Fortune India 2007: Index

Fortune India 2007

Indian stock market has gone up by close to 30% from the beginning of the year. This upswing in the market has resulted in almost all sectors doing phenomenally well. The growth story is not just applicable to the Large caps but also to the mid caps and the small caps. In this kind of a market picking a portfolio that makes more money than the Fixed deposit rates (close to 10% per an) is not at all difficult, but beating the indexes like Nifty and Sensex would be the thing that fund managers look forward to.

Picking a basket of shares like the Sensex (top 30 shares by market cap) or Nifty (top 50 by market cap) would be the ideal thing to do. But recently I found that that in Prowess database there is a group of companies called to Fortune India list. This list has selected companies as per the fortune rankings. I thought this would be a very good method to pick the top companies in the country and as long as the stock market is doing well this index must also perform better. The companies in the list are as following:



Watchout this space for more analysis to see how sucessful is it to invest in such index.

Reliance: Caution Ahead!

Can u rely of reliance? This is the question many people in the Market are starting to ask. Reliance has always been the stock in limelight, starting from the days of late Dhirubhai Ambani. Then the war between the brothers and excessive marketing made reliance a household name. People started speculating on whether Mukesh Ambani controlled business would be more profitable than ADAG (Anil's Cos) of vice-versa. But it was very shocking to see both brothers doing very well, at least in the stock market.

Fortune Favors the Brave!

Both brothers have consistently featured in the Fortune Magazine list of the richest people in the world. And according to the march 07 figures Mukesh was 12th richest and brother Anil at around 17th. All this changed with the stock market bull run. Now according to times Mukesh is the Fourth richest person in the world with $ 50 billion (Sept figures) just behind Warren Buffet $ 52 billion and Bill gates $ 57 billion and Carlos Slim $ 58 Billion (Aug figures). The combined wealth of the brothers (/family) stands at $ 80 billion, making them the richest family in the world. Amazingly Both brothers achieved this feat (journey beyond $ 1 billion) in only few years after the death of legendary Dhirubhai. Now the challenge for them is to stay in the top spot for a long time, remember Amiz Premji of Wipro, he became 3rd richest and was thrown out of position shortly within months.

Bubble?

I was amazed to see six Reliance companies in the top 10 companies by turnover in the NSE site. When i probed more i found out that earlier this year only two were present in a similar list. (see the chart below or click on the links for more detail on Year ending Mar 07 ; and Sept figures).



The recent surge in Reliance is making me worried about the valuation of these companies and the overall market (bec of high weight age of Reliance in stock market). Just few days ago one of my friend was justifying R Energy's PE of 40! I just couldn't belive that this was a power company. All this makes me believe that Reliance is cooking up something. Or maybe this is just a beginning of another era! This will be the difference between :

Reliance = Rely + alliance and
Reliance = Real + lying + alliance

Pantaloon heading to 500

In the early trades of today Pantaloon has broken the Previous resistance level of Rs. 440-445. The Stock in the intraday look strong is gaining pace rapidly. It has also broken another resistance level at Rs. 450. The share if closes today above Rs. 450 for today then it will surely race towards Rs. 500 in the coming week.



Look at the second graph which shows the resistance level at 500. It should be noted that since long term data on the share is not available proper technical analysis cannot be done. Only last six month data is available because of new listing. My recommendation to risk takers would be buy the share and keep it for next week to book a profit of Rs. 50. On the other hand people who already own the share and want to sell the share and book their profit can do so even at this level, because at this level it is very likely that the share will swing Rs. 50 plus/minus.

Pantaloon: Technical

For the past two months Pantaloon is showing a declining trend. It is showing movements against the movement of index like Nifty. According to the technical chart below of six month period there is a resistance level created by the two peaks created. This resistance level is graphically shown with a red horizontal line at around 440-445 level. This level seems very crucial for the stock. Yesterday the price closed right at Rs. 445 and today also when the market has not shown much movement after the initial gains, pantaloon has only moved around this critical level of Rs. 440 to Rs. 445.


