company’s current low valuations appear to be attractive for long term investors, as LIC Housing Finance’s stock price has fallen as much as that of other NBFCs, even though its fundamentals are much better than theirs.

Source: Economic times

Solar power - Huge Earning Opportunities for companies

Globally, energy is fast emerging as a critical issue, especially as existing power generation options have limitations in terms of growth potential and long-term sustenance. solar power is fast emerging as the most viable and eco-friendly power generation option for tomorrow—with no moving parts, no noise and zero emissions.

With the Sun supplying 10,000 times the amount of energy needed by Earth every year and with technological breakthroughs fast lowering harnessing and distribution costs, solar power is fast emerging as the most viable and eco-friendly power generation option for tomorrow—with no moving parts, no noise and zero emissions.

Solar Market grew by 35% over in the last 20 years. In Year 2006, the global market for PV energy was 2 GW, grew by 41% compared to the previous year. Market is projected to grow from $15.6 Billion in 2006 to $69.3 Billion by 2015. Further California Solar Initiative should add another incremental $13.2 Billion cumulatively.

Two companies we know well and have potential to become Photo voltaic segment leaders and so the future Multi bagger stocks are:

MOSER BAER INDIA LIMITED & XL TELECOM & ENERGY LTD.

The PV space is expected to grow five-fold to a global market size of Rs 300,000 crore ($70 billion) by Year 2015 as per Clean Edge Energy research. As the group is one of the early entrants in this space, and having exposure to domestic and international markets since 1994, Saptashva is well-positioned to leverage this explosive growth curve.

UBS’s global demand estimate is for solar electricity to grow from 5GW in 2008 to 22GW by 2012 (a 46% CAGR). It expects Spain, Italy, and France to increase to 35% by 2012 (up from 27% in 2007) of the global market and drive solar growth in the near term. Its estimate for global solar demand in 2010 is 10GW, which is the base case scenario. The aggressive case assumes faster adoption of solar PV in key growth markets of Spain and the US, with the approval of higher feed-in tariffs in Spain and passage of an energy bill in the US, which includes the extension of Solar Investment Tax Credits with removal of the residential cap and utility exemption.

Given the uncertainty of solar in the US market in 2009 and 2010, UBS believes it is more prudent to assume the conservative scenario. However, if the US Energy Bill passes with the solar investment tax credits included, UBS believes the more likely scenario would be closer to its aggressive case of 13GW by 2010.

The conservative scenario assumes a five-year CAGR of 30%, resulting in 5.5GW by 2010, and the aggressive scenario assumes a five-year CAGR of 55%, resulting in 13GW in 2010. The conservative scenario is based on sustaining the 2002-07 solar CAGR of 30%. Global solar demand reached 2GW in 2006, and UBS believes demand could grow by 70% in 2007 to reach 3.4GW lead by demand growth in Spain and Germany. It estimates that global demand will grow at a steady rate above 40% year over year until 2011, as solar PV generated electricity cost approaches grid electricity in regions with high retail electricity rates and high solar irradiance.

The 10 Most Valuable Companies in BT 500

Rankings in BT 500 are based on average market capitilisation for April - October period. It serves handy as barometer India Inc.'s perofrmance in tough times.

For the sixth year in a row, Mukesh Ambani’s Reliance Industries (RIL) grabbed the top slot of India’s most valuable company. Despite the carnage on Dalal Street, its average market cap increased by a handsome Rs 32,400 crore. Younger brother Anil, who took another company to the stock exchanges this year, Reliance Power, wasn’t so lucky, in taking over his elder brother in terms of market cap. The Reliance Power listing was expected to polevault Anil into a bigger league, but that didn’t quite happen.

The biggest surprise, however, came courtesy the public sector pack, where the overall market cap for the 50 companies in the list increased by almost Rs 1 lakh crore; in percentage terms that works out to a 10 per cent increase. The biggest contributors to the massive rise in the value of the state-run companies were NMDC and MMTC, whose combined market cap increased by over Rs 1.3 lakh crore. Although the floating stock of these companies is less than 2 per cent, the increase in their share price shows that the market sees value in them (considering there is hardly any operator-driven activity in state-run companies).

The sentiment on the Street is clearly bearish, and analysts feel the market has some way to go before it finds its bottom. In a technical analysis report, Enam Securities expects the Sensex to bottom-out in the region of 7,150-6,150. Now’s the time when the men in the BT 500 will be separated from the boys. This rough patch will provide an opportunity for cash-rich players to consolidate their positions, and result in shakeout of relatively weak players.
Sourced From: Businesstoday.in

Investment Guru Rakesh Jhunjhunwala*––**Who creates wealth? Who destroyed wealth?*

Investment Guru Rakesh Jhunjhunwala, Raamdeo Agrawal of Motilal Oswal and Sanjoy Bhattacharya, Founder and Partner, Fortuna Capital, spoke to BSE and NSE member Ramesh Damani and tried to find the answer to an important question*––**Who creates wealth? Who destroyed wealth?*

Damani introduced the discussion thus - "There is a Chinese symbol that consists of two characters, the top character has danger, and the bottom character has opportunity. Too often, when one focuses on danger, one forgets the opportunities present. The question before the panel and the house today is that in this current fall in the market, one of the great lifetime opportunities to load up on bargain, blue-chip stocks for the next 10-20 years or is the market blinking red and going into a deep freeze. That is the theme – the good, great and gruesome companies that we will select.*" *

According to Agrawal, while tapping a company as a good investment opportunity, "What is important with great companies because the longevity of these companies are perpetual - 50-100 years; what is important is not to buy them young or mature, but to buy them at the right price – at an attractive or reasonable price not at a throwaway price. You will never get it. So, it is not important to catch them young. Once it is demonstrated that they are great then later it can be made part of the portfolio at any point if you can find them at a reasonable price."
Bhattacharya is reasonably sure that India will have an aggregate output growth at something in double-digits for the next ten years, unless something goes seriously wrong. "Even if America goes into a recessionary environment for the next 3-4 years, and that is much more than what people think right now –– people don't think that it is going to last till 2011-2012 and despite that, India will have the ability for a number of reasons, which are very well known- like demographic, domestic, consumption number of things. I see aggregate demand here growing at 12-13%. It is given that it is going to grow at 12-13%; I don't think there is a need to be obsessed with those. I think the one thing that I would for is cash flow."

Jhunjhunwala said, "I always say it is important what you buy and it is not important in what size you buy. India is (one of) those who (would) see humongous growth for the next twenty-five years. So if you pick up some companies who are going to cater to Indian markets and you have some business superiority and you feel available at reasonable valuations, I think this is the opportunity in that time when it is the darkest and everybody is so pessimistic that you get the best investment opportunities."

*Here is a verbatim transcript of the exclusive interview with **Rakesh Jhunjhunwala, Raamdeo Agrawal and Sanjoy Bhattacharya* *on CNBC-TV18. Also watch the accompanying video.*
**

*Q: Great, good and gruesome as you put it. What are the characteristics of great companies?*
*Agrawal*: A great company, to put very aptly, is like a bank account where you get very high rates of interest, and that is say 55-60%. That is the kind of productivity of capital, which is very high. Once it starts with that, over the years, it keeps increasing. So the entry barrier or competitive advantage or popularity of the product keeps increasing over a period of time, and doesn't remain static. That is called a great company. So, profits are high and profitability keeps growing over a period of time. That is a great company.

