Market outlook
Stumble on the Street!
Everybody knows if you are too careful you are so occupied in being careful that you are sure to stumble over something – G Stein.
The bulls finally managed to jump around Mount 18K but didn't really manage to hoist their flag. The Nifty could surpass 5400 in the near term, provided there are no untoward developments. Some selling pressure will set in at higher levels given the jitters surrounding high valuations.
In addition, a spate of headwinds like elevated inflation, impending rise in interest rates and a fragile global economy could play spoilsport. Monsoon will of course be the joker in the pack.
Today we expect a slightly lower start owing to soft global cues. US stocks fell despite Fed's dovish words. Talk of potential changes to the EU-IMF debt rescue for Greek cast a shadow over world markets. Asian markets are mostly in red.
Back home, IIP data will be declared on Apr 12, while monthly inflation will be released on April 14. RBI's annual policy is on Apr 20. Another round of rate hike could be in the offing. So, trade wisely and be on guard to shift gears quickly if the need arises.
Trading ideas (Time period: 1-3 days)
Bombay Dyeing (BUY, CMP Rs590, Target Rs620): The stock has rallied smartly from a low of Rs416 in early-January 2010 to the present levels. The stock is moving alongwith the support of its 50-day DMA. On the daily charts, it has formed a pattern of a higher bottom. It is considered as the initial sign of a bottoming out process in the short term. The daily RSI is already in strong buy mode, indicating that the prices are set to rally from the current levels. A sustained move past the Rs595 levels will see the stock heading towards the levels of Rs620-625 in the medium term. We recommend high risk traders to buy the stock between Rs587-593 levels for a target of Rs620 with a stop loss of Rs578.
IDFC (BUY, CMP Rs172, Target Rs185): The stock had been facing stiff resistance around the levels of Rs168-170 from last four weeks. On Wednesday, the stock overcame the crucial resistance levels and closed above it. The upmove was accompanied with impressive volumes and closed well above its 100-day DMA. A move past the Rs173 levels, will confirm the basic bullish set up. We expect the stock to rally in the medium term. Traders can buy the stock in the range of Rs170-173 for a target of Rs185. It is advisable to maintain a stop loss of Rs166.
Derivative strategies (Time period: Till expiry)
± Long Nagarjuna Construction April Future @ Rs175-178 for the target price of Rs190 and stop loss placed at Rs169
Lot size: 2,000
Remarks: Net maximum profit of Rs30,000 and net maximum loss Rs18,000.
± Long Adani Enterprises April Future @ Rs492-496 for the target price of Rs518 and stop loss placed at Rs487
Lot size: 400.
Remarks: Net maximum profit of Rs10,400 and net maximum loss Rs3,600.
Mutual funds
| Fund focus | |||||||
| Reliance Growth Fund | Invest | ||||||
| Fund manager | Sunil Singhania |
| Min investment | Rs5,000 | |||
| Latest NAV | Rs452.5 |
| Entry load | Nil | |||
| NAV 52 high/low | Rs453/201 |
| Exit load | 1% <1 yr | |||
| Latest AUM | Rs6,733cr |
| Latest dividend (under dividend option) | 25% (Mar 30, 2010) | |||
| Type | Open-ended |
| Benchmark | BSE 100 | |||
| Class | Equity – diversified |
| Asset allocation | Equity (90%), Debt (0%), Cash (10%) | |||
| Options | Growth & dividend |
| Expense ratio | 1.8% | |||
Q4 FY10 Sector Previews
Automobiles
Indian automobile manufacturers are expected to report yet another strong quarterly performance (yoy) driven by robust growth in volumes and margin expansion. Across our coverage universe, OEMs have registered 18.9% - 138.9% growth in volumes. Volume growth has been driven by 1) improved consumer sentiment, 2) better finance availability (except 2-Ws), 3) pre-budget buying and 4) higher industrial activity (CVs). Margins are expected to be under pressure sequentially owing to higher raw material prices but will be substantially higher on yoy basis due to benefits of operating leverage. Auto component manufacturers in our coverage are also expected to report robust performance backed by improved domestic revenues and better margins.
