Advice On RIIL Ltd & Unitech Ltd.

About Reliance Industrial Infrastructure Ltd.

Reliance Industrial Infrastructure is referred as RIIL at Rs 1,002.15 with a target of Rs 1,048. This is a crude carrier company of Reliance Industries and there is a speculation of a big restructuring happening within the group by transfer of the gas line or maybe the gas carrier business in this company to act as a front for all the projects to be undertaken. So merely on speculation or on the expectation we have been seeing a good value coming in into the stock, so target for the day is Rs 1,048.

Advice on Unitech Limited

Unitech has restructure itself & shed off lot of non core assets. The company has repaid its debt. He feels that the main trigger for the stock is a possible increase in income tax exemption for interest & repayment of loans.

Advice On Nalco & Sun Tv Network

Advice On Nalco

As per technical analysis Nalco has corrected quite sharply. It did not participate in the metals rally on Friday, so we would be looking to buy it once it gets past Rs 314 for a target of about Rs 360. It is quite beaten up so you have Rs 10 downside probably.


Advice on Sun TV

Sun TV Network is currently trading at 26.2x its FY09 EPS of Rs 9.4, which is premium to its peer and deserve the premium valuation because of its unique business model (time slot model), highest operating margin as compared to its peers, strong balance sheet which has an cash position of Rs 400 crore. We believe company has a better placed than its peers because of its less dependent of advertising on national front and strong movie pipeline for FY10. Thus, we recommend a “BUY” on the stock with a target price of Rs 294, which represents a potential upside of 20%

India Budget 2009-10

Should reducing fiscal deficit be a priority or should thrust remain on growth?

There is no denying that India’s fiscal deficit is a cause for concern. As per the tax figures for April 2009, excise collections have been badly hit, and this has led to the fiscal deficit burgeoning to 16% of the targeted Rs.3,32,835 crore for FY10, in April itself.

But the Govt feels that there is nothing really to worry much about fiscal deficit as in April 2008, it was at 24.7% of the projected figure for the entire 2008-09. So compared to that we are better off. Fiscal deficit is projected to be 5.5% of GDP in the interim Budget for 2009-10. But this was base don the assumption that some of the tax cuts given in the Budget would be rolled back by then and that has not yet happened. Once the stimulus packages were announced, this fiscal deficit was revised higher at 6% and it was at 6.2% of GDP in FY09.

Montek Singh Ahluwalia said that there is nothing too much to worry about and assured that fiscal deficit would not get into the double digits. By saying this, he probably sent out a signal that the focus would be on growth as deficit is not really yet a cause for worry.

But in the same tone, it is imperative then to mention that RBI Governor, Mr.Subbarao had said that there was an urgent need to get the fiscal deficit under the belt and said that keeping interest rates low would only lead to this deficit burgeoning.

If the Govt goes ahead with a populist budget, deficit could rise to around 7.5%, ie: assuming that there are more tax cuts and other benefits. The Govt plans to spend heavily on social causes. President Pratibha Patil in her address to the joint session of Parliament had said that the Government's commitment to its flagship programmes like NREGA would continue. This again means that more money will be spent. And if we add this cost too, the deficit could rise to 7-8-8%.

Surely, these numbers would have been considered by Montek Singh when saying that fiscal deficit is not a cause for worry. And this would also be based on the fact that the Govt expects money to come in from PSU disinvestments and also from the recently announced 3G licence auctions.

Updates on Wockhardt

The Awaited News

Wockhardt is all set to seal its Corporate Debt Restructuring (CDR) on 26th June 2009. This is the most awaited news in Wockhardt as the future of the debts and thus its impact on the overall earnings of the company earnings depends on the way this CDR is packaged.

Financial Status

Wockhardt is sitting on a total debt of Rs.3100 crore of which rupee debt, borrowed from ICICI Bank, SBI, IDBI, BOI, ING and PNB stands at Rs.2000 crore. Forex debt is at Rs.1100 crore, taken mainly from ICICI Bank and some more foreign banks.

