C

Tata, buy buy

Tata steel is continuing its buying spree after it announced its plans to buy the world’s eighth largest steel maker Corus for close to $ 8billion. We had earlier seen Lakshmi Mittal creating its steel emprire by aggressively taking over other companies. In the last two years Tata steel made its expansion plans clear by acquiring companies like Singapore’s Natsteel and Thailand’s Millinium Steel.

Tata Steel is the second largest steel company in India with production of 5 mt (million tonnes) next to SAIL (12 mt). With the asian acquisitions it nearly doubled its steel capacity. Corus is British based company with capacity of close to 18.2 mt. After the merger the combined entity would be the sixth largest steel company in the world Tata is currently 55th.

The Synergy

Tata is one of the most efficient produces of semi finished steel (a low margin player). Corus on the other hand produces higher value specialized steel mainly for auto companies; with operations mainly focused in the high margin European market. The plans are to produce semi finished steel at low cost in India and then supply it to Corus which will increase the margin of Corus.

Valuations Comparison

Tata is paying Corus close to 5.5 pound per share in cash to Corus, while the share price of Corus was around 4.80 to 3.90 range in last one year. The recent Arcelor Bid by Mittal steel valued the company at 5 times EBITDA while the valuations for Corus is around 8 times EBDITA. But on per ton production basis the valuation for Corus is $610 compared to $785 of Arcelor (20% lower). It is clear that Corus is less profitable compared to Arcelor; Tata believes profitability for the combined entity would improve.

The cash for the acquisition would be raised mainly from debt. Corus and Tata Steel have low debt to net-worth ratio of 20% and 30%. Main concern here would be repayment because Corus is only starting to be profitable; between 2000 and 2003 it made losses close to $ 4 billion. And the synergy that Tata is looking for from its new plant its Orisa and Jharkhand won’t start operation till 2010.

Sensex touching alltime high

Sensex today closed at 12,928 up 191 points after touching the lifetime high of 12,968. TCS also showing a good Q2 net profit up 14.91% at Rs. 991 crores. HCL numbers to soon hit the market.

TCS is showing volume growth of 50.5% YoY and 10.8% quarter on quarter. The operating margin of the company improved by 300 bps; mainly due to exchange rate and offshoring. TCS closed on Sensex at Rs. 1,129.70.

HCL at closed on Sensex at Rs. 548.78, the net profit at improved at Rs. 250 crores vs Rs. 233 crores revenues Rs. 1379 crores vs Rs. 1253 crores

Two of the biggest worries for the markets at this stage are the crude oil prices and the interest rates. Rate hike due to inflation of close to 5% doesn’t take into account the lowering of crude oil prices by close to 20%. This means that the rate hikes do not look very likely.

So with the good earning season more up-swing in the markets can be expected for the last quarter of the year.

f

Infosys Performs Well

Infosys touched a high of 2,024 in the intraday trading and closed at 1,980 up 73.80 or 3.87%. The net profit of the company increase by 17%. The Operating margin of the company was at 32.13% an increase of over the previous quarter due to the economy of scale. Infosys is clearly able to outperform competitors like TCS, Satyam, and Wipro. Karvy is giving a target for Infosys at 2500. Foreign investors expect 20% to 25% increase in price. For Infosys 50% of revenue comes from US and 33% Europe. Also it was able to attract more Foutune 500 clients.

The FII invested close to $ 20 million in the Indian market today compared to $ 8 million yesterday. Low oil prices were a reason for the current market rally. But today OPEC decides to cut down on oil production by 1 million barrels per day. This means that the crude oil prices may rise above the $ 60, current brent crude is trading at arround $ 58.27 per barrel.

Sensex today started up with 213 point on back of infosys numbers. At the end down by 10 point to 12,353 steel and motor stocks fell close to 3%.

Earning Season to Start

Most analys are optimistic about the Q'2 earnings after the sensex gained its grounds in the last three months (up 16% for the quarter). The sensex is very close to the May levels after the decline below 10,000. According to study by Motilal Oswal of 127 companies for the next quarter sales projected to increase by 27%, EBIT by 39% and net profit also by 39%.

This quarter's earning season will start with high expectations from Infosys. Technology sector is expected to grow at about 40%. Infosys as projected by CNBC TV 18, is supposed to increase by 7.59% and revenues by 10.53%. Over the last three months Infosys has performed well with growth in share price from Rs. 1500 level to Rs. 1860 latest closing price. With its long reputation and investor expectations infosys still remains the best buy in the IT sector. Mphasis-BFL is close to its 3 month high of 198.40 from lows of arround Rs 130 to Rs. 120.

Auto and steel still looking promising. Expect Mahindra, Maruti, Cement are still strong in terms of valuation after a good run. The FY07 EPS of sensex is supposed to grow by 31% and FY05 by 14%. With crashing crude oil prices and global stock market boom not just in emerging markets but also in developed markets (Dow Jones US at all time high) the outlook for the markets look positive.