Banking
We expect our banking universe to report a modest 3%yoy growth in net profit. On a qoq basis, net profit, however, is expected to decline by 4%, largely on account of higher provisions. With pick-up in credit activities, the system credit growth has inched to 16%yoy levels (in-line with RBI estimates). The deposit growth, on other hand has remained in the narrow range of 16-18%yoy for past few quarters. As a result, while LDR has remained at ~71% levels, the incremental LDR has stretched to 65%. This, in turn, is likely to enable banks to report improvement in margins on a qoq basis. The cost-of-funds is set to rise in coming quarters as banks are now liable to pay interest on savings account on a daily basis. Also with last leg of re-pricing exercise in place, interest cost will only rise going forward. While concerns over asset quality have abated, provisions are expected to come in higher in case of banks with lower coverage ratio. We continue to prefer BoB and PNB in PSU space and HDFC bank, ICICI bank & Yes Bank in the private space. We remain negative on Axis bank due to valuation concern.
Capital Goods
A strong order backlog at the beginning of the quarter will translate into healthy revenue growth for engineering and capital goods companies. IIP growth of 16.7% in January 2010 reflects an improving economic environment, which will translate into better earnings for players. With the industrial capex reviving, we expect companies to experience an improvement in order inflow going forward.
Cement
Cement demand grew ~10% yoy in Q4 FY10, owing to the onset of peak construction season. Strong demand along with supply constraints had resulted into a sharp increase in cement prices across regions. Prices in the Northern, Eastern and Central regions rose Rs5-35/bag in Jan-Feb' 10, while prices in Southern region jumped Rs15-50/bag at the fag end of quarter. Realizations for our coverage universe are likely to improve 2-13% qoq. Barring Ultratech, our coverage stocks would post a 2-10% yoy revenue growth, led by Ambuja Cements (ACL). A 25% qoq rise in international coal prices coupled with hike in diesel prices (leads to higher freight cost) would hurt margins. Aggregate PAT growth of 10.3% yoy is primarily driven by strong performance from Grasim and ACL.
FMCG
Growth momentum in revenues for FMCG companies is likely to continue aided by a strong growth in rural demand, which is on back of rising government spend to increase employment opportunities in rural areas and improve agricultural productivity. We expect a 14.3% yoy and 1.3% qoq revenue growth for our coverage universe of 8 companies. We expect OPM for our coverage universe to rise by a modest 15bps but decline by 53bps yoy. This is primarily on account of rising competition disallowing companies to resort to price hikes even in rising raw material price scenario. Additionally, higher packaging costs and ad-spend is hurting profit growth.
Hotels
Hospitality industry is set to report improved sequential performance as occupancies inch up at least 300-400bps across major cities. Average Room Rates (ARRs), however, still remain under pressure yoy. Indian Hotels and Hotel Leela could witness 14-31% yoy gain in revenues primarily led by higher occupancies. On a qoq basis, the addition of the 436-keys 'Trident' hotel at BKC, Mumbai in Dec' 09 would help EIH post ~30% jump in Q4 revenues. EBIDTA margins should also recover up to 274bps qoq for the coverage stocks while EIH would lead the PAT growth with >100% qoq jump in net profit. The recovery in occupancies has so far not translated in to robust growth for ARRs across business and leisure destinations. Retain SELL on Indian Hotels and EIH and MP on Hotel Leela.
Information Technology
Q4 FY10 IT results are unlikely to deliver any significant positive surprises and therefore cause any material earnings upgrade. The quarter would be characterized by healthy volume growth, further stabilization in pricing and notable margin decline. Infosys is expected to stand-out with a resilient margin performance, however, its FY11 revenue and earnings outlook may fail to enthuse the market
Metals
Q4 FY10 is set to be among the best quarters for metal companies; realisations would be high while costs remained constant. Our coverage universe comprising eight companies is expected to report more than 100% earnings growth on a yoy basis. On a sequential basis, metal companies would register earnings growth for the fifth consecutive quarter. Steel companies would lead the pack as companies had increased prices during the quarter whereas raw material costs remain largely same. Non-ferrous prices, which rallied sharply in 2009, witnessed some resistance in Q4 FY10. Among the non-ferrous space, Sterlite is expected to report stronger numbers led by higher contribution from the zinc and power business. We believe JSPL could surprise the street by reporting higher than expected earnings in its steel business.