Reason For Debts

The reason for the mounting debt has been the overseas acquisitions made by the company in the last two years. It had acquired Ireland based Pinewood Lab for $150 million, then the France based Negma Lab for $265 million and US based Morton Grove Pharma for US$ 38 million. This has constrained the fund raising ability of the company.

As per the CDR worked out, the debt has been rescheduled to 7 years from 5 years. Interest rate has also been reworked at 8-9% compared to the 12.5% it is paying now. So the savings which would be made on account of the lowering of interest rates would be quite substantial.

There is also concern about the FCCBs worth $110 million which are due for redemption in October this year. These FCCBs are today trading at a huge discount. In all probability promoters will buy back the FCCBs and negotiations are on to go through with this too.

Promoters of the company, who own 74% stake, have already pledged 79.21% of this. They now plan to raise additional funds by selling their biotech and vet unit. It sold its German subsidiary Esparma on 18th June and raised Rs.120 crore. It had acquired this unit in May 2004 for Rs.49 crore, so this has proved to be a good deal. The cash raised would be infused back into the company. Promoters also plan to raise Rs.50 crore via equity.

The benchmark clause in the CDR, which could probably pave the way for others in India Inc would be the way it has managed to work its way out of the forex derivatives losses. For the financial year ended December 31, 2008, Wockhardt posted a Rs.581-crore mark-to-market loss on currency contracts. This is about the expired contracts, where losses have been realised, meaning the company now owes this money to the banks. On this issue, as per the CDR, banks are to be paid back by issuing zero coupon preference shares, which will mature in 2017. These shares will be converted into equity at a premium on redemption. But what is to be borne in mind here is that only 40% of the entire forex loss is part of the CDR, the rest is yet to be settled.

This working out of the CDR is good news and will help Wockhardt work its way out of the woods and once again concentrate all its attention back on running the business. It remains a sound company and is still the seventh largest pharma company by revenue.

Valuation Of The Company

Apart from this issue of debt, the company is not on thin ice. The company is estimated to have an annual sales of Rs.3,500 crore of which, Rs.2,200 crore may come from Europe and USA, based on the past data. Generally, on a global parameter, an established pharma company like Wockhardt, gets valued at 3 times of its topline. This means, it can get a valuation close to Rs.10,000 crore and if we deduct the debt of Rs.3,100 crore, it can have a net enterprise value of Rs.6,900 crore, resulting in a value per share of around Rs.630.

Shareholder Interest

As we had assured earlier, the minority shareholders would tend to gain, as we did not see the promoters leaving the company in a lurch. It is already up today by over 4% at Rs.147 and continues to hold tremendous value and potential for those, who have a 12 months view on the stock. Now with the CDR underway, the fundamental of the stock looks brighter.

Updates on Great OffShore Ltd.

The Story

This is one company where the original promoters just watched their entire control going away to their biggest competitor. Vijay Kantilal Sheth, vice-chairman and managing director of Great Offshore became the first promoter in India to lose control of his company after Bharati Shipyard took over shares Sheth had pledged against loans. Bharati acquired the shares at Rs. 315 a share.

And now this battle for complete control over Great Offshore by Bharati Shipyard continues. Drama started when ABG Shipyard made an open offer to acquire over 32% in Great Offshore at Rs.375 a share, countering Bharati's bid of Rs 344/share for a 20% made earlier this month. ABG holds a 2.02% stake in Great Offshore, purchased in FY09 from the open market. This open offer of ABG opens on 13 August 2009 and closes on 1 September 2009, with today being the last date for a competitive bid.

Bharati Shipyard, which had a 14.89% stake in Great Offshore disclosed yesterday that it had bought further 4.5% stake in the company from Bharat and Ravi Sheth (cousins of Vijay Seth) for Rs. 403 a share. With this buy, Bharati’s stake now stands at 19.1% and till date, it has spent Rs.245 crore for this stake.

The drama here is that both –ABG and Bharati are reluctant to let go. Bharati has said that it will make a counter bid for controlling stake and ABG has reacted stating that it will make another bid over this counter bid.

Effect On Shareholders

For the shareholders of Great Offshore, this is good news, especially in the short term. Today, the stock is quoted at Rs.420 levels and they should stay put for this war of bids to end at the end of which, the final price would be much higher and thus best to hold on.

