POWER GENERATION PROGRAMME OF INDIA

The Power Minister said that India would add 100,000 MW capacities during the 12th Plan period and the target for 11th Plan (ends in 2012) is 60,000MW. This has actually been scaled down from earlier announced 78,000MW for the 11th Plan. This scale down was blamed on the shortage of power supply equipments from BHEL and L&T. Till April 2008, we had achieved just about one percent of the earlier set target which is probably the main reason why the target has been scaled down considerably. Yet even this scaled down target seems difficult.

Of the target of 60,000MW, till date only 21% has been completed, meaning only 12,500MW has been added. So over the next three years, we are looking at a capacity addition of 47,500MW. This means, on an average, we have to add on 15,800MW every year till 2012. Well, 12,500MW took two years, can we have 15,800MW each year? When broken down as simply as this, clearly, it seems like a pipe dream. The Govt is banking on the private sector to deliver around 30% of the target before the end of the 11th Plan. It expects parts of the UMPPs to start adding on – 600MW from Reliance Power’s Rosa unit (end of 2009), 1320 MW from Reliance Power’s Sasan (by 2012) and Butiburi power unit to contribute 300MW by 2011. Tata Power has set itself a target of 5800MW by 2012 which includes parts of the Mundra UMPP going on stream and it expects 4000MW JV project with Damodar Valley to also be commissioned before end of 2012. So, putting together Reliance Power and Tata Power, we are looking at the best case scenario of 8000MW coming up by 2012.

JSW Energy is setting up a 3200MW power project and by March 2010, it expects 1200MW to go stream. Lanco Infratech also hopes to get 1000MW on stream by end of the current fiscal. GVK Power is also hoping to add another 1200MW before 2012. The biggest contributor would probably be Adani Power which is looking at delivering 6600MW by 2012. Indiabulls Power is also planning on huge power units but no major capacities are expected to go on stream before 2012. So when we total up all this, we are looking at another 10,000MW by 2012. And if we take into account Tata Power and Reliance Power, we are looking at the private sector contributing around 18,000MW of power by 2012. This is way above the 30% target given by the Govt but then we are assuming that there would be no slippages and the biggest contributor – Adani Power will keep up to its schedule.

The rest is to come from NTPC, which seems to be talking in the wind when it says that it is looking at setting up 30,000MW by 2012. Infact the private sector might deliver but NTPC will fall way short of the target and that could jeopardize the entire 11th Plan target.

To conclude, we will continue to have power shortages – both, in terms of actual supply of power and also in terms of generation but the private sector might just be able to keep the shortage at a lesser level if it does manage to keep to its schedules.

IPO's are back !!!!!!!!!!!!!!!!!!

The near comatose IPO market is surely showing of life and that too good life. All of a sudden, there seems to be a bevy of activity around the IPO markets and investors are reminded that apart from the secondary market, there is also the option of primary market coming forth soon.

The issue of Mahindra Holiday, despite being expensive managed to do well and the fact that it listed well above the IPO price, 5% premium over the issue price, has managed to buoy the moods – not just of the investors but of the companies too. The success of Mahindra IPO sent out a strong message – there is an appetite for IPOs but investors clearly are now careful about where they are investing. Known and reputed companies are what will see a good response.

The first such big issue is from Adani Power. This issue is opening on the 28th of July and closing on 31st July. This is the biggest power IPO to come to the market in a long while. The news on the street is that in all probability the IPO would be priced at around Rs.100-110 and aims to raise over Rs.3000 crore. Adani Enterprise, the listed group company, has been up since this news was announced as it holds a substantial stake in the company.

Then on 7thAugust, there is the IPO of PSU National Hydroelectric Power Co. (NHPC). The issue closes on August 12 and aims to raise over Rs 2,500 crore. As per the DRHP, the company is coming out with a public issue of 167,73,74,015 shares of Rs 10 each, which comprises a fresh issue of 1,11,82,49,343 equity shares by NHPC and an offer for sale of 55,91,24,672 equity shares by the president of India acting through the ministry of power, government of India. The issue shall constitute 13.64% of the post-issue capital of NHPC.

A month later, on 7th September, we have the IPO of Oil India Ltd (OIL), which aims to raise around Rs.2000 crore. The DRHP states that the issue is up to 26,449,982 equity shares of Rs 10 each and will be 11% of the fully diluted post-issue capital of the company.

So by September the IPO market aims to have raised Rs.6000 – Rs.7000 crore and surely, once this gate of raising money opens up, we will soon a flurry of activity. Infact Indiabulls Power has filed its DRHP with SEBI and it expects to raise around Rs.1500 crore.

As per Prime Database, 16 more companies have regulatory approvals and are finalizing plans to raise over Rs.5,700 crore from the IPO markets in this year. So what we are saying here is that 2009 would probably see around Rs.8000-Rs.10,000 crore being raised from the IPO markets. And those who have seen the IPO of Reliance Power, cannot help but ask, “will the market be able to absorb so much?”

The fact that over Rs.12,000 crore was raised via QIPs and there are more in the pipeline means that even the FIIs are waiting in the sidelines. Another point in favour of the primary markets this time around is that we are not in the stratosphere, with a zooming index. The Sensex is more subdued right now and this makes the pricing more attractive.

