Currencies - Indian Rupees & U.S Dollars Story

When the new UPA Govt took charge, the stock markets surged and so did the Indian rupee vis-à-vis the US dollar. And after a run up of almost over a week, the rupee slipped yesterday. And even today, the rupee depreciated 24 paise to 47.52/53 a dollar in the early trade. The word on the street is in the short term, the rupee will remain weak but in the long run, after August – September, once US stops buying its own Treasuries, the rupee will once again show some strength through the year. Though there are various versions saying that the money pouring into Asia has now cooled off, with some blaming this rupee fall of yesterday on the North Korea nuclear test, which is scaring off everyone from investing in Asia. Now that’s too far fetched a reason but what really ails the rupee?

To understand the behavior of the rupee, one has to keep an ear to the ground and watch out for some key international happenings. India can say that it is decoupled to a large extent when it comes to the stock markets, what with Indian economy being more resilient and all. But the movement of currency is necessarily dependent on international happenings. So what are the key things which could dictate the movement of the rupee?

US Rating downgrade?

Standard and Poor’s has put the U.K.’s Sovereign Debt rating on negative credit watch. This has raised fears that the ratings of US might also be downgraded as both US and UK have more or less followed the same policy of injecting billions of dollars into their economies by buying assets from banks. A downgrade in the rating would not bode well for the US economy which could weaken the dollar, if and when it happens.

It is unlikely that US or UK would be downgraded but surely will be put on a credit watch. Why? Because tinkering with the dollar, which is the global currency could once again send the entire world into a tailspin. India’s rating was downgraded by S&P on concerns of mounting fiscal deficit. But downgrading the US is not so easy. Hence it will not happen. No one, be it Moody’s or S&Ps or Fitch; no one would have the courage to downgrade US. The fear of another recessionary reaction worldwide is enough to keep these rating agencies from being proactive. So downgrade seems ruled out but being put on a credit watch seems more likely.

Ballooning deficit of US?

If we in India thought we had a problem with our fiscal deficit, take a look at the figures of US. Big deficits mean the government has to borrow more, which could put its credit rating at risk. They can also put upward pressure on inflation, thus cutting the purchasing power of the dollar.

S&P has presented a report wherein it has stated that debt in the U.K. could hit 100% of GDP in the near term. IMF released a report in April which stated that U.K. debt load will be at around 67% of GDP compared to 70% for the U.S. and 69% for the Eurozone. So clearly, the highest debt risk weighs on the US.

Why eye on US economic figures?

Now all these assumptions of deficit estimates are made on the basis of economic estimates like GDP growth rate, unemployment and these have not been too good in reality. In the first quarter of 2009, GDP was at - 6.1% and as against this, the estimate for the deficit is based on the assumption that the GDP growth in 2010 will be 3.8%. Unemployment at the end of April was at 8.9% while estimate is at 8.8% for entire 2009. So based on this, we now need to keep an eye on the figures of unemployment and growth rate of US GDP as it will indicate whether deficit would go up further than estimates or be around same levels.

So from whom will US borrow?

It is not like borrowing money directly as we do from a bank – how this works is that countries buy the financial securities issued by the US govt. Hence when we read news of China, Japan buying US Treasury it means US is actually borrowing. To now get over this deficit, US needs more money, the estimate is borrowing to the tune of $1 trillion by September. The government has said it will need to borrow $2 trillion, or 14 percent of the country's total economic output, in 2009 alone. The Federal Reserve will be buying back $1.5 trillion in mortgage and agency debt issued by Fannie Mae and Freddie Mac and is making direct purchases of U.S. Treasury bonds to the tune of $300 billion. This week the US Treasury is selling up $101 billion of fresh government securities.

China has purchased $23.7 billion dollars of US treasuries bringing their total to $768 billion. 70% of the estimated $1.95 billion dollars of China's reserves is in US treasuries. With countries not having enough to buy more from the US, the US Fed now plans to buy back mortgage- backed securities to the tune of $1.25 trillion this year. The Fed is in the process of buying $300 billion of long- term Treasuries through September. So this means that the dollar will remain up, at least till then.

Story in the long term?