*Q: But great companies have to be caught young otherwise they give mediocre returns. For example buying Lever in 1993?*

*Agrawal*: What is important with great companies because the longevity of these companies are perpetual - 50-100 years. What is important is not to buy them young or mature, but to buy them at the right price – at an attractive or reasonable price not at a throwaway price. You will never get it.

So, it is not important to catch them young. Once it is demonstrated that they are great then later it can be made part of the portfolio at any point if you can find them at a reasonable price.
*Q: But the fall as such that we have had globally and in India, you would be able to find a lot of great companies now, because stock prices are down 60-80% on average?*

*Agrawal*: The first thing is, great companies are not that many that you can come across every day. There are I would say, out of 500 companies about 50% on tangible assets not on their declared return on networth. There are only 10 companies that are more than 50% return on tangible assets.

So, going by Buffett's example of See's Candies, there are only 10 companies that can be today be called as acknowledged great companies. So, all those companies where I have looked at their valuations are definitely much more reasonable than what they used to be 10 years back, but are nowhere at a throwaway price at which we could buy See's Candies at about 7-8 P/E multiple or 20% earnings on his purchase price. Right now you get dividend at best 3 or 4%. I think the best you can get is – Hero Honda is about 13 times, which is 7-8% earnings yield, and Glaxo at about 5%, HUL at about 4%.

*Q: One thing that startled me about the study was that growth is not necessary for a great company, it is the cash flow, it is the dividend, it is the return on equity.*

*Agrawal:* Yes because once you have started a great machine of earnings and dividends because what happens is whatever is earned for example 1,000 crore is earned or 500 crore is earned, it doesn't need even a penny of that to grow into the future. Even if it grows at 10%, entire 500 crore can be given back to you by way of dividend like Hero Honda. It doesn't need any capital for growing. So all the profit they make 1200-1300 crore, technically they can pay it out to the shareholders. What more you want, why do you need the growth? The issue is that the extreme of dividend – it literally becomes a growing bond maybe growing at 8-10%. The issue is, are you able to buy it at a reasonable price.

*Q: So the trick is to find a great price?*

*Agrawal:* Yes.

*Q: You were talking about how you visualize great companies, can you summarize them for us?*

*Jhunjhunwala:* I think the first thing is that there should be huge untapped market because I don't agree that – See's Candies would be one example out of 1,000 companies which have given great returns to investors I think 999 would have grown. Second thing I feel is that the great companies are very much returned to the capital profile of a company what is the capital investment - the capital investment they need everyday in order to grow their earnings and also their working capital profile because Nestle and Lever have partly been able to get this kind of return on capital employed because they are able to squeeze their suppliers and they are able to sell everything on cash. So the working capital profile.

Secondly, I think that every great company has some kind of a business superiority, it could be a brand - I think in Bharti's case it is marketing, so there is some kind of a business superiority - from title also it is marketing. So there has to be entry barriers into that business.

See's Candies is selling for forty years because See's Candies has some loyalty from its customers and that loyalty cannot be recreated by another client otherwise there would have been a capital society or where somebody will compete and some will create it.

I always say it is important what you buy and it is not important in what size you buy, so it is not great buying of bond at 25 times earnings 4*% *yield and I personally feel that maybe it is three-four or five or fifteen-twenty years but India is (one of) those who (would) see humongous growth for the next twenty-five years. So if you pick up some companies who are going to cater to Indian markets and you have some business superiority and you feel available at reasonable valuations, I think this is the opportunity in that time when it is the darkest and everybody is so pessimistic that you get the best investment opportunities.

When I bought Titan, its marketcap was above 125 crore and its debt was 600 crore. Today its turnover will be 4,000 crore this year and its debt will be less than 600 crore and I envisage it everybody is going to buy watch ten years later, everybody is going to buy jewellery and everybody is going to wear these things. So there is going to be huge demand.

So I think this is a real time and it is very easy to read about Mr Warren Buffet and his great accomplishments which undoubtedly are but to find those circumstances in which we can recreate what he has done is extremely dismal because those circumstances will not exist and secondly we don't have the discipline. What Indian investor lands up doing is buying multinational companies who have the worst corporate governance in this country, Satyam is nothing.

*Q: What would you look for in a great company?*

*Bhattacharya:* It is very difficult to add to what they said and to directly address your question, he made this point - we live in a country where growth is bound to be there, why this obsession with growth in a country where nominal GDP is growing at 12.5-13% anyhow and will grow. I think there was and the will there is an interregnum here and that interregnum should not be treated as hanging* *permanently.

So, I think yes you are right that this year it may not but if you look at a broader sweep of India's economy- we can argue about the numbers. But I am reasonably sure that this country will have aggregate output growth at something in double digits for the next 10-years, unless something goes seriously wrong, which I simply cannot visualize right now.

*Q: Globally also you do not visualize anything wrong?*

*Bhattacharya**:* Which affects India- I don't think that even if America goes into a recessionary environment for the next 3-4 years, and that is much more than what people think right now. People don't think that it is going to last till 2011-2012 and despite that India will have the ability for a number of reasons, which are very well known- like demographic, domestic, consumption number of things. I see aggregate demand here growing at 12-13%. It is given that it is going to grow at 12-13%; I don't think there is a need to be obsessed with those. I think the one thing that I would for is cash flow.

To answer your question there must be a tremendous focus on cash flow. I think the lesson of 2008- if I may and have never able to expect it, as well as Mr. Jhunjhunwala would have expressed it but I'll give this a shot is to focus on cash flow rather than newsflow - I think that is the big difference. People I don't think they have ever looked at cash flow.

I think the other thing, which is very important and I am surprised it hasn't been brought up so far. But to my mind it has primacy- if you want to buy great companies and being reflective of the Indian investor this is not something important, we keep on paying tribute to Buffet and great investors but we don't seem to recognize this. It is very important that capital allocation is rationa -- if capital allocation is irrational; then no matter how good the business, no matter how much cash flow it generates, it is not going to be a great investment.

I don't want to get into specifics but there is a business in this country; it is a fabulous business, first in the country to get into it, absolute money machine, doesn't require any incremental capital employed, had a great start, they generate a large amount of free cash flow but they just blow it up. They buy fixed assets, they buy a building for themselves to live in rather than rent it. They invest in bonds and debentures, they find ways to deal with the cash flow rather than pay dividend and that is what has prevented that company from achieving great business. It has greatness thrust upon it but could not get there.

*Q: A stock you have often mentioned – Bharti – good, great or gruesome?*

*Agarwal*: It's at the high end of good and yet it hasn't achieved greatness, because they have not paid a single penny, yet. There is huge cash flow; operating cash flow is more like 15-20%. But they have huge capital expenditure ahead and it's a debt free company. In fact take pride that they don't pay dividend so.

*Q*: Telecom same business, Bharti becomes a great company and TTML you say is a gruesome business why?

*Agarwal*: *TTML is a gruesome company, the underlying business is mobility and both of them have same business underlying. *

*Q*: *What did TTML do wrong*?

*Agarwal*: We have seen it all in the last five years. But they missed the first mover advantage, they got into wrong technology.

*Jhunjhunwala*: Bharti paid no price for the Delhi license. They paid a heavy price for the Bombay license.

*Agarwal*: TTML has only one circle which is very limited access which is Maharashtra and Goa, so they have very limited access and they have Sigma which is a handicap technology at least to start with. So everything went wrong with that company and this business requires a lot of capital, they kept on pumping capital and one good thing is that they had the Tata name.
*Jhunjhunwala*: So it was a bad thing that they would go and keep pumping capital. Putting good money on a bad thing.