COMMODITIES TO BE BULLISH AHEAD

Rains are lashing Mumbai city and the commercial capital of India, is facing flooding in many areas and public transportation system is grappling to keep going despite the rains. Though this does not talk too highly about the infrastructure development of the city, it certainly is good news if the lakes manage to get sufficient water to quench the thirst of the city.

Though Mumbai is having a good rainfall today, the other states in India, especially Northern India is facing a tough time. Jharkhand today declared four of its districts as drought hit. The Met department is worried but not yet panicking. Revival of monsoon since July 8th has managed to reduce the deficiency from 46% to 33%. The Met Dept today stated that states of Madhya Pradesh and Maharashtra and Gujarat would get good rainfall over the next two days.

And in the midst of all these clouds, one thing shining brightly is the emerging truth that commodities might well turn out to be the 'next big thing'.

A deficient rain would mean lower agricultural production, meaning pressure on foodgrains and crops, which in turn means that prices would go up further. Unlike the stock market, where there are more downs than ups, the outlook is extremely bullish on commodities. If there is a drought, the prices will go up and if the rainfall in sufficient, production would be higher and that signals a positive for the commodities. We all need food, irrespective of a bull or a bear run. If there is a drought, imports will have to come in to feed us all. And once there is a bounce back in the economy, it is commodities which will be the first to see a jump. What happens if the downturn continues? People will still back commodities as the faith in currencies is slowly getting lost.

Take a look at the trend in China. In a bid to steer away from US dollars and stop putting all its reserves in the US dollars, China has been secretly stocking up on gold to diversify its vast foreign reserves. Usually, gold prices rise when dollar weakens and that is probably the trend which China, like the rest of the world, foresees in the future. Russia is another country which has been increasing its holdings of bullion.

Metals too will be the first to rise once the bounce back happens. Currently, the rally in iron ores is driven by China and its controversy with Rio Tinto. The three largest suppliers of iron ore in the world - Vael, SA, Rio Tinto and BHP Billiton are currently holding out to their cash sales to China to ensure supplies to customers in Europe, Japan and South Korea. Commodity experts say that demand and prices for Indian ore may increase should the Chinese state investigation discourage purchase of ore from Australia and Brazil. As per data put out by Bloomberg, China’s iron ore imports rose 3.4% in June to the second highest level this year. The shipments had hit a record of 57 million tons in April.

There are some murmurs in the corridors of corporate honchos that negative data from US came in at a time when it was essential to pull down the stock markets, timing it with the auction of the US Treasury Bonds last Wednesday. The usual trend is that people turn towards bonds when equities slip and in that auction, there was record demand for the bonds even as world over Govt's are having a tough time with bonds. The auction was three times oversubscribed, and this was the first time it had happened since 1994. But some time soon, US will realise that it is borrowing too much and that is the time which is feared by the currency traders.

Overall, the perception is that global stock markets would remain volatile, the dollar long term outlook does not look too good but outlook for commodities is bullish.

International Monetary Fund Report

IMF has put out a report which suggests that this recession might well be at its bottom and there is recovery ahead.

IMF has stated today that India’s economy would grow by 6.5% in 2010, compared with the April forecast of 5.6%. It has stated that sectors with strong domestic demand – auto and FMCG are expected to see very good growth.

In an update of its World Economic Outlook, the IMF said the global economy is likely to contract 1.4% this year, marginally lower than the 1.3% decline it projected in April. It now sees world growth strengthening to 2.5% in 2010, compared to an April forecast of 1.9%. The report has said that the global economy is slowly starting to pull out of its deepest recession since World War Two but a recovery will be sluggish and policies would need to remain supportive.

IMF states that while the world economy is still in recession, the recovery is coming but it is likely to be a weak recovery and emphasized that confidence in the financial sector would not return until toxic debts were removed from banks' balance sheets and frail institutions recapitalized. The IMF report warns an economic recovery still depends on government intervention. It says governments need to continue pushing stimulus measures, including increased spending or greater tax cuts, through 2010.

The revised IMF forecast says the U.S. economy will shrink 2.6% in 2009 and grow by 0.75% next year, rather than the 0% it forecast earlier this year. China's economy is now forecast to grow 7.5 percent this year. The IMF lowered its expectations for growth in Africa, the Middle East and Latin America, as they have been more hurt than the rest of the world. It expects Europe to show a much slower than expected growth in 2009 but in 2010 would grow faster than expected.

The Asian economies are expected to do much better but IMF has also warned that the growth in these countries could slow if the economic recovery fails to take hold in advanced economies.

This is not like a glowing report on the world economy from IMF but then at least for a change, there is something positive. At least there is the promise of recovery and that is good enough for now.

Advice On Sail & Adhunik Metaliks

Advice On Steel Authority Of India Ltd.