With more and more money getting printed and pumped into the market to buy back these securities, it is estimated that more money supply will get more money into the hands of people, who in turn are expected to spend more. Right now, no one is really spending but once they do start spending, money supply will be more than the goods and that will lead to inflation. And at that time, to control the inflation and curb money supply, interest rates would have to be hiked and securities will have to be sold. When so much gets sold, the value of money will go down. And if China is one of the biggest buyers today, won’t it sell when the value goes down? So at that time, all would sell dollar into their currencies. And that is the time when US will have to come with another rescue plan to stem the crash of the dollar.

Updates on Airtel & MTN Deal

Exactly a year ago, it was on 24^th May 2008 to be precise when the deal with MTN had fallen through. At that time if the deal had gone through, Bharti Airtel would have become the subsidiary of MTN, seriously compromising the interests of the minority shareholders of Bharti. Also from being a true Indian multinational telecom giant, symbolizing the pride of India, it would have become a South African company.

And now, on 25^th May 2009, exactly a year later, the clock seems to have turned completely in favour of Bharti. Instead of an out-and-out 100% takeover, Bharti is planning to acquire 49% stake in MTN and in turn, MTN and its shareholders would acquire approximately 36% economic interest in Bharti. The ultimate aim is to takeover MTN completely, but Bharti is planning to take this slow, as and when it is practical. The deal has been valued at $23 billion.

How is this deal different from last time?

The earlier deal fell off over issue of ‘exclusivity’. This time around Bharti and MTN have agreed to discuss the potential transaction exclusively with each other by July 31.

In the earlier deal, Bharti wanted to go for 100% takeover but this time around, it is going slow which makes practical sense.

How has the deal been worked out?

It’s a two set deal – MTN plans to buy about 25% in Bharti for about $2.9 billion in cash and also issue new MTN shares to Bharti, equal to about 25% of current share capital of MTN.

In the second step, Bharti plans to acquire about 36% of the currently issued share capital of MTN from MTN shareholders for Rand 86.00 ($10.3)/share in cash and 0.5 newly issued Bharti shares in the form of global depositary receipts for every MTN share acquired. Each GDR would be equivalent to one share in Bharti and would be listed on the Johannesburg Stock Exchange

Post this transaction, Bharti would have a 49% stake of the enlarged capital of MTN.

SingTel currently has about a 30% in Bharti Airtel and post this deal, it will continue to be a strategic partner and significant shareholder but it has no plans to fund this deal for Bharti.

Standard Chartered Bank and its affiliate First Africa SA (Pty) Ltd are the financial advisers and AZB & Partners and Bowman Gilfillan are the legal advisers to Bharti.

Is the Deal Good?

Bharti would have substantial participatory and governance rights in MTN enabling it to fully consolidate the accounts of MTN.

MTN’s economic interest in Bharti would be equity accounted and would have appropriate representation in the Bharti board.

With this deal, Bharti will continue to pursue further expansion in India and Asia while MTN would be the primary vehicle for both Bharti and MTN to pursue further expansion in Africa and the Middle East.

Only one third of the population is South Africa has been connected on the mobile, thus indicating the huge potential it has.

The MTN-Bharti combined revenues would be of over $20 billion and would give a combined customer base of over 200 million.

Currently a lot of Indian companies are grappling with the various prestigious takeovers they had done abroad. So for Bharti too, the initial year would bring in pains of integration.

My View On SEAMEC

About The Company

South East Asia Marine Engineering & Construction (SEAMEC), with four vessels, provides offshore support to petroleum exploration and production companies, in India and abroad. It is a subsidiary of Coflexip Stena Offshore (Mauritius) Ltd, which is owned by Technip.S.A. France.

The positive about Seamec is that it has a small fleet of just four vessels and hence deployment is easier. In 2009, as against last year, all the four vessels have been hired as of now. The company expects no dry docks for the year, and there are no cancellations as of now. There is no dry-docking in 2009, only one ship in 2010.

About The Results

The company has posted the results and had managed to finally turnaround in the fourth quarter ended 31^st Dec 2008. And it has continued with his good performance into first quarter ended 31^st March 2009. This consistent spurt in performance has been because in the previous year only two of the four vessels were employed, resulting in increase in net profit during the current period. And this small fleet has helped the company do exceedingly well. For Q1CY09, though the net sales of the company was down 4% on a QoQ, lower operating expenses helped the company post a 13% jump in net profit. But the best part was the profit margin OPM was at a very healthy 69.47% compared to 59.30% in Q4CY08. NPM was at 61.88% vis-à-vis 52.27% in previous quarter.