*Agarwal*: They are so nice that they kept pumping capital we were so good that when they asked for a rights issue at Rs 21, we again gave them. So instead of getting dividends, we have been giving them money. And I wished them all the best.

*Q*: *The macroeconomic environment in India is improving considerably, isn't it?*

*Jhunjhunwala*: Improving? I don't know maybe next year there will be no oil subsidy, I don't know what the government is saying. As per my calculations if today Oil is 45/bbl, Indian Basket is 40/bbl, oil companies today are making a profit after providing for subsidy of at least Rs 50,000 crore at 47 to the dollar. What was said in June that there was a loss of Rs 2.45 lakh crore. So, Rs 3 lakh crore is going to come in, this country is going to be saved, this has such consequential effects, sulphur has gone from USD 800 to USD 90. I don't think there will be a fertilizer subsidy more than what they have provided for in the budget in this year.
Cumulatively they estimated at the peak fertilizer and fuel subsidy was going to be about 3 lakh and eight thousand crore. Next year it maybe not needed at all. This will have a very big effect on the value of the rupee, on government

 finances<http://www.moneycontrol.com/india/news/market-outlook/rakesh-jhunjhun...>, it will have a very big effect on liquidity because someone in the country had to pay this 3 lakh eighty thousand crore. The government may not have included in the budget but IOC had to get that money from somebody, if they don't get from government bonds then from government banks. So if you don't pay out Rs 3 lakh eighty thousand crore out of this country what will happen to the liquidity?

After that there are interest rates, one thing is that you have reduced excise duty across the board by 4%, commodity prices have halved. If I say that commodity prices constitute 50% of every product sold in this country, even if you pass on 40% of the benefit that is going to come to the producers, if commodity prices will sustain you will see a reduction in prices between 20-25%. And no manufacturer in his right mind today is going to look at volumes, at price he is going to look at volumes. After that if interest rates crash and I am buying an asset with interest rates, it will give me a cushion of 5-7% to 10% over the life of the asset in any asset that I buy. This is not Japan nor is it America.

*Q:* *This is not a corporate holiday for profits. If commodity prices, interest costs going down why should there be a holiday for corporate profits? *

*Agarwal*: I am not talking about individual group of companies. In aggregate, when you talk about India Inc, in 2003 the India Inc made – I am talking about all listed companies –about Rs 30,000 crore. In 2007-08, they made 3 lakh 11 thousand crore on a GDP of about Rs 40 lakh crore. This year say Tisco made a profit of about 10,000 crore, last quarter itself they made about Rs 5,000 crore. To replace Rs 10,000 crore you need many midsize companies.
*Jhunjhunwala*: In your study for earnings growth, you said you had 17% compounded growth over the last 15 years. But you have 12% normalised GDP growth. So to expect the corporate sector not to have growth of more than 5% and in between you have to exclude the companies who have been newly listed. In 1993, ONGC was not listed; today ONGC's profits are Rs 15-20,000 crore. So as a percentage of GDP the profits have also gone up because of the newly listed companies. So the profit growth that we have had over a period of time has not been anything out of the extraordinary. When you have 12% normal GDP growth and it is the efficient and large companies which are listed. So I don't think it is anything exemplary which is not sustainable.

*Agarwal*: 17% is not a problem but in the last five years you had more than 25% of earnings growth for the entire India Inc, 10 times in 5 years, at aggregate level. I am not disputing what Titan can do. *Q: Commodity prices are going down; globally we are heading into deflation – what are the risks of that? * *Bhattacharya*: I don't think that people will produce oil if it stays at USD 25 per barrel. I don't know why it is taken for granted that oil will remain at this price for ever.

*Q: Because Saudi Arabia and Venezuela need money to finance their own budgets? * *Bhattacharya:* But it is cartel.

*Q: And cartel as we know has never worked. * *Bhattacharya*: But in oil if the OPEC decides for some reason and this is a recessionary environment, the demand for oil is coming down and let's not forget that United States of America is the largest…

*Jhunjhunwala:* But no one is predicting. 88 million barrels is the daily consumption and they are going to cut 4 million, no one is predicting a fall of more than one million next year. So it's peculiar we don't know anything of the commodity market we should ask the Mr. Jim Rogers, he knows best.

*Bhattacharya:* I think all predictions are a complete waste of time, neither of us knows what is going to happen in the next 6 months. So I don't think we should get too carried away with forecasting. The value of forecasting is mainly to provide entertainment which is the part of the reason we are here but I don't think we should get carried away with the idea of forecasting.
Mr Agrawal has a very valid point and this is proven across economies, across the world, across economic environment there is mean reversion in* *corporate profits. This is a truth, nothing grows to the sky. If profits are grown at 25% for the last 5 years and taking Jhunjhunwala's point if that they can grow at 17-18% because you have a nominal GDP growth of 12%, that 25% to grow for 25 years we will have to have a period when it grows at 5% for the next 5 years and that is the period we are unfortunately looking at because they have grown 25% in the last five years. So its like heads and tails, it is very unlikely though you can have it..

*Q: Are you predicting? *

*Bhattacharya: *No, not predicting I am pointing out something that people learn in statistics which sadly in this country people have not had much exposure to, useful statistics. You can have 10 heads in a row equally you can have 10 tails in a row but the distribution of heads and tails, suggestthat those are outliers, so we shouldn't bank on outliers to make our judgment come right.

*Q: So flip a coin since you don't like prediction - 7,700 on Sensex will hold? * *Bhattacharya*: I think that is completely irrelevant to what you need to do today.

*Q: Which is what? * 

*Bhattacharya: *Basically buy, There are bunch of really high quality companies and even Rakesh has made this point, a bunch of really good companies available at very attractive prices, unless you are thinking about next 3 months what is the scare about buying these companies? If you have a 12-18 to 24 month outlook, you can buy high quality, really great businesses. And I will get to the level because I am no where near greatness, so I will talk about less great companies which are available at stunning prices. Take a company like Blue Star it is available at a stunning price in relation to what it has done - contracting, project, core air conditioning, heating etc it has compounded seven years return on capital employed of 37%, it has grown profits in excess of 27%. It has never had in the last 10 years a year in which absolute profits have grown and there has been no dilution in the last 10 years.

*Q: Just for disclosure of Sebi you have an ownership?*

*Bhattacharya: *Yes I do have a ownership*.*

*Q: Will 7,700 on Sensex hold? * 

*Jhunjhunwala:* I don't know about 7,700 because if commodities dip, we have very high weightage for the commodities but I think the broad market is going to hold and that is what the bond market is showing for the simple reason that I have never seen such pessimism in my life, I have never seen such depression in my life.

*Q: Have you seen such optimism like we saw in January?*

Jhunjhunwala: I have seen the 1992s one – this one is nothing. In 1992 it was worse. 1992 was 60 times earnings and fortunately there was no scam this time. That was the only difference. There optimism in 2001 – McKenzie said Indian software industry will grow 100%. Infosys profits will double every year. I have never seen such kind of optimism. I don't think we are anywhere near that kind of optimism and the Indian economy and India as a nation and we as a market had far greater places for this bull market in 2008 although there was a lot of excesses then what we had in 2000 or 1992.

*Q: 50 Indians own 40% of the GDP – that's pretty optimistic in terms of valuation. But your call is 7700 will hold – that's what you said in your study?*

Agarwal: I am pretty certain to the extent that's why I have put the word probably because still one could be wrong 5-10% but 90% probably 7700 as a bottom.

