Market outlook
Don't worry, its Budget as usual
A budget is just a method of worrying before you spend money, as well as afterward.
The Big Budget day is here. No point in speculating now on what it will have in store for the India Inc. and the people in general and the market in particular. Let's wait and listen. With the Finance Ministry having accepted most recommendations of the 13th Finance Commission, there is not much suspense left so far as fiscal consolidation is concerned.
The fact that the fiscal stimulus has to be unwound is a no-brainer. Some announcement on GST implementation is likely. Some sops may be retained for sectors that are yet to recover fully.
Expectations of big bang reforms are minimal. One space which needs to be dealt with urgently though is the huge subsidies, especially to the oil sector.
Whether the Finance Minister takes any concrete step in this direction is anybody's guess. On the whole, the market will be volatile, which is a given on the Budget day. The start will be nervous due to mixed global markets.
Trading ideas (Time period: 1-3 days)
Orient Bank of Commerce (BUY, CMP Rs277, Target Rs295): On the daily chart, the stock broke out from a four week resistance line. The stock touched a low of Rs253 in early February 2010, which has proved to be an intermediate low. Since then, the stock has created multiple higher bottom formations. The supportive technical oscillators are positive and the upmove which begun last week from the levels of Rs258 has taken support at 100-DMA. We recommend traders to buy the stock between the range of Rs275-280 for target of Rs295 with a stop loss of Rs268.
Tata Motors (SELL, CMP Rs667, Target Rs630): Tata Motors has seen a strong uptrend from the levels of Rs254 from the July 2009 to the levels of Rs845 in January 2010. This week, the stock fell below its short-term moving average. Moreover, on Thursday, it closed below the support of its long term trendline, and 100-DMA breaking down from the bullish price channel. Volumes have also picked up substantially as the stock breached the crucial support levels. It presents great opportunity for the traders to jump in on the downtrend. An occurrence of this event indicates further selling and continuation of the downtrend. We recommend traders to sell the stock between the levels of Rs673-660 for target of Rs630. A stop loss of Rs683 is recommended in all short positions.
Derivative strategies (Time period: Till expiry)
± Long Dabur March Future @ Rs169 for the target price of Rs175 and stop loss placed at Rs166.
Lot size: 2,700
Remarks: Net maximum profit of Rs16,200 and net maximum loss Rs8,100.
± Long Chennai Petro March Future @ Rs242 for the target price of Rs252 and stop loss placed at Rs239.
Lot size: 1,800.
Remarks: Net maximum profit of Rs18,000 and net maximum loss Rs5,400.
Mutual funds
| Fund focus | |||||||
| UTI Opportunities Fund | Invest | ||||||
| Fund manager | Harsha Upadhyaya |
| Min investment | Rs5,000 | |||
| Latest NAV | Rs22.5 |
| Entry load | Nil | |||
| NAV 52 high/low | Rs25/11 |
| Exit load | 1% <1 year | |||
| Latest AUM | Rs1,200cr |
| Latest dividend (under dividend option) | 15% (22-Jan-10) | |||
| Type | Open-ended |
| Benchmark | BSE - 100 | |||
| Class | Equity-diversified |
| Asset allocation | Equity (77%), Debt (0%), Cash (23%) | |||
| Options | Growth & dividend |
| Expense ratio | 2.2% | |||
Event Update: Telecom – 3G Policy
Eventually the government, after much delays and controversies, has managed to announce the schedule for 3G/BWA spectrum auction. According to the notice inviting bids from telcos, 3G auction would start on April 9, 2010 while BWA auction would follow 2 days after close of 3G auction. For 3G, a minimum of 3 slots of 2x5MHz each in the 2.1GHz band would be offered at a pan-India reserve price of ~Rs34bn. This figure is above the average of the respective asking prices of DoT and the finance ministry.
Two slots of 20MHz each in the 2.3GHz band for BWA shall be sold at half the base price set for 3G. Based on 1.5x (3G) and 1.3x (BWA) bids above reserve price, we project total auction revenues of ~US$4.2bn, much lower than that budgeted by the government. Given the pricing war and prospects of weak earnings over next few quarters, companies may tone down aggressive bidding at the auctions. Expect pan-India incumbents like Bharti, Vodafone and Rcom to be key beneficiaries while others like Aircel may prefer to bid aggressively only in their pockets of dominance. Retain Bharti as the top pick in the sector.