Why do these two companies want Great Offshore?

For Bharati Shipyard, it is imperative that it gets the company as currently 30% of its order book comes from Great Offshore and if ABG gains control, then it might stand to lose more than just the controlling stake. So for Bharati it’s a cacth-22 as taking over will trigger off high debt and letting go would mean probable loss of revenue.

What these Company Do?

Great Offshore is an offshore oilfield services firm while ABG and Bharati are ship manufacturing and repairing companies. The outlook looks bleak for both ABG and Bharati as no new ships are being built and order book is not very good for current year. But if either of them manage to get control of Great Offshore, it would help them get over their current slowdown. The acquisition could make either of them into fully integrated player in the highly lucrative field of offshore oilfield services market. Great Offshore has a fleet of 40 vessels of which 75% are old and needs to be decommissioned. This would mean business for ABG and Bharati, not to mention revenues which would come out of repairs.

But can ABG and Bharati really afford this price war induced acquisition?

For them, this counter bidding will prove to be counteractive as every hike in the offer price, signals more money than anticipated going out of the company. Bharati would have arrived at a price of Rs.344/share after calculating all the fair valuation parameters. And now, it paying Rs.403 for 4.5% stake and new offer price, are all price forced due to circumstances. This new price would not be the fair valuation because it has now become more or a tussle than a ‘strategic’ takeover, and this works out to be too expensive. Bharati has already spent Rs.245 crore till date. So this means the company will now go for more debt to make this acquisition that too at a time when business for the shipping sector is not exactly booming. For FY09, Bharati Shipyard posted net sales of Rs.1019.23 crore on which it posted a net profit of Rs.130.03 crore. Its interest outgo was at Rs.56.71 crore and it does not have reserves to really fall back upon to fund this acquisition, meaning its debt component would go up further.

On the other hand, ABG Shipyard for FY09 posted a net profit of Rs171.10, up 6.48% on net sales of Rs. 1412.20 crore, up 46%. Its interest outgo for the year was higher at Rs.74.24 crore. It has reserves of Rs.788.05 crore which is why it has stated that it will fund this acquisition through internal accruals.

IPO NORMS BY SEBI

With the objective of boosting investor confidence in the primary market, SEBI has announced a few fresh measures for new Public Offer.

A look at the primary market measures:

1. Any unlisted company making an IPO will have to list in at least one of the stock exchanges having nationwide trading terminals – this means companies cannot call themselves being ‘listed’ by getting the company listed on any of the small regional exchanges. It would necessarily have to go for a listing on the NSE or BSE. This would also ensure that the companies, to get themselves listed on the NSE or BSE would have to comply with some strict norms and that ensures some amount of quality. Also, listing on any of these national exchanges would bring in more depth and give assurance of trading. There are so many stocks, which though listed, hardly ever gets traded and becomes a liability for the investor and for the stock exchange. And one more big advantage – it will ensure that terminals of NSE and BSE now reach all nook and crannies of the country thus ensuring ‘national’ participation. This will provide a liquid trading platform to investors in securities of the company.

2. The biggest move is the ushering in of the concept of an ‘anchor investor’. In CB Bhave’s words, “The concept will work like this. The anchor investor will have to be a QIB, what we call the Qualified Institutional Buyer. He can get up to 30% of the quota that is reserved for a QIB. In effect, about 15% of the issue can be given to the anchor investor.”

3. As per the guidelines, anchor investors will apply for the shares a day before the subscription opens for other investors. They will pay 25% of the purchase price when placing the order and the remaining 75% within two days after the IPO has closed. There will be a firm allotment to this anchor investor and therefore there will be a lock-in of 30 days after the issue gets listed. No person related to the promoter, promoter group or the book running lead managers will be allowed to apply as an anchor investor. This is a good move as it brings a certainty to the issue and would help the promoters of the IPO create demand for their shares and get a better price.