*Q: Is that generally in historical terms – great periods of wealth creation are followed by wealth destruction? *

*Agarwal*: This has been characteristic of Indian stock market<http://www.moneycontrol.com/india/news/market-outlook/rakesh-jhunjhun...>. I though a year or two back that this particular bull market is the first bull market led by earnings growth. So the foundations are solid. But again the story is the same because this time though you have solid earnings but the PE multiple came back all the way down from 30 to 10. The masses look at the price and not the value and that's where the problem is.
* *

*Jhunjhunwala*: People talk about deflation, lower inflation – they compare us with Japan, America, and Europe – they're all over 80s, we have just had puberty, we are young economy. Here my driver if he gets something cheaper, he increases the amount of shirts he buys or he increases the amount of foods he eats. So price deflation in India according to me is going to be a big spur to consumption. One of problem

*Q: Jim Rogers was quoted on television saying that equities is going to be an impaired asset class over the next 5-10 years. What would you say to that? * *Bhattacharya*: I think he was referring to the western world. But I read Mr. Rogers' comments in the light of what is happening in Western Europe and America because there your fundamental problem is that demand has been seriously impaired. The ability to stimulate demand is the challenge.

*Q: So, India will be an island? * *Bhattacharya*: I don't think we'll be an island. But I think what is very important, very fundamental and I would say it applies to large parts of Asia – I wouldn't say even India – I would venture to say there are many countries in Asia and that includes countries like China, Korea, I think what is going to happen is that increasingly we are going to see these countries become far more competitive in terms of their abilities to displace other manufacturers and providers of services. That increased competitiveness is what is going to lead eventually to a change in the way that these companies prosper in terms of their corporate profit, in terms of their ability to gain dominant positions and eventually the way they are valued.
**

Source : Moneycontrol.com .. Video Link -http://www.in.com/active18/watchnow/watchvideo_mc.php?autono=371778
-- Regards

Buying stocks? Take a bite of ETFs

Exchange Traded Funds don the role of a good teacher for lay investors, who have appetite for the equity market. They offer the best of both worlds — benefits of mutual fund and the convenience of stocks.
Index funds are for those who’d like to avoid choosing from a confusing spread of stocks and funds.
S. Hamsini Amritha
Tempted by the present “attractive” Sensex levels? Are you one of those convinced that this is a good time to enter the equity market? If yes, read on.
If you are not technically qualified to understand the nuances of a company’s financial statements, then the easy way to buy stocks is to invest in companies that are well-known — blue-chip companies traded on the stock exchanges for decades. There are two ways to do this. Buying large-caps
Based on the value of a company’s outstanding shares, companies are broadly categorised as large-, mid- and small-cap companies. Companies such as Reliance Industries, Infosys, Hindalco or, for that matter, any of the Sensex constituents (the large caps) are scrips that have withstood the test of time.
Though the prices of these stocks too have been beaten down since January, the fall in mid-cap and small-cap stocks is much higher than that of the Sensex.
While the latter shed 55 per cent during this period, mid-caps and small-caps registered a loss of over 60 per cent each. This is because large companies are expected to weather any economic slowdown better than their smaller peers.
Even within sectors, Sensex stocks have performed better than the mid- and small-cap stocks. For example, in the IT sector (whose performance in the stock market has been wobbly since January), while Infosys lost more than 30 per cent since January, HCL Technologies and Hexaware shed about 63 per cent and 75 per cent, respectively.
The same is the case with some other sectors such as power generation, telecom and capital goods. NTPC, a blue-chip scrip, lost about 32 per cent while the mid-cap Neyveli Lignite Corporation lost over 50 per cent.
Such trends are visible across most sectors, making the case stronger for first-time investors to stick to large-caps. Welcome to EFT!

How do you choose which Sensex stock to buy when it is a collection of India’s best-known names and each looking lucrative in its own way? To step-side this problem, you’ll need to buy the entire Sensex basket. But won’t that require a lot of money? Confused?
Welcome to ETFs, or Exchange Traded Funds! They are funds that mimic baskets of securities in an index, and are traded like individual stocks on an exchange. In India, there are now six ETF options. Table shows the popularly traded ETFs.
ETF Vs MF
These funds may be look-alikes of mutual funds but actually have two major differences. One, they are ‘passive’, unlike mutual funds, where fund managers actively choose which stocks to buy. The movement of the ETF is almost a mirror image of the respective stock market index.
Two, in contrast to MFs, one buys and sells ETFs through the market and not through a fund house. This means you may buy and sell an ETF at any point during a trading session, just as you trade in shares. All you need to buy and sell these funds is a demat account.
Many mutual fund houses also offer investors open-end index-based funds. But these funds may not be fully invested at all times. They do hold back some portion as cash to meet redemption.
This leads to a “tracking error” error (difference between ETF returns as against that given by the index it tracks) where such funds may not completely replicate indices. The fact that Nifty BeES and S&P CNX Nifty are now trading 52 per cent below their respective January levels is a good indicator of how closely the ETFs track the indices.
Just like how an investor may be confused about which stock to pick, he may be confused about which MF to invest in as well!
The reason is fund houses often offer products across diverse sectors such as infrastructure, power, realty and so on. Sometimes, a particular sector may not participate in a market upswing and your money may go for an absolute toss. So, an investor is expected to apply reasonable judgement in selecting the fund(s). If that be the case, a beginner might as well put his money directly into the equity market, why MFs? ETFs offer a solution by picking the whole basket and thereby minimising the risk of wrong choice. Advantage ETF
To wrap up, ETFs are a good bet for more reasons than one. Statistics show that, in the long term, equity returns have surpassed that of every other asset class.
Since ETFs invest in securities that form a part of a particular index, their returns are more or less in line with index returns (though it is not expected to outperform the index, which individual stocks may).
Their low-cost structure makes ETFs more economical than MFs. The Nifty BeES, for instance, has a cost structure of around 0.50 per cent, much lower than what conventional mutual funds levy (around 2.5 per cent). But the ultimate advantage is the real-time trading, which allows you to buy or sell at the exact time of your choice.
ETFs don the role of a good teacher for lay investors, who have the appetite for equity market. Once you are comfortable with trading in ETFs, you are all set to make the big plunge. In short, for a rookie, ETFs offer the best of both worlds — they give benefits of mutual funds and the convinience of stocks.

Market News of the Day

Unitech, Ranbaxy Laboratories, Jaiprakash Associates may see actionITC, hotel chain Accor, and some high net worth individuals are in the race to acquire six hotel properties owned by realtor Unitech. However, the report suggested that Unitech's managing director denied any direct talks with ITC.

Meanwhile, Unitech has reportedly finalised a deal for the sale of its budget hotel in Gurgaon for Rs 270 crore to a high net worth individual.

Ranbaxy Laboratories is reportedly planning to sell three of its manufacturing units in China, Vietnam and Malaysia as part of a strategy to rationalise its business portfolio and cut costs.
The board of Jaiprakash Associates will meet today, 22 December 2008 to consider scheme of amalgamation.

State Bank of India will slash its lending rate by 75 basis points, with effect from 1 January 2008. The prime lending rate, or the rate that it charges its top customers now stands at 12.25%, the bank said.

Housing Development Finance Corporation has cut its retail lending rates by 50 basis points, effective today, 22 December 2008. Rates on new home loans up to Rs 20 lakh will drop to 10.25%, while those on bigger loans will attract a rate of 11.25%, it said in a statement.
The government is reportedly considering reimposing 10% countervailing duty on steel bars and structurals to safeguard domestic companies in the wake of rising imports.