Click to view the Chart in Detail

Friday would be a crucial day and if the stock crosses the resistance level with good volume and closes well above Rs. 450 then technically the stock should start an upward trend and price could reach as high as Rs. 500. On contrary if the share fails to close above this level or even worse falls significantly then further correction in prices seem very likely, below Rs. 400. Earlier the stock had broken the resistance level with but soon could not hold on to the gains, the volumes have also fallen which is a negative sign. Look at the large white candle stick (bar at the end).

Sake fueling Cars!

Japan has always been a technology loving and environment friendly country. Japan imports huge amounts of crude oil like other developed countries. The Japanese are now looking at cost effective and environment friendly alternatives for the crude oil. The Japanese have turned towards their traditional wine “sake.” Sake is a wine (more like a beer) made from brewing rice. This is the stuff every Japanese restaurant would serve after a good meal of “sushi” and “sashimi.” The ethanol made from rice would be used after blending it with petrol. So in future cars would be running on really strong saki.

Lately with record high crude oil prices agri-based fuels have gained popularity. Brazil has become one of the largest producers of agri-based fuels. They have pioneered the technology related to making ethanol from sugar-cane crops. Already up to 85% blend of ethanol and petrol is supplied throughout the country. Also cars that run on 100% petrol or any other blends of petrol is already available in the country. Now Brazilians are looking at bio-diesel in a big way. They are now using castor oil to make bio-diesel that can fuel diesel-based cars.

But still all these technologies seem to be not so cost effective because of their alternative use/demand. Take castor oil for example. In India 20 kg of castor seeds cost around Rs. 400 (from NCDEX). If 36% bio diesel can be extracted from it then one kg of bio-diesel would cost around 50Rs. to 55 Rs. This is nowhere near below Rs. 40 for per Lt. of Diesel being sold at pumps. Now let us take the “Japanese sake”; it takes more than one Kg of rice to produce half a Lt. of ethanol. This would not only mean high price but also could lead to food shortages! Since rice is a staple diet in many places including several parts of India as well as Japan. Use of crops like corn for production of ethanol in US has lead to doubling of prices. This impact can be felt in Mexico where their staple diet tortilla is made from corn.

The answer lies in finding alternative crops which does not use much of resources for production at the same time are cost effective because they are not already used elsewhere in the industry. The switchblade grass or jatropha can provide the answer. Both of these can be grown in arid lands without much use of resources required for agriculture. But lot of research work need to be done before these “non-food-low-resource” alternatives can become practical.

Mkts Wait for i-rates

It is going to be another busy week for traders and analysts, because of the central banks of key economies are about to unveil their policies related to interest rates. US Federal Reserve Chairman Ben Bernanke is expected to release its comments on Wednesday. The Bank of England and the European Central Bank will also come up with its view on interest rates. Widely it is expected that the Bank of England will raise its interest rates by 25 basis points to curb the inflation. On the other hand US and the ECB is expected to keep its rates untouched.

The next two three days are going to be very exciting. In case if the things don’t go as expected then the markets make take a big hit. Already the Dow is at new all time highs and so are the indexes at other countries like the French CAC.

Indian markets are also showing a similar trend. The Nifty is still hovering above 4000 points. In this market global markets are going to have a significant impact. Keep watching this space for more articles on Interest rate policies and its affect on markets.

Dow to beat S&P

The Dow is touching new highs and so is S&P.In this rising market it is important to know if the blue chip companies are going to be better or the Mid-caps. In my opinion exports and foriegn operations of compaies is now going to matter. Given the economic conditions where dollar is constantly depreciating companies with higher proportions of income from abroad are going to benefit. Traditionally companies in the Dow make a lot of money outside the country because of their multinational operations.Historically large caps have outperformed S&P by close to 15%. But in the last few years small caps were getting more attractive. This trend is now goin to change with MNC companies of DOW reporting higher earnings from abroad incomes.So in my opinion the Dow should confrotabily beat the S&P, in future at least in earinings.