4. SEBI has also tinkered with some norms in the rights issue. It has barred companies from issuing shares with superior voting rights. One of the representations from the market was that the disclosure documents for rights issues tends to be extremely bulky because it is treated like a public issue, whereas that company is already listed and has continuing disclosure requirements. Investors know not only the price of the shares but also know the continuing disclosures. So SEBI has decided to do away with certain earlier requirements, including disclosing the summary of the industry and business of the issuer company. This will hasten the process for companies and also help reduce the costs.

Negative Inflation In India

Latest Inflation Figures

Inflation for the week ended 6th June 09 came at -1.61%. It has happened for the first time since 1977 that we have a negative inflation. And this only evinced a smirk from most as for every man on the street, these figures have no meaning as they continue to pay more and there is no indication for them that prices have come down.

Capital Market Response To It

The markets also gave this number a cold shoulder and ignored it completely. But it surely got the economists excited, as this was a first. Negative inflation which is also referred to as deflation is the biggest indicator of recession in the economy. But here, in Indisa, it was touted by all as a “historic statistical curio”, that’s all it was. A statistical aberration.

Does this mean that the Indian economy is in recession?

Definitely not! For a economy to be officially declared as being in recession, it has to show a negative real economic growth or falling GDP consistently for at least two quarters. Deflation in economic parlance means fall in price level of goods and services, resulting in an increase in the real value of money.

When Deflation Occurs?

Deflation occurs where there is a fall in demand and prices are also down. In deflationary economy, people typically delay their buying until prices fall further which in turn reduces overall economic activity, leading to huge idle capacities thus contributing to the deflationary spiral.

Deflation is usually counteracted with a cut in interest rates, increasing supply of money and announcing economic stimulus. Now this is something which we see in USA – the stimulus, the bailout leading to increased money supply and interest rates are at their lowest levels.

Indian Scenario

In India, there was a time when people delayed their buying’s but this was seen only in realty sector but not all around. It’s not like people have been putting off buying cars because they expect prices to come down further. One has to just go the shopping malls on any given weekend to see if people have stopped buying. And rate cuts? There is no way that RBI is going to initiate any rate cut now based on this negative inflation as it is simply not needed.

Then there is the question of increase in the real value of money. Apart from the rupee rising vis-à-vis the US dollar, there is no real rise in the value of money. Price of commodities is up, pulses and grains, vegetables and fruits costs’ more.

Yes, we did have economic stimulus and lowering of interest rates but that was at a time when the entire world was reeling under recession and we had huge piles of inventories. At that time, if someone had said that we had deflation it was more believable. But today, when the April IIP numbers have come in the positive and some sectors are showing sure signs of revival, how can we say this -1.61% is deflation?

why do we have a negative inflation?

The biggest reason is the base effect. Due to higher prices last year as measured by the WPI, we thus have a negative inflation. It is more of a statistical fall and does not indicate any systemic deficiency. Consumer price index is over 9% and India’s GDP is growing at the rate of 6%.

The struggling-to-survive man on the street, the woman haggling with the vendors to save a few pennies more and the elderly having to do away with healthy fruits simply because they are unaffordable all point in one direction – prices need to come down. On one had we have deflation and then life becoming tough due to mounting costs on the other. This means, we need to urgently change the way we calculate our inflation rates as it seems to have no connection whatsoever with the ground reality.

Fuel Price In India to get fired.

Deregulation Of Oil Sector

If crude crosses $75/barrel, the Govt would get into the picture and control the prices once again. Well, at that time, on 29th May to be precise, there was no real fear of that $75/barrel coming in too soon. But now, this is the stark reality staring at our faces. Crude continues to flirt with $70/barrel levels and the threat is very real of it reaching the $75 threshold soon. So then that makes us wonder about all the hullabaloo and celebrations on Dalal Street over the decontrol of oil.

When things just about seem to be improving, something comes up on the horizon which threatens to remove the small trace of smile coming on the face of the economy. If the April IIP numbers had managed to bring in cheer, the rising crude price and the delay in monsoon shows those days of low inflation might as well be over. Prices of petrol and diesel are expected to be hiked any time soon.

But one has to be thankful that this deregulation did not happen because if it had happened, once crude had crossed $70, price of petrol would have been hiked by Rs.6.50 per litre and that of diesel at Rs.3.25 per litre.