The founders of Subex have decided not to exercise the warrants allotted to them last year. They had been issued 22.3 lakh warrants at the purchase price of Rs 630.31 a share and were to be exercised by 18 December 2008, Subex said in a statement to the stock exchange.
Fortis Healthcare is reported to be in advanced stages of finalising the pricing and other technicalities for an Rs 1800 crore - Rs 2000 crore rights and warrants issue to fund expansion.
Delhi International Airport, a GMR Infrastructure-led consortium that operates New Delhi's Indira Gandhi International Airport, has reportedly told the civil aviation ministry that work on the modernisation of the airport may come to a halt in the next 45 days if the consortium is unable to raise funds.

The Indian government is reportedly planning to provide infrastructure companies with subordinated debt with a maturity of around 10 years through state-run India Infrastructure Finance Company in a bid to provide long-term capital to these cash-strapped firms. Source: Capital Market--

Some wise words from wise men - 'Sh. Padmanabhan ji'

Dear Investors,

What the financially challenged don't know…

*1. They don't know how to get into the money flow.* The crucial
distinction between sportsmen and spectators is not that the sportsmen
play and the spectators watch; it's that sportsmen get paid, while
spectators pay! To get paid you need to be inside the lines, on the
field of play. As long as you're the one settling debts, you're a
spectator. You're investing in someone else's game.

*2. They don't know how to create value.* To get into the money flow
means creating value, and value is created automatically when you're
in your own flow, when you're doing what comes naturally to you.
Warren Buffet is in his flow - buying undervalued stocks. He has an
eye for spotting opportunities in great business opportunities, which
he buys. He has become second richest person in the world. Donald
Trump is in his flow buying and selling property. He has an eye for
spotting opportunities in buildings, which he buys and sells. He has
become one of the biggest property tycoons in America.

*3. They don't know the difference between good debt and bad.* When
you buy a luxury car or a fancy electronic gadget, you're buying a
liability. Any purchase that does not put cash in your pocket is a
liability. Good debt buys assets that bring in cash. If you take a
loan to buy an apartment building that will produce revenue, that's
good debt. You can also borrow against your mortgage to acquire more
assets.

*4. They don't know how Rs100 saved can be turned into Rs1000
invested. *When you're spending everything you earn just to survive
and pay off debt, you normally think you don't have much left to save.
But the truth is you don't need loads of cash to start saving, a few
hundreds saved can be used to raise finance to buy an asset that will
generate thousands. You can start with as little as Rs1000.

*5. They don't know how to use other people's resources.* Take a look
at any wealthy or successful person. Are they operating alone, or do
they have a team of supporters?
The gung-ho, lone-ranger approach simply does not work. The first step
to getting on to the field is putting the right team together. You
don't have to know how to do everything, you only have to know who can
do it for you.This is a key to your success.Have an asssociation with
the right team of mentors,advisors,partners & workers.

*6. They don't know how to control their emotions. *Starting your own
business is risky. So is any investment. The single most important
factor is not knowledge, but being able to manage your own emotions.
Most people don't invest or don't start their own business or manage
an investment, not because they don't know how, but because they're
afraid. which leads to errors of judgment. Emotional maturity is
absolutely crucial.

*7. They don't know why they want to be rich.* Most people just have a
vague idea that they'd like to be rich. They don't know why. They
don't know what they'd do with it once they get it. If you don't have
a good enough reasons you should find one now.

Hope you found this article useful.

Happy Investing
Padmanabhan

A separate reality

When the Prime Minister says, which he did in Tokyo, on Tuesday, October 21, that "financing this level of investment [$500 billion in the 11th Plan] presents a special challenge in view of the

uncertainties now prevailing in capital markets of the world", infrastructure-watchers can read the message loud and clear — India is not going to meet its ambitious 11th Plan target by a wide margin.

In fact, different think-tanks are broadly consensual on the fact that we would indeed be lucky if we hit $300 billion, or roughly 60 per cent of the target. This should be seen against the spend of $215 billion in the 10th Plan period. In simple terms, investments in infrastructure would be growing at the same pace as annual growth of GDP, rather than growing much faster, as planned.

Gross Capital Formation in Infrastructure (GCFI) across the 11th Plan period is unlikely to cross the level of 5 per cent of GDP. This is against China's purported 11 per cent, and the Planning Commission's own desire to hit an average of 7.5 per cent across the 11th Plan period.

It is useful to remember that around 80 per cent is still funded by public expenditure. And the pace of implementation of public-funded projects has been lacklustre and tardy, to say the least.While addressing the Economic Editors' conference on November 30, the Planning Commission's Deputy Chairman said that power sector investment during the 11th Plan period is now expected to be $100 billion as against the original estimate of $200 billion. In the much-

touted Bharat Nirman Programme, there is significant underachievement, particularly in irrigation and rural roads.

Simply put, barring a few new flashy airports, a clutch of private ports, a selectively better road network, and some high-profile improvements in city transportation, for the broad swathe of public utilities, the aam-admi must necessarily now look for the beginnings of infrastructure-salvation in the 12th Plan period, ie, between 2012and 2017.

The Prime Minister, in Tokyo, further said, "In our world of uncertainties, investment is both an act of faith, and also an act of great adventure". While private investment in Indian infrastructure has always been a great adventure, "faith" is currently in short supply. There are clear indications of "withdrawal symptoms" from PPP/ BOT projects by Indian corporates under huge fiscal stress.

The reasons for private sector shying away from PPP/BOT are easy to decipher. Consider the following:

(i)Lack of buoyancy in existing operations.

(ii)Private equity, private placements and IPOs are off-radar.

(iii)Domestic lenders have become highly circumspect in disbursing fresh loans. Scrutiny of DPRs and projects has suddenly become extremely rigorous, often detrimental. For ongoing projects, working capital limits have been reduced, and banks are even asking for a steep rate increase mid-way. [Interest rate for long-term lending is now in the range of 17 per cent to 21 per cent].

(iv)Benefits of ECB liberalisation would only be felt after the global financial situation stabilises.

(v)There is a year-long uncertainty related to elections.

(vi)Land acquisition has become an extremely sensitive issue.

(vii)Confusion prevails on bidding formats.

So, financial closure has become a "killer" apprehension; and the view amongst the biggest and best of India's infrastructure developers seem to be to get back in right earnest to good old EPC and works contracts without having to take balance-sheet risk. The "fiscal stimulus package" announced on Sunday, December 7, is considered by most infrastructure watchers as lacking in breadth, depth and imagination.

This "withdrawal symptom" from PPP/BOT projects has serious implications:

One, it sets the clock back by well over a decade of well-articulated and well-orchestrated measures to create a PPP culture. These included financial innovations like annuity, viability-gap funding,securitisations and non-recourse lending; the fine-tuning and standardisation of bid-process management and significant PPP capacity-building work at state levels.

Two, it will result in less than half of the infrastructure investments from private sector expected in the 11th Plan. An expectation of $150 billion will now be whittled-down to $75 billion or less.

Three, it will mark a move back to the "statist" model of infrastructure-development where 'Sarkar' is once again the mai-baap of public utilities provision and private sector is reduced to mere "thekedari".

Economists around the world have suggested increased government spending as a way out of the current crisis. The Indian government would do well to choose infrastructure investments over many other schemes where outlays disappear into thin air. But it is not that the "statist" model is free of difficulties.