At the current market price (CMP) of Rs 153.65, the stock is trading at a forward P/E of 10.9x and 10.5x the FY10 and FY11 earnings, respectively. Based on our DCF valuation, we have arrived at a target price of Rs 181 (assuming a 15.4% WACC and a 5% terminal growth rate). At the CMP, the stock provides an upside potentional of 18%. Thus, we give a Buy rating to the stock. As the DCF valuation is sensitive to the changes in WACC and terminal growth rate, we have performed a sensitivity analysis of the same.


Advice On Adhunik Metaliks

AML's increased capacity (steel and ferro alloy) will be fully reflected from FY10 onwards. OMML has also started mining from the Q3 FY09. So, there will be a significant contribution (due to high margins) by OMML towards the consolidated net profit of AML, the full effect would be seen in the FY10E. At the current price of Rs 79.55, the stock is trading at a P/E of 6.1x FY10E & 4.2x FY11E, which we feel is quite undervalued looking at the huge earnings potential of the company & the quantum of mineral resources owned by the company. The current price of Rs.79.55 per share discounts our Target price of Rs.98.90 per share by 24.3%. We Recommend a “HOLD” Rating on the Stock with a Revised price target of Rs.98.90 per share.

My View On INEOS ABS

About The Stock

Known earlier as ABS Plastics, 83.33% stake is held by Ineos ABS Jersey and it today the holding company of Lanxness AG of Germany. The company has a manufacturing plant in Nandesari, Moxi which manufactures acrylonitrile butadiene styrene (ABS) with an annual production of 60,000 TPA was to be increased to 80,000 TPA in FY09 and further to 100,000 TPA in the current fiscal, which was to be funded through internal accruals. There is no news about this expansion in FY09 having gone through, especially given the tough times the company had to go through. The company`s products are used as raw materials in many households, automotive, electronic and telecom sectors, with a clientele list to include names like Samsung, LG, Videocon, BPL, Ford, Hero Honda, Cello, Lexi and Bajaj.

About The Results

For the first quarter ended 31^st March 2009, the company managed to turnaround and that itself was reassuring. From a net loss of Rs.4.35 crore in sequential quarter, it managed to post a net profit of Rs.5.93 crore and this was up 36% on a YoY. And this was despite a 15% fall in net sales on a YoY and a 19% on a QoQ. And this turnaround was thus possible only because the reduction in operating expenses, which on a QoQ was down 30% and 18% on a YoY.Interestingly, it is a zero debt company as it has no interest outgo.

Its strong point is its R&D facility at Moxi, Gujarat. Rated as one of the best in the business, this centre is currently engaged in research and development in areas of engineering thermoplastics for Lanxess’s global operations. The company plans to further upgrade its R&D facilities and its main focus will be on high-grade ABS which is a metal substitute at lower costs.

About The Stock

Its best to take a call on the stock once its results for Q2 is out, till then the outlook on the stock remains cautious.

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

Indian Economic Survey

Presented by the Finance Minister, the economic survey is basically what the Govt wants to do over the next few years, not just in the forthcoming Budget but in the ensuing months. Usually, the survey is dull and drab and is mumbo jumbo of figures of revenues and expenses of the fiscal, but this Economic Survey is path breaking in the sense that it is more like a wish list of what to expect in the Budget.

THE ROAD MAP AHEAD:

ABOUT ECONOMICS…

1. GDP maintained at.7% in FY10

2 Ample liquidity to fuel next inflationary cycle

3 Roll back excess liquidity once growth picks up – clear signal of rates going up

4 Passage of Pension Regulatory bill

5 Zero Fiscal deficit on cyclical adjusted basis

FDI

1. 100% FDI in healthcare, weather insurance

2. Insurance FDI to be raised to 49%

3. FDI in defence production to 49%

4. Permit FDI in multi-format retail starting with food

PATH BREAKING MOVES….

1. Decontrol sugar and fertiliser

2. End Govt monopoly in railways, coal and nuclear energy

3. Lift price controls on all drugs, except essentials

4. Lift all bans on future contracts to restore price discovery

DISINVESTMENT…

1. Disinvestment - 5-10% in profitable non-navratnas

2. Auction loss making PSU

3. Aim – Rs.25,000 crore per annum from disinvestment

4. List unlisted PSUs , offload at least 10% equity

5. In loss making PSUs where net worth is zero, allow negative bidding in the form of debt-write off

TAXATION….

1. Introduce new income tax code

2. Rationalise dividend distribution tax to do away with double taxation

3. Review customs duty exemptions

4. Phase out cesses, surcharges and transaction taxes - commodities transaction tax, securities transaction tax and Fringe Benefit Tax

SUBSIDY…

. 1. Provide fertiliser subsidy directly to farmer

2. Limit LPG subsidy to 6-8 cylinder per consumer per year

3. Cut oil, fertiliser, food subsidy leakages

4. Convert producer subsidies into direct consumer subsidies

5. Kerosene subsidy to non-electrified/ non-LPG homes

Too many things in the economic survey appear more like wishful thinking than something which can be implemented. It would require a gargantuan amount of legislations and implementation mechanisms. The intent is good but does not seem feasible, especially when it comes to subsidies. How will the Govt ensure that fertiliser subsidy go to the farmer directly? How will the Govt know which home has no electricity or LPG to give them kerosene subsidy.

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.