Infact, the private sector OMC – Essar has already hiked its price. It has raised diesel prices by Rs1-2 a litre and petrol prices by Rs1-2.5 per litre depending on location of the fuel station. RIL which had recently started selling diesel at its 65 operational outlets, has not yet taken a final decision. This scenario of rising crude is a no-win situation for the private sector players. They cannot afford to sell at lower prices and if they hike prices, they lose their customers to the PSUs.

About our PSU OMNCs?

After having made profits for the past seven months, once again HPCL, BPCL and Indian Oil have started making losses on the diesel and petrol which they are selling. The figure which has come in is that these OMCs stand to lose around Rs.38,700 crore in revenue this fiscal. IOC, BPCL and HPCL are selling diesel at a loss of Rs2.96 a litre from Tuesday. And the loss in petrol is higher – Rs.6.08 per litre of petrol from Rs3.68 a litre in the first half of June. So this means, these three OMCs are losing Rs.135 crore per day on sale of petrol, diesel, domestic LPG and kerosene.

OMCs have already hiked the price of aviation fuel. Effective 15^th June 2009, IOC, BPCL and HPCL raised aviation turbine fuel (ATF) price by Rs 3,949 to Rs 36,252 per kilolitre in Delhi. This is an over 12% price hike. Jet Airways has been the first to react and today, it announced a Rs.400/ticket fuel surcharge across all domestic sectors effective June 17.

Is a fuel price hike imminent?

The Govt has categorically given a firm “No” and has stated that prices will be hiked, if and only if, the average price of crude crosses $70/barrel. The average price of crude oil this quarter is around $57 a barrel, so that clearly means that there is no case for a fuel hike right now. This is good news for us but for the OMC, it means that their losses would mount further.

There was news that there was to be to an oil cess on income tax to recover oil subsidies but today, the Oil Ministry has clarified that there is no such move and if a cess is put, it plans to oppose the cess.

Small Savings Rates To Reduce : NSC & PPF Under Cowerage

Small Saving Schemes

Just as traditions and cultures are handed down to us through generations, we are taught very early on in life to invest in National Savings Certificate (NSC) and PPF. Their interest rates are higher and being owned by the Govt, it is considered most secure. It also gives tax benefits. And this is precisely why majority of our elderly put their savings into these NSC and PPF schemes and it becomes a major source of income for those retired without pension benefits.

Latest Govt. Planning

Hence it came as shocker to know that the Govt is now planning to reduce the interest rates on these small saving tools. Grappling with huge fiscal deficits, the Govt is looking at every single nook and corner to either raise money or curb outgo. And after all this hunting around, it has come up with a solution – it may look at reducing the rates on small savings schemes by 50-75 basis points from the current rate of 8%. To look into the viability of this, it is planning to do what it does always – set up a committee, and this will be chaired by the former governor of RBI to study the issue and suggest appropriate steps regarding the same.

Why are they looking at this option?

If banks reduce their fixed deposit rates beyond a certain limit, it would become unattractive and people would divert all their money into small savings schemes. They say that close to 55% of savings by Indians are in bank deposits, and a shift of 15-20% of these deposits to small savings schemes can be expected if the term deposit rates are cut further.

This they feel is the main reason why the banks are not reducing their interest rates. So to get the banks to reduce their rates, the Govt wants to reduce the small savings rates. Well, if that is the logic, then where was the Govt when bank rates were much higher than the small savings rates? At that time, did they think of increasing the small savings schemes rates?

Impact Of action

This Govt has built up an image for itself of being a very fair Govt, giving benefits to those in the lower rung, being more social without being Leftist. So, in that context, this reduction of interest rates on PPF and NSC would go completely against the very grain of the Govt. This reduction, if it comes in, would hit the elderly and the vast majority of the middle and lower middle class very badly.

We may have an inflation rate of below one percent but does it really mean that the elderly and the middle class have more disposable income in their pockets today? Prices of commodities, fuel, health care, education, everything is higher than earlier. When the elderly spend 60% of their income on medical needs, this reduction from 8% will risk them making almost destitute.