Now lets get back to Indian Stock Markets.

The heavyweight companies in india are very much dependent on exports. So with current appreciating rupee it is logical to think that their performance will get worse compared to the Mid Caps. But in Indian context, my opinion is that the large caps will outperform the Mid Caps. The reason is that Large caps like TCS which rely heavily on exports are better prepared with hedge positions to protect themselves from adverse currency movements. Majority midcaps which are also into exports don't have highly hedged positions. This means that in the end the Large Caps basically comprising of Nifty (top 50) and Sensex (top 30), could still outperform the Mid caps and Small caps.

The first part of the article was written as comment on "US Market Watch"

i-rates & Monsoonomics

Latest annual inflation figure for the week ending 21st April came out at 5.77 percent, lower than the expected 5.87 percent. It was lower than the previous months figures of 6.09 percent. The RBI in its annual policy set inflation target of around 4 to 4.5 percent, which seemed impossible. The Finance minister commented that the monetary measures of the government before the policy are the reasons for the decline in the inflation rates. Last week RBI was very confident that there was no need to revise the key monetary rates, the Repo rates and the Reserve ratios.

The RBI must also be good at predicting the weather. Commodity prices like pulses and other agricultural commodities were the main culprits behind the burgeoning inflation. A good monsoon along with bumper crop could actually solve the problem related to inflated food prices. The RBI must have predicted a low inflation on the basis of good expected crop or in other word good expected monsoon.

This gives new twist to the “internationally popular” fisher’s formula. Which says that nominal interest rates are just and addition of real interest rates and expected inflation. Now at-least in Indian context the economists have to also include Expected monsoon next to Expected inflation to perfect the equation.

Read other articles related to inflation on the blog by clicking at the tags placed at the end of the article.

Global Hedge Fund Alert!

The New York Federal Reserve gave an alert on accumulated risks created by the growing Hedge Funds. They concluded that this could be the biggest threat to the financial world since the fall of LTCM (Long term Capital Management). LTCM was a Hedge fund founded on the shoulders of mathematical / Economic geniuses, Robert C. Merton (and Myron Scholes (who won Nobel Prize in 1997.

LTCM took full advantage of leverage and used its size to create a huge diversified portfolio. During the 1998 economic turmoil their funds lost the diversification advantage and this resulted in a highly correlated portfolio. In the end within months the whole fund collapsed and in the end the Federal Bank of New York had to step in with support of close to $ 4 billion to stop a “systemic fall” of the financial markets.

The Federal Reserve of New York compares the current scenario of Hedge funds with the LTCM crisis. The Hedge funds are showing a huge correlation in their returns, predisposing the markets to a “systemic downfall.” The total size of the Hedge funds now stands at $ 1.4 trillion, larger than many economies of the world. The funds are now betting aggressively with fewer strategies and by taking higher leverage through use of derivatives.

Corus Repurchasing Debt

Corus which was recently acquired by Indian Tata Steel is offering a share repurchase worth 800 million euro due in 2011. The company would buy back these bonds at 101% of the face value of the bonds. This means that they will be paying 101% + 1.375% (accumulated interest) for these bonds. The investors showed negative reaction to this because the face value of the bonds was at 106.5%, much lower than what was offered by Corus. Due to this the five-year credit default swaps on Corus rose 10 basis points to 133 basis points on the news. Credit default swap is a type of insurance where in case of default by the borrower the swap buyer will end up paying for the debt, which was unpaid. The credit derivative market is concerned that the credit default swaps would be useless if the investors redeem the underlying debt.

Bharati Q4, Earnings

Bharti Airtel Ltd. came up with its latest 4th Quarter figures, beating the forecasts. India became the world’s fastest growing telecom market. Now it boasts of more than 150 million subscribers, which shows that still only 15% of the country’s population is covered. The projections made by Sunil Mittal look forward to tripling of the total customer base within five years. Which means that around half of the population would be using mobiles.