Fiscal expansionism is a huge concern. So, it is time again to woo multilaterals like World Bank and ADB more assiduously. The World Bank is set to provide India an additional $3 billion. At the G-20 summit, the then Finance Minister P Chidambaram welcomed additional lending by

agencies like the World Bank. Domestic infrastructure companies have also started approaching multilateral financial institutions like IFC and DEG. Government should also look for government-to-government collaborations like the Japanese financing of Delhi Metro, and now the proposed Delhi-Mumbai freight corridor.

Further interventions in the realm of the possible include:

* A larger, second-tranche "fiscal stimulus package" for the infrastructure-sector under the auspices of IIFCL or a finance ministry 'sector-focus window'. The package needs to be funded to the extent of around Rs 75,000 crore and to be immediately used to provide refinance-cum-interest cushioning to commercial lenders across the board for ongoing, as well as fresh projects.

* A Planning Commission list of infrastructure projects that will be funded through budgetary allocation. The idea is to have a ready list of projects that can be executed fast to boost the economy.

* Creation of new public sector delivery and implementation capacities a la NHAI, NTPC or Delhi Metro; and allowing these entities to access capital and operate professionally.

* Relaxation of provisioning and lending norms for banks for infrastructure lending.

* Allowing separate treatment to NBFCs lending to infrastructure sector.

* Honouring awards given by Dispute Resolution Boards and Arbitrators nand stop challenging them in courts. This will release money wrongly locked up in unending disputes.

* Appealing to the Election Commission not to stop award of new development projects during election times.

Margaret Thatcher had a beautiful quote: "You and I come to office by road or rail; but economists travel on infrastructure." For travelling economists, there is clearly a separate reality in December 2008 than there was in December 2004.

The author is the Chairman of Feedback Ventures. He is also the Chairman of CII's National Council on Infrastructure. The views expressed here are personal.

BS

Hindustan Dorr Oliver-Should Trade Upto Rs 50

*Hindustan Dorr Oliver-The Cheapest, The Best* *BSE 509627; CMP Rs 33* **

*With an order book of Rs 600 crore, this 53 per cent subsidiary of IVRCL
Infra is the cheapest play on the burgeoning demand for Water Treatment
Specialists. Just to give an example, the AP Government's massive Jalayagnam
project that seeks to move drinking and irrigation water into the interiors
of the State will cost over $ 10 bn. Similar scale projects are being executed by the Governments of Maharashtra, and Tamil Nadu and all arid States of Central India. As long as people need drinking water, HDO will remain at the forefront.*

Hindustan Dorr Oliver Limited (HDO) is an Indian EPC company having its core
business activities in providing Engineered Solutions, technologies and EPC
installations in Liquid-Solid Separation applications. Hindustan Dorr-Oliver Limited has a new face. HDO is now a 53 per cent owned subsidiary of M/s. IVRCL Infrastructures and Projects Ltd., who are one of the leaders in Indian infrastructure industry, having core business
focus on total Water Management including pumping, conveyance, treatment and distribution, national highways, roads, buildings, hydro-electric projects, power distribution, desalination, etc. IVRCL is also executing many projects on BOOT basis for various Government Departments of India. HDO has over decades established a unique track record and position as
an extremely dynamic, totally reliable and component-engineering company,
having a cutting edge of superior technologies to emerge among leading process equipment and plant engineering companies in India. Today, with every conceivable engineering skill at its disposal, HDO is engaged in an endless endeavor to upgrade, modify, adapt and invent
products, processes and technologies to design, construct, install, erect and commission systems on complete EPC basis.

Stock Pick - Dabur India Ltd.

Dabur India, with popular brands such as Vatika, Real, Hajmola and Dabur Chyawanprash, is a prominent player in the fast moving consumer goods (FMCG) space. The company has a well-diversified portfolio of over 350 products spread over segments such as consumer products, health products and foods. With very little presence in the luxury or premium segments (which are the first to bear the brunt of any slowdown in consumer spending), Dabur is fairly insulated from slowdown pressures. Further to this, new launches and brand extensions, growth in key categories such as hair oils, shampoos and baby and skin care and strong growth in the international market make Dabur a good, long-term investment.

Business performance. During the September 2008 quarter, Dabur’s consumer care division (CCD), which forms almost 77 per cent of the revenues, grew by 18.86 per cent. Its renewed focus on ayurvedic over-the-counter (OTC) products saw consumer healthcare division grow by over 21 per cent in the same quarter.

Within CCD, hair oils grew by 20 per cent in the quarter while baby and skin care business saw 18 per cent growth. Shampoos grew by over 36 per cent in the quarter. A recent report by AC Nielsen ORG Marg says Vatika shampoo’s sales (volumes) grew by 38 per cent during the April-September 2008 period compared to the industry average of 10 per cent. In terms of value, it grew by 33 per cent while the industry average was 15 per cent.

Financial performance. Dabur registered a compounded annual growth rate (CAGR) of 14 per cent in revenues and 25 per cent in net profit, over the last five years. Sustained growth rate in its key categories has helped it register 18.32 per cent growth in sales in the September 2008 quarter as against the previous year’s quarter. Its international business (19 per cent of the total revenue) saw a good growth of 40.5 per cent led by robust performance in GCC (Gulf Cooperation Council), Egypt, Nigeria, Yemen and North African markets.

Its operating margin, however, slipped by 179 basis points on higher commodity prices, advertising cost and loss (Rs 5 crore) from its retail venture. But, cost management measures and pricing strategy helped net profit grow by 12 per cent for the September 2008 quarter. The health and beauty retail venture (which the company entered last fiscal) has also slowed down the pace of growth in earnings. This could continue to drag the profitability for a few more quarters as this business has long gestation period.

Growth plans. Dabur plans to strengthen its presence in the shampoo (revamped Vatika packaging and introduced Vatika black shine shampoo) and skin care categories. It is also strengthening its OTC portfolio (plans to launch ayurvedic skincare range) and is expanding its homecare portfolio (launched hard surface cleaner Dazzl). It is planning to launch fruit juices at different price points and is making packaging changes to the entire chyawanprash range. The new launches will be growth drivers over the next few years. The ayurvedic and herbal association is a plus.

Valuation. Going forward, if the current softening seen in the commodity prices continues, then the pressure on operating margins will ease. The price hikes seen during the previous quarter is also likely to improve the margins. At the current market price, the stock is trading 20.91 times its earnings, low when compared to players like Hindustan Unilever (25.9 times) and Nestle (27 times). Invest for steady returns and low downside risk.

Market Factsheet - A Squeeze On Margins

With economies worldwide shrouded in gloom, a slowdown in India Inc.’s Sep-tember quarter (Q2FY09) earnings was expected. Despite this recalibration, the sharp year-on-year (y-o-y) fall of 26 per cent in net profit for the universe of the BSE 500 companies as against a growth of 28 per cent in the corresponding quarter last year (Q2FY08) appears disturbing. No wonder the Sensex slipped below the psychological barrier of 10,000 in November, dropping by over 20 per cent since September. Markets have evidently factored in this performance in the share price.

However, during tough times every bit of information has to be looked at with a magnifying glass and positives cannot be overlooked. That the oil marketing companies (BPCL, HPCL and Indian Oil Corporation), which suffered a combined loss of Rs 12,000 crore due to huge subsidy burden, have contributed to this significant drop in earnings cannot be ignored. The fate of these oil companies is mired in politics and is beyond economics. So, if we remove these culprits from the list, there is a marginal y-o-y growth of 3.5 per cent in the net profit as against the 30 per cent growth in Q2FY08. Another positive point is that almost half the companies from this list have outperformed the index companies with respect to earnings.