HC Judgement Reliance Industries & Reliance Natural

As expected, the much awaited High Court judgement went in favour of RNRL. The HC has directed Reliance Industries (RIL) to supply 28 metric standard cubic metre per day (mmscmd) of gas at US $ 2.34 per million metric British thermal unit (mmbtu), for a period of 17 years.

The repercussions of this landmark judgement:

1. This also means that 12 mmscmd gas will be supplied to NTPC at the same terms – 17 years and at a price of $2.34/mmbtu. If NTPC decides to forego this gas, the entire 40 mmscmd would go to RNRL.

2. RIL, throughout its arguments before the court, had maintained that gas could not be supplied to RNRL or any other company for lesser than $4.20/mmbtu, as the price has been decided by the Empowered Group of Ministers. But now, with the HC deciding on a much lower price, it is quite evident that RIL would knock the doors of the Supreme Court.

3. RIL pays royalty and profit sharing levies to the Govt at the rate of $4.20/mmbtu. But with it now selling gas to RNRL at $2.32/mmbtu, would RIL still continue to pay the various levies to the Govt at the higher rates?

4. RNRL currently does not have gas based power plants ready, so till such time that it gets to use 28 mmscmd of gas, where will this gas be used? RNRL can use this gas to trade within the group companies and now this gas would thus be made available to Reliance Power and this is great news for Reliance Power. Firstly, it will fast track the power projects – Dadari and Shahpur, and this availability of gas at such a lower rate, would ensure a saving of almost Rs.3500 crore on its raw material costs, resulting in an equivalent rise in its profitability.

5. The capex outlay of RIL has been increased from $ 2.47 billion to $ 8.8 billion, with increase in estimated production also, from 5.3 trillion cubic feet (tfc) of recoverable reserves at a plateau production of 40 MMSCMD now to 11.3 tcf and plateau production of 80 MMSCMD. With this pricing rule now coming in, how does RIL make up for the increase in capex?

6. What happens to 40% claim of RNRL on excess production by RIL from K G Basin, beyond 40 MMSCMD? RNRL may have to contest strongly, to push for this claim of overflow capacity and also on the 12 mmscmd, if not supplied to NTPC.

7. The HC asked RIL to arrive at an arrangement along these lines within a month. And it has also ruled that the Ambani brothers may consult their mother, Kokilaben, if there is any difficulty in arriving at a conclusion as the MoU provides for this. This once again proves that the Court has upheld the supremacy of the role of mother.

8. Govt has stated that RIL will have to sign the gas supply master agreement (GSMA), if RIL goes with this pricing of $2.34/mmbtu.

The biggest positive of this ruling, more than RNRL is actually for Reliance Power. With assured supply of gas and that too at such a lower price, will go a long way in improving the profitability of the company.

ATTENTION REGISTERED MEMBERS

NOTICE.
Dated: 15/06/2009

ALL REGISTERED MEMBERS ARE HEREBY INFORMED THAT SCRIPTS FOR GOOD RETURN IS LIKELY TO BE FORWARDED TO ALL MEMBERS TO BE BOUGHT FOR GREAT RETURNS.

IN THIS REGARD ALL MEMBERS ARE SUPPOSE TO EMAIL ME MENTIONING THE DATE OF REGISTRATION ASKING FOR THE LIST.

A.GOYAL
Senior Advisor , Multi bagger Group

Inflation & Ineterst Rates

Disappointing Inflation Figures

Inflation figure proved to be a non-event again.It is either because people feel there is no co-relation between the inflation figure published and what they are actually paying for necessities. Or it is because the market has already discounted for the low rates and its like ‘ho-hum-so-what’ kind of reaction.

Inflation came down to as low as 0.13% for the week ended 30th May 09 as against 0.48% last week. But hidden in this low inflation figure is a message for the future – interest rates are bound to go up by Jan 2010.

Present Liquidity

Right now there is a lot of liquidity in the market and banks, which are sitting tight on the rates and pots of money, will soon loosen their purse strings. Be it at the behest of the Finance Minister or economic conditions, banks will bring down the rates in the immediate few days. It is not expected that RBI will announce rate cuts but it is the turn of the banks to now act on the earlier rate cuts announced and bring down the PLRs.