One of the overseas charter contracts was prematurely terminated in July 2007, due to delay in payments. As per the terms of payment agreed with the charterer, the company has since recovered Rs.19.48 crore against the total outstanding of Rs.25.18 crore from the charterer, the balance amount is receivable on or before June 30, 2010. The charterer has since paid interest @ 8% for the half year ended December 31, 2008 on the balance amount, as per terms of the contract. The balance amount is expected to come in before first half of 2009. The company has recently received a one-year contract for Seamec II, though at lower rates, while it has also received a two-month contract for Seamec Princess, starting May 15, 2009.

About the Stock

The stock touched a new high at Rs.161 on 26^th May’09 and since then has now settled down at Rs.160 levels. The stock could be traded for short period but any long term investment in this stock is not suggested.

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

ATTENTION ALL REGISTERED MEMBERS !!!!!!!

NOTICE TO ALL REGISTERED MEMBERS.

सभी पंजिकृत सदस्य के लिए सुचना

All registered members of the multi bagger group is hereby informed , that a fresh and latest list has been issued of the segment along with selected stock in each category , which is expected to out perform in the next bull run. These stock are meant for long term investment to get the ultimate return of the invested funds.

These stock must be accumulated within a defined period from where the bull run is expected to begin and must exit at a defined time , where the next bear phase is likely to begin.


All members are advised to send a email mentioning the date of there registration and ask for the list which would include :

1. Sector to out perform or lead the next rally.
2. Stocks to pick in each such sector.
3. The deadline time to enter these stocks.
4. The time by which exit is to be made.

AMIT GOYAL
ADVISOR

Advice For DLF & Educomp Solutions.

At the current market price of Rs 322.65 the scrip trades at 24.87x of FY10 EPS (consolidated). The 52-week high and low PE is 24.08x and 4.55x which averages to 14.31x. The scrip has gained 118% in the past three months as against markets gain of 58%. The UPA government win with a clear majority has boosted the sentiments. However the steps taken by the government to induce economic activity will not give immediate effects. Realty sector will face challenges ahead due to lower consumer confidence and no incremental sales. We recommend a sell with a target price of Rs 208 which is 16x EPS of FY10. Currently Sensex is trading at a PE of 19.43 and Nifty is trading at 20.41. There will be no immediate changes in the scenario of realty sector but as the market has entered bullish trend and DLF being index scrip we feel PE of 16 is justified.





Educomp Solutions reported 89.5% jump in Income from Operations to Rs 496.7 crore from Rs 262.1 crore. The EBIDTA was up by 114.9% to Rs 267.9 crore. EBIDTA margin improved to 53.9% from 47.6% recorded in 2008. PAT was up by 83% to Rs 128.2 crore. On consolidated the company reported Net income from operation of Rs 634.2 crore from Rs 287.2 crore recorded the same period previous year (jump of 120.8%). We maintain our target price of Rs 3,570 per share.

The sister concern of the same promoter being titled as "Everonn Systems" also holds good position int he present scenario.

Stock Market Waiting for Finance Minister Appointment

Awaiting for Declaration Of Finance Minister.

The next biggest impact of politics in Indian domestic capital market after clear majority of UPA would be finalization of the finance minister among the various choices. Some would receive a warm welcome with a big spurt again while some will flatten the market or rather would help to loose some points on indices.


Considering the most expected names , we could summarize there experience and expected impact on capital markets.

MONTEK SIGH AHLUWALIA (Age: 65)

Ø Alumnus of Oxford

Ø Deputy Chairman of the Planning Commission

Ø Has worked with the World Bank and also the IMF.

Ø Was Member of the Planning Commission and Economic Advisory Council to the PM

Ø Was Finance Secretary at Ministry of Finance

Ø Was Secretary at Department of Economic Affairs

Ø Was Special Secretary to PM Rajiv Gandhi

Ø Was also Member of Washington-based financial advisory body, the G30

He is the first choice of Dr,Manmohan Singh but the others in the UPA have opined that he is more of a bureaucrat and is not a politician and hence not well suited for the job. Well, one can argue that Dr.Singh was also more of a bureaucrat when he took over the reins, and it is only now that his skills as a politician are getting honed. His biggest positive, apart from the vast experience is that he is more attuned to deal with the current global financial crisis and the Indian economy.

He is also the best choice as per the markets and if he is named as the Finance Minister, Dalal Street will surely love it!