Bharati which is the telecom leader in India boasts a subscriber base of 39.02 million as on March 07 and has become one of the largest companies in India. It has the third highest market capitalization of more than $40 billion. This means that the company has a total weight of close to 7.5% in NSE Nifty compared to around 10% weight of both ONGC and RIL. It is interesting to note that RCOM (Reliance Communication) has a weight of 4%.

Bharti has relied on GSM technology for its growth compare to RCOM which relies on rival CDMA technology. The battle between these two companies extends from customer base to technology. With introduction of 3G in India the market place will become complex. Already Anil Ambani has shown interest in the rival GSM technology on a limited scale to leverage on 3G techonology.

Bharti for long has maintained a good lead over the competitors. It has maintained its position as a favorite for foreign investors. Currently SingTel (South East Asia’s largest Tel. Comp) holds around 30.8% of the company. Before Vodafone, world’s largest telecom company also held a strategic 10% stake in the company.

Bharti is seeking more efficiency by outsourcing majority of its telecom operations. Bharti’s share rose 21.4% between January and March this year compare with 5.2% in the benchmark index. Bharti’s shares were down 2% at around Rs. 844 compared to the 1.6% drop in the index.

Nifty loosing early gains

Markets falling lower after opening close to 1% high. This is after the Nifty touching breaking the 4200 barrier (touching 4212 points) in the morning with ease. It seems like a technical reaction to the levels that are broken. If all goes well market seems to close higher that 4200 today. This would be a very optimistic rally for the markets.

Annual Policy: Surprise

It was widely accepted that the RBI would increase its rates in its annual policy. Many economists were predicting at least 25 basis points increase in the Repo rates. But the RBI kept its policy rates unchanged; Repo Rates at 7.75%, and Reverse Repo and Bank Rate at 6.00%. Also CRR and SLR were untouched at 6.25% and 25%.

The policy also motioned to curb inflation into a range of 4.0% and 4.5% from the current level of just above 6%. Just recently at a lower level of inflation the RBI increased rates to keep inflation under control. But it resulted in only Rupee appreciating to its highest level for last (aprox 10 years). Rupee so far is the best performer amongst the Asian currencies, appreciating about 15% from lows of around 47.04 in July last year. The RBI was letting the Rupee appreciate with the logic that Rupee appreciation would cut down inflation, by lowering the cost for imports. The higher Rupee is actually hurting the small exporters who were unable to hedge their Forex positions.

But RBI clearly stated in the policy that the affect of currency appreciation on Inflation rates is minor. So it looks like the RBI has no concrete measures to cut down the inflation apart from praying for lower price levels. Main source of increase in the WPI is higher Food commodity prices and infrastructural commodities like cements and steel. A good monsoon (for agricultural commodities) and calm Middle East (for crude oil prices) would help in achieving this.

Meanwhile the Nifty soared to new highs at 4167.30 up from 4141.80 showing a 0.62% increase. Till afternoon the Nifty was showing a downward trend on the back of NIKKEI in Japan which closed -1.24% lower at 17236.16.

RBI Credit Policy

Tomorrow RBI will reveal new tricks in its credit policy. Big changes are expected on the back of Friday’s inflation numbers which showed the WPI increasing above 6% from the expected 5.8% level. The USD/Rupee rates have touched new lows. At current levels many exporters are asking for measures from the government to appreciate the Rupee. Already the Government had taken measures like increasing the CCR and the Repo Rates. Leading to liquidity problems for rupee and huge appreciation of the currency.

UK recently touched its peak of 2 USD for a GBP. This was also triggered by the increase in the interest rates by the BoE. In India it is widely expected that there will be a slight rate hike (around 50 basis points) combined with some regulatory changes. To some extent the large FII inflow is also responsible for the appreciation of Rupee, to arrest this at-least temporarily the government can come up with measures like putting roadblocks to investment in highly speculative sectors like infrastructure. Another thing they can do is imposing some sort of tax on FII investments.

There is a paradox developing here for the RBI and Indian government. On one hand appreciation of Rupee is hurting the exporters. At the same time the appreciation is lowering the prices of the imports of the country, bringing some relief to the inflation levels.