Oil and Gas
Brent prices averaged US$76.5/bbl during Q4 FY10, compared to US$74.8/bbl in Q3 FY10 and US$45.1/bbl in Q4 FY09. This translated into a 14% sequential jump in under recoveries to Rs160bn. With no indications from the government, we have assumed the sharing pattern as: auto fuel losses to be borne by upstream companies and cooking fuel losses by OMCs. Singapore GRMs recovered from negative territory at the start of January 2010 to average at US$4.1/bbl for Q4 FY10 vis-à-vis US$0.6/bbl in Q4 FY09. This will result in strong performance by Reliance and CPCL. Higher production from KG-D6 will further improve earnings for Reliance and will result in higher transmission volumes for GAIL. While Cairn will see higher revenues due to increased crude oil production from Rajasthan field, ONGC will gain on account of higher net realizations (yoy). ONGC and GAIL will witness improved profitability as sharing of only auto fuel losses will lead to lower share in under recoveries.
Telecom
Pricing war amongst telcos took a breather in Q4 FY10 as operators focused on residual subscriber migration to the aggressive tariff plans launched in Sep-Oct' 09. Wireless revenue for Idea and Rcom is likely to remain flat but decline 3% qoq for Bharti. Revenue/min is unlikely to fall more than 2-4p, while sequential traffic could rise 2-3% qoq. Although subscriber base should jump 7-12% on quarterly basis across our coverage stocks, dual SIM usage would limit the revenue upside from incremental new users. Bharti and Idea could report EBIDTA margin dip of ~15-75bps qoq. Bharti could report the least drop in sequential profit while Idea PAT is likely to be 13% lower qoq, partly due to new circle losses.
Utilities
During the first two months of Q4 FY10, the country added only 1.3GW, lower than what was added during the first two months in the sequential quarter. With this India's installed capacity increased to 157.2GW. NTPC commissioned its Unit-5 490MW at Dadri and Unit-3 500MW at Kahalgaon during the quarter. CESC also commissioned its 250MW Budge Budge III unit. India's PLF continued to remain strong for the period April-February '10 at 77%, marginally lower than FY09. Generation during the quarter was higher by 7.3% over the corresponding period last year and 3.9% sequentially. IEX spot rates averaged at Rs4.1/unit during the quarter, higher by 20% over the sequential quarter.
Corporate Snippets
± Reliance Industries has implemented and commissioned 1MW solar Photo Voltaic power plant at Thyagaraj Stadium in Delhi. (BL)
± NTPC is planning to enter into large volume contracts for coal supply. (BL)
± Cabinet to take SAIL disinvestment proposal today. (BS)
± NTPC to build power plant in Bangladesh. (BS)
± Indian Hotel Company may scout for acquisitions for expanding operations overseas in the near future. (BL)
± M&M raises utility vehicle prices by up to Rs26,100. (ET)
± JSW Steel has earmarked a capex of Rs70bn for CY11. (ET)
± National Pharmaceutical Pricing Authority has slapped a notice on Piramal Healthcare for selling its 10-ml pack of Pred Acetate without getting regulator's prior approval. (BS)
± Canara Bank may consider raising funds through QIP this year. (BL)
± Andhra Bank total business grows 29% yoy in FY10. (BL)
± Emami to set up power plant in Ethiopia. (ET)
± NHPC would commission a 700MW project during FY11. (BL)
± Kingfisher Airlines set to float US$100mn GDR issue. (BL)
± Natco Pharma launches Bendit, drug for the treatment of Chronic Lymphyocyctic Leukemia. (BL)
± BGR Energy bags an order worth Rs990mn from PowerGrid. (BL)
± Moser Bear commission solar farm in Maharashtra. (BL)
± JK Paper to expand capacity, invest Rs15bn. (BL)
± Nestle to offer more 'Indianised' products. (ET)
± Essar Energy may launch the biggest ever IPO by an Indian company as early as next week to raise US$2.5bn. (ET)
± Blackstone group invest Rs2.25bn in Jagran Media. (BL)
± Ackruti City plans to raise Rs2.5bn for its proposed real estate venture capital fund. (BS)
Economic snippets
± The government is expected to take a decision on the proposal to ban FDI in tobacco products. (ET)
± Government is likely to set up a committee of Group of Minister to take a final decision on divesting stake in BSNL. (BS)
± India has set up a panel to specify audit norms for all communication networks. (ET)
± Tea output rises 23%, exports up 11% in Jan-Feb 2010. (BL)
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