PRANAB MUKHERJEE (Age:73)

Ø Currently, External Affairs Minister and Finance Minister

Ø Parliamentary career spans nearly four decades

Ø Finance Minister (1982 to 1984)

Ø Deputy chairman of the planning commission (1991-1996)

Ø Also served as Union cabinet minister.

Ø External Affairs Minister for the first time (1995 – 1996)

Ø Defence Minister in 2004

Ø Was instrumental in getting the US-Indo nuclear deal signed

He is the front runner for the post of Finance Minister and in the Govt circles, it is almost certain that he will get the finance portfolio. He has been described as a “number-crunching politician with a phenomenal memory.”

He is a good choice but from the market point of view, he is not the best. He is considered to be more conservative and the market perceives him as a man tuned to deal with Indian economy but not as well suited for the current global crisis. But is he is given the Finance portfolio, who then deals with equally crucial external affairs?

The markets will take his appointment in its stride and to a large extent, it has already discounted this factor.

KAMAL NATH (Age:62)

Ø Minister for Commerce and Industry(2004-2009)

Ø Alumnus of Doon school

Ø Minister of State for the Environment and Forests (1991 to 1995)

Ø Minister of State for Textiles (1995 to 1996)

Ø General Secretary of the INC (2001-2004)

His biggest success has been the way in which he held his steed in the WTO talks, not allowing USA to bully India to allow developing countries to impose agricultural tariffs to protect their farmers from U.S. exports. He was also the one to set up the SEZ formula to give impetus to manufacturing activity.

His success and exposure is limited, compared to the other contenders hence market might eye his appointment with an amount of skepticism.

CHAKRAVARTHY RANGARAJAN (Age:77)

Ø Deputy Governor of RBI (1982 to 1991)

Ø Governor of RBI (1992-1997)

Ø Governor of Andhra Pradesh (1997-2003)

Ø Chairman of 12^th Planning Commission (2003-2005)

Ø Chairman of the Prime Minister's Economic Advisory Council (2005-2008)

Ø Presently, member of the Rajya Sabha & Chairman of the Madras School of Economics, Chennai

Known in the market circles as ex-RBI governor, Rangarajan has a doctorate in economics from the University of Pennsylvania. He was the Governor when Dr, Manmohan Singh started opening up India’s economy. He was the one who ushered in an era where banks were allowed to set their own interest rates. He also set global standards for measuring NPAs for banks.

The market would be non-committal and would wait for his reforms to get announced before giving any verdict. But the fact that he is a part of Dr.singh’s liberalization process would go in his favour.

JAIRAM RAMESH (Age:54)

Ø An IItian, he has also got additional degrees from Carnegie Mellon and Massachusetts Institute of Tech.

Ø Presently, MP in Rajya Sabha

Ø Advisor to the Finance Minister (1996-98)

Ø Advisor to the Deputy Chairman, Planning Commission (1992-94)

Ø Advisor to the Prime Minister in 1991

Ø Put together the National Common Minimum Programme

Ø Minister of State for Commerce till Feb 2009, quit to concentrate on election

A relatively new face for the markets and not very well known. His appointment might not go too well with the market.

Awaited IPO's & Disinvestment

NEW INITIAL PUBLIC OFFER (IPO's)

Scenario In 2008 & 2009

Over the past 10-12 months, there have been virtually no IPOs. It’s a tap which has gone dry. In the calendar year 2007, Indian companies raised Rs1,45,000 crore from the markets and expected to raise Rs.2,50,000 crore from the Indian markets in 2008 but managed to raise just Rs.50,000 crore. Things only got worse in 2009. According to Prime Database, only one IPO hit the market in 2009 (till April), raising only Rs 24 crore. Interestingly, there was only one PSU IPO in 2008 and that was Rural Electrification Corporation which raised Rs 1,421 crore.

Expected IPO's Ahead

Those expected to hit the markets when the divestment plans take off would be the much awaited

1.Oil India (Rs.1,400 crore) IPO,
2.NHPC (Rs.2,060 crore) IPO , and
3.Rail India Technical and Economic Services (RITES).

All these three already have the necessary approvals. The news on the street is that once this revival process takes off, around 18 companies are ready and waiting in the wings with their IPOs, and they, together expect to raise around Rs.7,405 crore. Then there are the others like

1.Cochin Ship Yard,
2.Telecommunications Consultants India,
3.Manganese Ore India,
4.Rashtriya Ispat Nigam and
5.Satluj Jal Vidyut Nigam.