Once money starts flowing in, economic revival starts happening, then demand is bound to pick up. And once demand starts picking up and economic growth starts showing a better pace, prices or inflation starts going up. Economic growth and inflation also go hand-in-hand. Inflation and interest rates move in tandem while economic growth rate and inflation move in opposite directions. So to bring down the prices, it becomes essential to put some curb on the supply of money and thus interest rate hikes will come in.

Inflation In coming Days

Once growth starts picking up in India, it will gallop and in that context, inflation is also expected to more than double up. The Indian economy is showing slow but sure signs of recovery and strong recovery is expected to happen by Q4FY10. Economists are predicting inflation to go up to as high as 5.5-6.5% levels by the end of this current fiscal.

Crude Pricing in Coming Days

Crude which was ruling low for some time has also started picking up and today it rules above the $70/barrel price. This rise in crude, without any cut in oil output is also an indication of activity slowly picking up. And once globally, recovery starts happening, naturally demand for crude is expected to go up considerably. Oil experts, on a conservative note, expect crude to rule at around $85/barrel by Dec 09 and expect it to go up to $95/barrel levels by end of 2010.

Interest Rates may rise in 2010

About 60% of India’s import basket comprises of oil imports and naturally, we are at a disadvantage when crude rises. This will only further add on to the inflationary pressures. Even a 10% price hike in petrol and diesel would add on around 0.6% to benchmark wholesale price index.

And based on previous discusssions, it seems inevitable that interest rates would go up by Jan 2010.

Advice On Cummins India & Thermax

Cummins India's (CIL) comparable Q4FY09 net revenue and net profit reported decline of 8% and 12% respectively. After Q3FY09 results the management had indicated that net revenue and net profit are likely to fall due to recession in domestic and global markets. Export revenue (50% to total revenue) is expected to decline in FY10E while we expect improvement in domestic revenue on the back of initial positive signals and likely focus on infrastructure projects which will help construction, mining, marine, power generation segments. We estimate CIL to report EPS of Rs.19.4 for FY10E which is a 17% decline. We assign 'Reduce' rating on the stock with a target price of Rs 237.

Thermax is Indian engineering MNC providing solutions in Energy and Environment sector. In FY10, it is likely to report an EPS of Rs 27. Investors can 'BUY' at CMP for a target of Rs 460 i.e. 17 PE on FY10 estimates.

Disclosure: I do not have any personal holding in these stock.

Satyam : Large Cap to Midcap , Tough way ahead too!

In the disclosures made by Satyam , one thing comes forth – we need to change our perception about Satyam being in the league of Infosys and Wipro. We have to now change our perspective and look at Satyam like any other mid cap IT company. This change in outlook, from a frontline IT to mid cap IT company helps us take a more objective view. Let’s face it – the fact that Satyam is where it is today, notwithstanding the damage done by Ramalinga Raju, is indeed quite good.

A look at the numbers in the table given below, shows that things have gone bad but not as bad as we had expected. Or rather, we had already made up our minds for the worst and in that context, what came forth is not bad.

The biggest question in everyone’s mind is what to do about the open offer of Tech Mahindra? The offer is scheduled to open on 12th June 09’ and will close on 1st July 09’ and has been made at a price of Rs.58/share. Tech Mahindra will buy a 20% stake. After these disclosures, Satyam has already moved up to the levels of over Rs.66/ share on the BSE. For investors, financials of the company would not have much meaning, it would be all about making money. At this point of time, investors tendering in their shares at this lower open offer price is very doubtful. This then raises two options – either Tech Mahindra ups its open offer price or as per the rules, if the offer is not fully subscribed, it has the option of a further preferential issue from Satyam to lift its stake.

Then the question which comes to mind is – if Tech Mahindra ups the offer price, is the share worth above the current market price? Based on the current financial disclosures, assuming that the company has an annualized revenue of Rs.10,000 crore and giving due credence to the loss of clients, high attrition rate and the Rs.1230 crore claims made by 37 companies, it would be prudent to assume a NPM of around 10%. Based on this, the annualized net profit would be around Rs.800 crore and on an equity of Rs.134.70 crore, annualized EPS would be around Rs.6. This, on the current market price gives us a PE of around 11. It is pointless trying to compare it with the PEs of Infosys and Wipro but if we look at the mid cap IT companies, then it seems reasonable priced, with a slight margin of probably going up further. But anything above 14 PE would be more than fully priced.