Overall in recent past it can be seen that with appreciation of Rupee there is an increase in the Stock markets. But stringent policy of the government to cut FII investment could have melt down affect on the markets.

Japanese Interest Rates

Japan for long was a low interest market, serving as a source for low interest loans for Japanese funds. These huge funds kept on using "carry in" trade strategy where they borrowed funds at low rates and then invested it overseas in markets where the return is high (Emerging markets). About a month ago when the Japanese increased the interest rates, it was expected that the Yen would start appreciating and most probably accompanied by flight of funds from the Emerging markets.

In the past few weeks close to $4-5 billion was taken out by the top Japanese funds. Out of this more than $1 billion was sold off from the Indian market. And about $5 billion from Emerging market excluding Asia (Brazil, Russia etc.)

Morgan Stanley had earlier predicted that there would be a huge flight of foreign funds from the Indian markets. It is clear that Indian markets are having the most impact from the global market. But long term optimism is still there; few days ago one of the Japanese Bank announced close to $1 billion for Indian dedicated fund. This clearly shows that long term optimism is still intact for the Indian markets.

Hindalco Novelis.. contd.

Hindalco Novelis Merger: Previous Article

Financial numbers show that novelis is not a good choice by Hindalco at least at the price that they paid for the company. The imediate effect of the merger is that Hindalco would achieve its target of doubling its turnover to $ 20 billion three years in advance. Novelis fits well in the long term strategy of Hindalco. Novelis is not a dying company looking for a savior, Hindalco approached Novelis because they believed that Novelis can give them some business advantage.

Natural Hedge

All raw aluminium is processed so that it can be used in products. Fourty percent of the products are rolled products and Novelis is in leader in rolling business with a market share of 20%. Any change in the raw material price is directly passed on to the customers who range from coca cola to automobile companies like aston martin. The current revenue of hindalco is very much dependent on the aluminium prices and when the prices are high they make a larger margin, this not the case with rolling business which usually has a constant margin.

Technology

Novelis being market leader in the rolling business, has invested heavily in developing various production technology. One of such technology is a fusion technology that increases the formability of aluminium. This means that it can be better used formed into the design requirement by the car companies. For Hindalco to develop such technology will take a lot of time. According to Standard and Poors it would take 10 years and $ 12 billion to build the 29 plants that Novelis has with capacity of close to 3 million tonnes.

Future Synergy

Currently Hindalco's production is tied up with clients. Also Novelis has similar contracts with its suppliers. But after 3-4 years it would start the operation of new plants. Then it can source excess capacity to the Novelis plants located in south east asian countries.

The merger looks not bad if the current financial valuations are ignored. Also we need to keep in mind that Hindalco is a very aggressively growing company, for it to build infrastructure that can match Novelis is very difficult.

Please drop your comments by clicking the "comments" at the end of the blog.

Hindialco Novelis Merger

The recent bid made by Hindalco of $6billion for Novelis is very much sidelined by the Tata Corus deal of close to $13 billion. Tata tried to gain more synergy by the deal and more importantly trying to gain access to high margin markets of Europe. This is a very good risk mitigation ploy, isolating Tata from the adverse movements in global steel prices.

Birla with Hindalco is trying a similar hedging strategy by taking over the aluminium rolling business of Novelis. It a market leader with a share of 20%. The rolling business is very less risky because any price change is passed on directly to the clients.

Financial Troubles

The financial trouble for Novelis began with wrongly speculating that the prices for Aluminium (raw mat) would stay soft. It entered into contracts (sept 06) with four major customers (accounting for 20% of the revenue) to keep the prices constant even in case of increase in input costs. Within few months the prices for aluminium increased by close to 40% resulting in the company selling below material costs. They made a loss of 170 million last year.