There is also the IPO from UTI Asset Management Company. The Govt is also expected to fast track issues of BSNL, National Aviation Company and Ircon International.

PSU IPO’s are normally at reasonable prices and in the current market, such issues, which are not overvalued will do well. And even if one PSU IPO manages to evoke a huge response, it will restore the faith back into the primary market, paving way for the others. And the response is expected to be very good as investors are starved for new issues and anything which is good right now, will appeal hugely.

There are two companies which have filed their Draft offer documents with SEBI –

1. Kabirdass Motor Company which filed on 28^th April 09’ and

2. Adani Power which filed on 22^nd April 09’.

Disinvestment Expectations

The buzz going around is that PSU divestment would be a priority on the agenda of UPA when it takes charge, which in turn would revive the IPO markets. The logic behind the divestment process taking off in a big way is the burgeoning fiscal deficit, which has ballooned out of proportion. So getting that demon under control will be the priority and to do that, divestment would be the best and the easiest way to raise money. It could go in for minority stake divestment or majority divestment but it is sure to go full throttle.

Some of the PSUs where the Govt has a stake above 85% and are some of the companies where the Govt could reduce its stake.

1.Hindustan Copper,

2.NMDC,

3.MMTC,

4.Neyvelli Lignite,

5.Power Finance Corporation,

6.Indian Oil Corporation

Rally in Reality Sector - A Quick View

Why this run up in realty stocks when fundamentals of the sector have not really changed all that much?

The Q4FY09 performance of most of the realty companies was dismal to say the least. But the market always knows best. Something has changed and that is what is leading to this rise in the realty stocks. A quick look at the possible reasons.

1. The biggest possible factor is the way in which frontline realty companies have managed to tide over their liquidity crisis. For eg: Unitech had raised $325 million through a QIP last month and it has announced today its board has approved raising additional long-term funds by selling securities and issuing share warrants to its founders. DLF promoters raised Rs 3,860 crore by selling about 10% at Rs 230 per share against Rs 1,205 again in January last year. Indiabulls Real Estate plans to raise Rs.2820 crore through share sale to QIPs. There is similar fund raising buzz coming from Sobha Developers. This fund raising of various realty companies will bring down the debt and hence the perception on the street is that probably the worst is over for the realty companies.

2. With the UPA Govt taking center stage, it is now expected that more reforms would come in to give a push to this sector. Expectations are high that RBI might bring in more rate cuts and the Budget is also expected to deliver some measures to prop up demand for realty.

3. The commodity prices have cooled off and this has helped the sector considerably as overall costs have now come down, making it more economical to sell at the given lower rates.

4. Most of the developers have reduced prices and this has helped buoy the mood. There is buying interest, not in the luxury segment but certainly in the affordable housing segment.

5. Banks are not going all over the place, lending to any Tom, Dick and Harry, as they did in the boom times but surely they have started lending more than what they did even three months ago. The screening process has become more stringent but the number of applications from borrowers has certainly gone up.

6. The decision of Maharastra Government to reduce floor space index (FSI) price, the redevelopment plans of dozens of Mhada (Maharashtra Housing & Area Development Authority) residential colonies is expected to get a major boost.

There is no doubt there has been an improvement in the overall sentiments but whether this change in mood will translate into actual buys, one does not yet know. The challenges for the sector remain but maybe, it is this shift in sentiments which will bring it out from the abyss it is currently in.

View On Chambal Fertilisers

Chambal Fertilisers and Chemicals’ (Chambal’s) Q4FY09 net sales grew by 43.4% YoY to Rs 8,708 million (our expectation was Rs 7,773 million), on the back of higher trading sales and other income. Chambal’s adjusted PAT grew by 107.9% to Rs 593 million (Our expectation was Rs 618 million)."

Chambal’s 90% of the urea business is on cost plus 12% post tax ROE (i.e. fixed earning) basis and shipping business is on time contract till FY10. Hence, we believe that a downward pressure on earnings would be less. We expect PAT to grow at two year’s CAGR (FY09-11E) of 9.5%. While on the basis of historical rolling band chart of last ten years, Chambal has traded in the range of 4x-16x. We maintain our ‘Accumulate’ rating on the stock, on the basis of 9x at FY10E earnings, target price of Rs 60