More than Satyam, based on the disclosures, it is apparent that it is a very good deal for Tech Mahindra. The synergistic advantages would be very good and allows Tech Mahindra to move away from the shadow of British Telecom and emerge as a more, well rounded IT company. At this juncture hold on to both Satyam as well as Tech Mahindra as a clear picture will emerge in a day or two.

(Standalone)	JAN 09	FEB 09
REVENUE	681cr	676cr
NET PROFIT	4cr	52cr
OPERATING PROFIT	61cr	118cr
OPM (%)	8.96	17.46
Total orders at $380 mln as on 31/03/09
Cash balance of Rs.373 crore as on 31/03/09
23 clients lost with billing of $70 mln
$164mln Forex contracts outstanding as on 31/03/09
Forex loss at Rs.110cr as on 31/3/09 and Rs.148cr between Jan-Feb 09’
Consolidated NP for Oct-Dec 08’ at Rs.160cr

Disclaimer:

(These financials have been prepared by the company with data collected using the company's internal management information system, which may not be adequate and books of accounts, making certain management estimations, assumptions and approximations. The figures are unaudited.)

AGRICULTURE GROWTH

If being a predominantly agrarian country was a drawback for India a few years ago, it has become our biggest strength today. Infact, it has shown the world that in such turbulent times, it was rural India which, to a large extent, helped India keep its head above water. Rural India is today the biggest thing, not just for the UPA Govt and scores of Indian companies but also for the MNCs. The potential of rural buying has been realised and everyone wants to make the most of it.

During this ongoing downturn, urban India faced the brunt of development and global alignment but it was rural India which helped the companies show a decent growth, despite the downturn. What does this mean? Rural India is crucial for our growth and the growth of rural Indian depends solely on agriculture. So, if India’s economy has to grow, agricultural growth has to happen. It is only when there is money in the hands of the farmer that buying will happen, be it bikes, tractors, televisions or even shampoo’s and soaps. And money will come into the hands of the farmer only when he has a good harvest. And it is only a good harvest which will keep a check on the prices of commodities and thus keep a lid on inflation. So the roots for overall growth lies in agriculture and this is an irrefutable truth.

In India, 67% of the population and 55% of the total workforce depends on agriculture and other allied activities. India's economy grew 5.8% in the Jan-March 2009 period, which was better than had been expected. Among the sectors showing an improvement was farm output, which grew at an annualised rate of 2.7% having contracted 0.8% in the previous quarter.

CMIE expects agricultural output to grow at 1.3% in 2009-10 compared to 0.7% during the previous year. Production of foodgrain as well as non-food crop is projected to increase during the year, assuming that there will be adequate precipitation during the 2009 south-west monsoon season. CMIE has assumed that the 2009 monsoon will be good and hence it will not spoil the growth story in FY10.

To achieve a 6.5 - 7% GDP growth, India needs to have a 3% growth in agriculture and a good agriculture growth depends on good and evenly spread out monsoon. We may have made tremendous progress in terms of technology and science but we continue to be held to ransom by the rain gods. India has had four consecutive years of good monsoons, will we be lucky fifth time around? On 18 April, India Meteorological Department (IMD) had said the country’s average annual monsoon is likely to be around 84cm this year, the lowest since the last four years. The annual June-September monsoon generates nearly 80% of the annual rainfall over the country and is the main source of water for agriculture, which accounts for around 17% of India’s GDP.

As per the estimates of the farm ministry, India’s rice production may total 99.37 million tons in the year ending June, up from 96.69 million tons a year earlier. Wheat output may be 77.63 million tons, compared with a record 78.6 million tons a year ago. Shortfall is expected in maize, jowar, bajra, pulses, gram, pulses, oilseeds, sugarcane and cotton.

The current year’s monsoons are crucial for the economy as it is only buoyant rural consumption which will be the key driver of growth for India.