Valuations

This makes the valuation of the company really interesting. Birlas are paying close to $46 per share for this company even though the maximum price quoted by the company when it was doing well was below 30. If you compare this with Corus Aluminium and Aleris merger, where Corus Aluminium a smaller company was valued at only 18 times (market cap/PBT) compared to double (36) for Novelis. Also the company has accumulated a total of $2.33 billion of debt with a net worth of only $322 million. This gives a highly levered debt-equity ratio of 7.23/1.

All this casts a serious doubt on why Birlas are ready to buy such sick and overvalued company. The answer lies in "long term strategy"

Keep watching this space for the other half of the article...

Corus Welcomes TATA

Finally TATA Steel ends up as the winner in the poker match between TATA Steel and CSN (Companhia Siderurgica Nacional)for Corus. It was very clear that TATA would bid aggresively and in the end they ended up paying 508 pence a share for Corus. Translating into 6.2 billion pounds or $ 12 billion. 30 percent higher than the initial offer made by TATA. For CSN it was second time in five years that it has failed to acquire Corus.

Valuation

The bid made by TATA Steel values the firm at 7.6 times the EBITDA of Corus. If the merger is compared to the $32 billion deal of Arcelor Mittal then the valuations seem overpriced. Arcelor was valued at 4.6 times its EBITDA. But if you look at valuation per mt then this deal could be considered a good bargain. According to TATA it would take arround 80% more capital to build up capacity and quality similar to Corus.

For two days after the merger TATA Steel shares were trading 12% lower. Now on 2nd feb it gained 1%. It shows that eventhough valuation for the merger was overvalued, tata did the right thing at the right time to acquire Corus(their bid was only 5 pence higher than CSN). In the short term TATA may face financial troubles due to overvaluations, but in long term this deal puts up the foundations which will make the company a 90 mt Steel company from the current post merger 28 mt. TATA would also have to overcome the task of integating close to 50,000 worker of the company spread accross UK and Neatherland.

FDI in Capital Markets

Arround the world a trend of consolidation can be seen in the stock and commodity exchanges arround the world. Just recently the Merchantile Exchange acquired the C-Boof(Chicago board fo trade). Also NASDAQ is trying out for a hostile takeover of LSE (London Stock Exchange) with valuations reaching as high as $ 5 billion.

Just yesterday Goldman and Sachs and NYSE showed their interest in acquiring the 5% each stake in NSE. National stock exchange has not formally declared anything regading this matter. Goldman and sachs already acquired a 5% stake in MCX, (multi commodity exchange).

The lawsforeign only 49% foriegn investment in stock exchages with a limit of 26% in case of FDI and 23% FII. Also no one investor can invindividuallyan 5% individualy, this last limitaion is placed by the SEBI any in future this could be relaxed.

All this means more funds and techniforeignport from foriegn player, which will make the exchanges more efficient. Also we are still long way to witness something like the LSE takeover or the Euronext tforeign, where a foriegn firms tried to gain control of regionally strong exchanges.


 

Inefficiency of Indian Companies !

The Net profit of Indian companies is lower 40% as compared to other MNC companies

43%. The figures were of top 100 Indian and MNC companies. This might only look like

a marginal thing. But it is important to keep in mind that the aggregate turnover of

an sample MNC company has increased 22.9% as compared to 34.5% for Indian companies.

This could be attributed to inefficiency of the Indian companies. Mainly the input

costs of the companies have gone up. For Reliance the growth in profits was limited

to only 10% dispite of a 38% increase in turnover. High crude oil price was the main

cause, the aggregate costs have risen by 42%.

Tata steel also showed similar performance with 14.5% increase in the expenditure

and only 4.4% increase in the net profits. The MNC's have fine tuned their cost

management. Their turnover has not inceased that much compared to the indian

companies. This could be signs of inefficiency of the Indian companies. The interest

liability of Indian companies has declined compared to last year.

It important to notice that Indian companies are taking more debt to finance their

activites. TATA steel for example is planning to finance its Corus deal using debt and Reliance also trying to raise money

through foriegn debt market. In future rising interest costs on borrowings would

bring down the net profit growth even more. With Sensex now at all time high and valuations on stretch it is

very important to pick companies with steady growth in future.