Sales performance for this universe (475 declared results as on 7 November 2008) indicates that the volume of business was strong, resulting in a 37.89 per cent y-o-y growth as against 16 per cent in Q2FY08. However, this BSE 500 Index set of companies (which represents almost 93 per cent of the total market capitalisation on BSE and covers all 20 major industries) reeled under input cost pressure. Rising raw material cost, up by 58 per cent, was a major drag and the ratio of raw material cost to sales shot up to 60 per cent in Q2FY09 (53 per cent in the corresponding period last year). No wonder the operating profit margin (OPM) dipped by 775 basis points (bps) to 17 per cent on a y-o-y basis. The impact of the softening commodity price is yet to be reflected in the performance. Interest cost, however, grew at a much slower pace—37 per cent for Q2FY09 against 49 per cent in Q2FY08.

To get a much clearer picture of how Q2FY09 turned out to be, we analysed the performance of five key sectors that constitute 29 per cent in market capitalisation of the BSE 500 companies—fast-moving consumer goods (FMCG), healthcare, banking, automobile and information technology. Their respective BSE sectoral indices have been used for this analysis.

Fast-moving consumer

Goods (FMCG)

Performance of the BSE FMCG index set of 12 companies shows that spending in consumer goods has not slowed down despite the inflationary trend and the uncertain economic environment. Sales for Q2FY09 has grown 21 per cent y-o-y compared to 16 per cent a year ago. Marico (an OLM stock pick) has outperformed the index with a sales growth of 30 per cent. Close on its heels is Ruchi Soya and Britannia Industries (both OLM stock picks) with sales growth of 28 per cent. United Breweries and Godrej Consumer Products also saw good topline growth, but their net profit slipped significantly.

OPM declined for all companies largely due to pressure on the raw material front. Raw material cost to sales increased to 58 per cent in the latest quarter as against 54 per cent in the corresponding period last year. The impact of the declining commodity price is not reflected in the latest quarter results possibly due to inventories held at higher price levels. But, FMCG companies have been able to restrict the OPM fall to the extent of 161 bps due to cost control measures and price increases. The full impact of the price increases seen over the last few months may have a positive effect on the operating margin in the next quarter. And the impact of lower commodity prices will be felt October (when international commodity index Reuters-CRB dropped the most) onwards.

The adjusted net profit (excluding exceptional income) has grown 6.73 per cent against 1 per cent in Q2FY08. Colgate Palmolive, Dabur India and Marico (part of OLM’s FMCG stock picks) have posted double-digit growth rates, outperforming the BSE FMCG index profit growth. The BSE FMCG index itself was the most stable in terms of holding share price (BSE FMCG index went down 3 per cent y-o-y, while BSE 500 slipped 51.50 per cent y-o-y).

Going forward, one cannot rule out a slowdown in purchasing power and consumer spending, given the uncertain economic environment. However, companies have adopted various methods to tackle this—new product launches, packaging style and strong brand positioning. Companies with a mixed approach—focusing both on rural and urban sectors—are likely to maintain their growth rates. FMCG intake from the rural sector is still around 35 per cent, indicating potential for growth. It would be prudent to watch out for companies with a diverse portfolio basket, especially in those segments that lack substitutes and do not have significant exposure in the premium space.

Healthcare

The BSE Healthcare index witnessed a 28 per cent growth in sales in Q2FY09 as against 13 per cent a year ago. This uptrend can be attributed to steady growth in the domestic market, new product launches in the regulated markets and growth in the contract research and manufacturing services (CRAMS) business.

Rising input cost (up by 14 per cent as against a fall of 5 per cent in Q2FY08) due to a supply crunch of active pharmaceutical ingredients and intermediates in China has affected the sector’s OPM. It slipped 68 bps in the latest quarter, a less severe drop when compared to other sectors.

Many companies from this sector had to suffer due to the losses on account of depreciation of the Indian rupee against the dollar. These companies have high foreign exchange (forex) liabilities in the form of foreign currency convertible bonds (FCCBs). For instance, Ranbaxy Labora-tories suffered a forex loss of Rs 309 crore due to exchange differences on foreign currency borrowings. Aurobindo Pharma incurred a loss of Rs 105.10 crore for similar reasons. Adjusting such forex impact, this index has registered a net profit growth of 12 per cent y-o-y against a 1 per cent growth in Q2FY08. Divi’s Laboratories, Glenmark Pharmaceuticals, Lupin, Opto Circuits, and Sun Pharma-ceuticals have outperformed the BSE Healthcare index in both topline and bottomline growth significantly.

The sector’s long-term growth potential is intact. While pressure on margins may continue, it may see volume-based growth, especially as drugs worth $60 billion will go off patent in the next few years.

Banking

This sector grew at a faster rate than many others in Q2 FY09. The total income for BSE Bankex set of companies was Rs 70,577 crore—a growth of 26 per cent over Q2FY08. HDFC Bank, Axis Bank and Yes Bank outperformed this index with a higher growth in total income—over 50 per cent. Banks also registered a strong growth in the interest income on the back of high lending rates. Net profit growth for the BSE Bankex was 27 per cent.

Even during the high interest rate regime in Q2FY09, the net interest margin (NIM—a profitability measure of banks’ investment decisions) for most banks remained flat compared to Q2FY08. OPM was stable at 16 per cent. Bank of India remained the most profitable (as measured by OPM) bank with a significant growth in its NIM. The asset quality of Indian banks improved significantly. Of 18 companies in the Bankex index, the net non-performing asset of 12 banks improved over the previous quarter.

The recent cuts in cash reserve ratio (CRR), repo rate and statutory liquidity ratio (SLR) will free funds for banks to lend at a higher rate than the one they were receiving by investing in government securities (in case of SLR) or keeping cash idle with RBI (in case of CRR). Also, these rate cuts could lead to declining interest rates amid moderating growth and inflation. All this means more business and higher margins for banks in the coming quarter. The only major concern for the banks in the near term will be commercial loans turning bad in case of slow economic growth.

Automobile

Higher interest rates and raw material costs took their toll on the auto industry. High repo rates and CRR limited the ability of finance companies and banks to finance auto sales, which was the main driver for its volume growth. Sales impact was mixed. Sales volume for cars and commercial vehicles (CVs) was the most affected while two-wheelers escaped the impact (largely due to Hero Honda). Overall, the net sales for the industry grew at 13 per y-o-y in Q2 FY09.

However, the industry’s quarterly expenses grew faster—at 17 per cent compared to 10 per cent during the same period last year. Higher raw material costs ate into the margins of these companies resulting in a 498 bps drop in OPM from Q2 FY08 level. Q2FY09 y-o-y growth in operating profit and net profit was negative at -27 per cent and -18.47 per cent, respectively.

Major players saw a drop in their profit growth over the previous quarter, barring Hero Honda Motors (OLM stock pick) and Bosch. Dismal sales in October and slowdown in production by many major players indicate that their is more pain ahead. CV makers Tata Motors and Ashok Leyland have decided to cut back production. Ashok Leyland is opting for a 3-day week till December, while Tata Motors plans to stop production of CVs in Pune and Lucknow for six days this month. Although the recent CRR and repo rate cuts is a positive step, it will take some time for demand to resume. Meltdown in commodity prices will be a relief to contracting margins.