Company Update: Bharti Airtel – BUY
CMP Rs276, Target Price Rs388, Upside 40.4%
Bharti hosted a conference call to outline the rational and synergies from the acquisition of Zain Africa. With its India operations yielding significant free cash flows (~US$1.8bn in FY11E) and greenfield opportunities no longer feasible, Bharti's management has been on the look out for assets that operate in India-like markets. Bharti appeared confident it can replicate the 'minutes factory' model at Zain – deeper penetration coupled with driving down costs/min through extensive IT/network outsourcing, cut in network capex through passive infra sharing and lower overheads. While the deal would involve payout of US$9bn and be EPS dilutive in the near term, mgmt does not foresee any material capex investment in Zain. Even as we await further details on the deal, retain BUY on Bharti attractive ~11x FY11 PER.
Result Update: Tata Power (Q3 FY10) – BUY
CMP Rs1,265, Target Price Rs1,566, Upside 23.8 %
± Consolidated revenues de-grow by 6% yoy - due to degrowth in both power and coal businesses
± Power division's EBIT margin expands by 731bps yoy to 17.7% while that of coal business is impacted by Rs3.5bn write off of deferred stripping expenses
± Lower effective tax translates into flattish adjusted profit growth
± Merchant sales and timely commissioning of projects will aid 18.4% earnings CAGR over FY09-12, re-iterate BUY
Sector Update: Commodity Monthly Update – February 2009
Base metals pack, which registered a strong comeback in 2009, has unexpectedly found some strong resistance in the start of 2010. Base metal prices in the first two months of 2010 are under pressure on rising concerns over the state of the European economy and on expectations that the monetary tightening measures used by several central banks to curb liquidity will curb the demand growth. The selling pressure on base metals has also intensified after the US President curbed the trading activities of US banks. Though metal prices managed to bounce back form its lows in the last one week, the tone in the market remained negative. Contrary to the base metals market, the ferrous space has witnessed steady increases in both raw material and finished goods prices. Chinese exporters have increased offer prices of HRC by US$20-25/ton during the month of February to offset the jump in raw material costs. However China's finished steel exports fell in January, ending six months of consecutive increases as high offers started to turn off buyers. Overseas buyers too became cautious and reduced bookings when Chinese export offers were raised to a high level. Iron ore prices after a slight dip in mid month, firmed up to US$130/ton levels. We believe that the steel end users in the European and American region will not absorb the increase in steel prices. Hence, we expect the increase in steel prices will be lower than the increase in raw material costs, leading to pressure on margins of non-integrated steel manufacturers.
Corporate Snippets
± Bharti Airtel may issue fresh shares or divest its holding in telecom infrastructure companies to fund Zain deal. (ET)
± DLF plans to build a premium residential apartment complex in the Worli area of Mumbai instead of high-end mall and office project as planned earlier. (BS)
± ICICI Bank has raised deposit rates by 25-50bps. (BS)
± L&T plans to borrow US$2.2bn this year to fund road building and power projects. (ET)
± Nalco has sited diplomatic and financial roadblocks for not being able to make any progress in the Rs100bn greenfield project in Iran. (ET)
± Tata Motors announced the completion of a GBP340mn loan from European Investment Bank to JLR. (BS)
± Tata Power will start supplying 500MW to Maharashtra from April 1. (BL)
± Reliance Capital raised its stake in Fame India by 1.7%. (BS)
± Government of Maharashtra has awarded Worli-Haji Ali sea-link project to a consortium led by Reliance Infrastructure. (ET)
± Nalco has lined-up Rs500bn capacity expansion programme to be completed in 8-9 years. (FE)
± Aurobindo Pharma has received tentative approval from US FDA to manufacture and market its Navirapine tablets for oral suspension. (BL)
± Cadila Healthcare will issue bonus share in the ratio 1:2. (BS)
± RBI has slashed a fine of Rs2.5mn on Bank of Rajasthan for violating regulations. (BS)
± Coal India will invest about Rs25bn to set-up 20 coal washeries. (BL)
Economic snippets
± Six core industries grew by 9.4% yoy in January 2010. (BS)
± Power Tariffs across the country may have to be revised upwards in excess of 7% annually if the Government goes by the recommendation of the 13th Finance Commission. (ET)
± Government has invited applications from telecom operators for bidding for 3G and Broadband wireless access spectrum to be auctioned starting April 9. (BL)
± Gujarat proposes 5% increase in tax on tobacco products. (BL)
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