Information Technology (IT)

The September quarter had mixed news flow for the Indian IT companies. Leading US financial institutions collapsed and many of them were clients of Indian IT companies (Lehman Brothers, for instance, was a client of TCS, Wipro and Satyam). The scenario could have been worse had the rupee not depreciated against dollar leading to higher revenue in rupee terms.

Companies in the BSE IT index registered a cumulative net sales y-o-y growth of 30 per cent in Q2FY09, faster than 22.67 per cent in Q2FY08. Most of the companies reported net sales growth of around 25 per cent, while Satyam Computer Services (OLM stock pick) and MphasiS grew higher than their peers. However, the operating profit growth for the index declined over the same period last year. OPM dipped by 268 bps. Rupee depreciation could have improved the margins for these companies had they not hedged against currency fluctuations at a higher rate. As a result, net profit growth halved to 13 per cent compared to Q2FY08. The crisis in the West will certainly affect the revenues for Indian IT companies. Pressure on the margins will continue as the pricing ability of the companies may get hit.

Earning Report I

Earning Report II

Stock Picks for the week

ACC 
RESEARCH: ABN AMRO 
RATING: SELL 
CMP: RS 399 

ABN Amro has cut ACC’s earnings and downgraded it to ‘sell’. ACC seems financially well-placed with moderate expansion plans, but its earnings outlook has weakened, since the industry may see excess supply for at least two years, which will lower cement prices. FY09 cement demand growth YTD, at 6.6%, is below expectations, due to the stress in credit markets and delays in capex. So demand estimates for FY10 and FY11 fell by 200 bps each to 8%, which exposes the industr much longer to surplus supply. Restructuring over the past five years has seen ACC exiting non-cor businesses. The company, which had high gearing in the last business cycle (1997-03), now seems in a stronger financial position. ABN estimates it will have a debt-equity ratio of just 7% even after financing its entire planned capex of Rs 3,700 crore over the next three years. This will raise its capacity by 9.6%, slightly ahead of the expected demand growth. ACC looks cheap, trading at a cement enterprise value/mmt of $61 (vs replacement cost of $110), but ABN sees more downside to its earnings, given the overhang of excess supply. 

HINDUSTAN CONSTRUCTION 
RESEARCH: HSBC 
RATING: UNDERWEIGHT 
CMP: RS 40 

HSBC Global has reiterated its ‘underweight’ rating on Hindustan Construction Company (HCC). It has factored in a dividend payment of Re 1 per share, implying a dividend yield of 2.2%. Thus, the total potential return on investment in shares over the next year is -1.8%. HSBC considers the share price to be volatile. For Indian stocks, HSBC considers the average cost of equity to be 11%. A volatile Indian stock with a potential total one-year return of 10 percentage points on either side of 11%, i.e. 1-21%, merits a ‘neutral’ rating. As the potential total one-year return on HCC is less than 1%, HSBC reiterates its ‘underweight’ rating on the stock. A key upside catalyst for the stock is sharp increase in order inflows and reduction in leverage, resulting in lower interest costs. A sharp drop in execution volumes along with demand slowdown remain key downside risks to HSBC’s valuation. 

POWER GRID CORPORATION 
RESEARCH: CITIGROUP 
RATING: SELL 
CMP: RS 74 

CITIGROUP has maintained its ‘sell’ rating on Power Grid Corp (PGCIL) with a target price of Rs 69. PGCIL’s shares have outperformed the Sensex, post its IPO. Despite correcting more than 55% from its peak, it is not in the value zone yet. They are trading on par with NTPC, which appears unjustified. The key upside risks are: 1) Favourable CERC regulations for FY10-14E; 2) Faster-than-expected project execution; and 3) Higher non-core business profits. PGCIL has the potential to generate 14-17% returns on its regulatory equity base, compared with NTPC’s 14-22%. NTPC under-reports its profit/net worth. PGCIL matches depreciation under the tariff with reported depreciation, whereas NTPC’s depreciation under the Company Law is higher than under the tariff. PGCIL’s target price of Rs 69 is set at 1.8x FY10E P/BV from 2.2x earlier — a 10% discount to the target P/BV multiple for NTPC. PGCIL’s H1 FY09 reported PAT, at Rs 700 crore, was down 15% y-o-y. But this is largely due to forex fluctuations and a pass-through in tariffs. 

BANK OF BARODA 
RESEARCH: INDIABULLS SECURITIES 
RATING: HOLD 
CMP: RS 268 

INDIABULLS Securities has reiterated its ‘hold’ rating on BoB. The bank reported an average performance in Q209, even as its asset quality improved. It expects interest income to grow by 16% in FY09, against 31% in FY08, as the growth rate of advances is likely to fall to 23% in FY09 vis-à-vis 28% in FY08. In addition, the expected fall in yield on investments will affect interest income. Advances may be under pressure due to the global financial crisis and slowdown in the domestic economy. Over 20% of the loan book is accounted for by real estate and SMEs, which are prone to default in the current domestic scenario. BoB’s net interest margin (NIM) increased by a mere 4 bps sequentially to 2.8%. NIM is likely to be under pressure in the coming quarters due to increased cost of deposits, though RBI has lowered its key policy rates. With increased risk-aversion, BoB may shift the mix of interestearning assets from high-yield, risky advances to safer, low-return investments. This is likely to reduce the average yield, further pressurising NIM. 

RELIANCE INDUSTRIES 
RESEARCH: MERRILL LYNCH 
RATING: BUY 
CMP: RS 1,127 

MERRILL Lynch has retained it ‘buy’ rating on Reliance Industries (RIL). Its refining margin has consistently been higher than the benchmark Singapore complex refining margin. Analyses suggests RIL’s superior refining margin is due to its ability to refine heavier crude than Dubai. Compared to the last refining downturn, RIL is set to benefit more in FY10-FY11E from its ability to refine heavier crude. Reliance Petroleum’s (RPL) refinery, which is expected to start operations soon, can process even heavier crude than RIL and has a superior product slate. The average discount of Arab heavy to Dubai since FY01 is $2.4/bbl. The discount has sustained at over $5/bbl even in the past six weeks, despite the slump in oil prices. Merrill Lynch estimates RPL’s refining margin at $12.9/bbl if it were to operate in Q3 FY09, vis-à-vis Singapore margin of $7.3/bbl. It will produce more gasoline than RIL. Gasoline cracks have always been at a premium to naphtha and LPG cracks. Merrill Lynch feels that a weakening in diesel and gasoline cracks is the main risk to RPL attaining such high margins when it begins operations. 

STEEL AUTHORITY OF INDIA 
RESEARCH: EDELWEISS 
RATING: REDUCE 
CMP: RS 63 

SAIL has a saleable steel capacity of 13 mt. But with no major capacity expansion over the next two years and moderate demand scenario, incremental volume growth is seen at 0.6 mtpa in FY09E and may decline by 0.4 mtpa in FY10E on production cuts. SAIL’s average volume-based growth till FY10 will be more muted than that of Tata Steel and JSW Steel. The company is targeting completion of modernisation-cum-expansion by end-FY11, which is set to hike its saleable steel capacity to 23.1 mtpa, up 78% from FY08 levels. It will also improve the company’s productivity and refine its product mix. While the project will put SAIL in the global league, its timely completion looks daunting. Due to its scale and operational vastness, SAIL is best-positioned among its peers to gain from Indian steel consumption growth in the next two years. But in the absence of tangible volume growth, slow demand growth for steel, exposure to tight coking coal market, highest susceptibility to government norms on prices, and potential delay in expansion plan, Edelweiss expects SAIL’s margins to be under pressure in the next two years.