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.

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.

Metal Stocks to Loose

Over the last week the metal stocks have declined by close to 6%. This is due to the bear run in the various metal commodities in the international market. The brokers believe that many hedge funds who invested in commodities are selling and this would continue for a while pulling down the metal prices further down. There is also a speculation of cooling off of the Chinese Economy which was the main consumer pulling the the commodities during the bull run.
On wednesday Hindustan Zinc lost Rs. 15 to Rs. 598.

Gold at 11 week low

Gold prices continue to be hard hit in this week. The latest spot prices is arround $ 578.60 per ounce. This is nearly a fall of over 10% in the week from the high of $640.5 per ounce. Predictions are that it might touch levels of $ 550- $500 if a quick rebound does not take place. The same was the fate of silver which fell to $10.97 per ounce from above $ 12 per ounce a week ago.

G

Sugar Party Over!

For last two years we have seen a bull market in comodities market. Sugar companies have enjoyed double digit profit growth on the back of increase in the global sugar prices. Commodities market follow a cyclical demand, where prices first go up and then the companies start investing in new facilities resulting in more supply and eventualy the prices start falling. So it could be concluded that the commodity cycle depends on the ability of companies to put up new production facilities. Refer the COPPER Article for more informaion.

The Sugar prices are falling for some time now and analysts believe that there is excess supply created in the market which will push prices down further. The prices of Sugar on London futures have fallen from a high of $490 per tonne to $384.9 on 20th August. Since August is usually depressed period for sugar prices becuase of the full swing of harvest in the centre-south Brazil(largest producer of Sugar) and Northeast Brazil harvest about to get in full gear. This means that the prices could fall by another 10% next month.

Another big factor is increase in production form Russia to Thailand. Russia which is the largest importer of raw sugar is harvesting a larger than expected big beet crop. And Ukraine is also expecting a larger crop this year compared to last year. Plantations arround the world have increased their sugar plantings to take advantage of the Sugar bull market. The supplies from these new plantations would hit the market soon at pull the sugar prices down.

In China the use of alternative sweetners is picking up. They have been using sweatner made from corn for a while and now they are testing sweatner from rice which is also in abundance in China. Another dampner for the demand of Sugar could be crude oil prices. In Brazil they are using their Sugar Cane crop to produce Ethanol as a substitute for gasoline (petrol). They prefer production of Ethanol over import of more expensive crude oil. All this could change in case the crude oil prices fall to levels where profitability on production of Ethanol would fall and a shift towards production of Sugar would take place.

Anyways it is very clear that the Sugar market is facing huge surplus due to higher productions. Some forecasts put ther figure between 3.1 million tonnes to 3.3 million tonnes, but some traders feel that the surplus would be even bigger.

Interest Rates Rising

US FED Reserve had been constantly hiking interest rates due to high inflation fuelled by the heating up of commditities prices. And Globaly central banks were trying to match US FED by doing the same. In India also RBI started taking a harder stance by revising the REPO and Reverse REPO rates. Last month the rates were increased by 25 basis points. This has lead to increase in the cost of borrowings of commercial banks who are passing this on to their clients by revising their lending rates.

It is quite evident that since the rate of interest goes higher it will impact the sectors of economy that are dependent on interest rates, like the housing sector. To some extent the housing real estate boom in India was related to the cheap housing loans offered by banks. Still finace minister P Chidambaram believes that the interest rate hike is very moderate and it will not affect the booming housing sector.

The government is trying to do its best to not allow the interest rates to hamper the growth of our economy. The cost of borrowings of the Indian companies has increased in recent times which might affect profitability. The govt. is trying its best to keep a balance by hiking the interest rates to control inflation (abt 5%) and at the same time trying to keep the cost of borowings down by infusing liquidity through reduction of CRR ratio to 5%.

It is very clear that the govt. supports high growth rate of GDP, and in order to maintain this they are trying to keep cost of borrowing low. They are also asking the PSU banks to not hike their PLR(Prime lending rates) in accordance with the market.

SBI Margins Improve but Q1 net falls

SBI reported a net interest margin of 3.37 percent comparede with 3.14 percent a year earlier, adjusting for one-time income. The margins improved because of the decline in the cost of deposits to 4.47 from 4.82 a year earlier and its average yield on loans rose to 8.49 percent from 7.80 percent. The Net interest income fell 8.7 percent to Rs. 38.84 bill from 42.53 bill. This is mainly due to lower income from treasury operations. The central bank is aiming to keep inflation in a 5 to 5.5 percent range and raised the short-term interest rates by 25 basis points earlier this week to 6 percent.

The central bank is projecting a growth rate of 20 percent for the year to March 2007 so bankers see more rate increases ahead if loan growth shows no sign of slowing. The SBI is more bullish by aiming for 25% loan growth for the year. SBI holds more than third of its deposits in government bonds, suffered a 20 percent fall in the treasury revenue to 36.06 billion rupees form 45.24 billion a year earlier as bond yields rose 60 basis points in the April-June quarter. The shares of SBI valued at $8.4 billion dropped by almost 25 percent in April-June, underperforming a near 6 percent fall in Sensex.

M&M up by 7 %

Mahindra is the world's fourth largest tractor maker in the world. It was formed in 1945 to make Chrysler Jeeps in India. Now Mahindra has a joint venture with China's Jiangling Motors and is looking for lucrative acquisitions in Europe after bid for Romanaia's Tractorul Brasov failed. It also had a $80 million joint venture with Navistar Inc. International Truck and Engine Corp. to make 50,000 medium and heavy weight trucks. M&M believes that it could be the largest tractor company in the world in five years. They are also in a tieup with France's Renault to make Logan sedans form next year.

Mahindra sold 60,495 vehicles and tractors in April-June (15% rise). The passenger vehicle market in india is forecast to nearly double to 2 million units by 2010. The demand for trucks in India is $5 billion. Material costs are going up, but we have created a margin of safety through cost management and higher productivity and we look forward to the rest of the year with confidence. Mahindra shares are valued at $4.5 billion and fell nearly 1 % compared to 11 % drop on the auto sector and 6 % decline in the sensex.

The Net sales of the company rose vy 23 % to Rs. 22.36 billion from 18.12 billion a year earlier. The operating margins of the company rose to 12.1 % form 10.65% a year earlier. The shares closed on BSE at Rs. 563.10 up by 6.6%. When the Sensex climbed by nearly 200 points. The numbers of the company is really impressive but they have to sustain the high margins when input prices goes even higher. Higher crude oil prices and high interest rates could futher dampen the demand.

Lowest in 4 weeks

Markets today hit their lowesr in four weeks due to the concern that the falling rupee might slow down the FII investment. the indian rupee hit its three-year low of 47 per dollar. The higher crude oil prices due to the tentions in the middle east was also another reason for the fall. The index is down 21% from its may peak and the FII's have trimmed their net investments to $ 2.5 billion from nearly $ 5 billion in early May.

The BSE sensex lost 219 points or 2.15% to close at 10,007 after inta-day swing of 436 points. The biggest loosing sectors were Metals (3.95%), Auto (3.6%), IT (3.06%), Capital Goods (2.8%) ,Consumer Durable (2.3%) and FMCG (2%). The worst hit stocks were Wipro (5.5%), Satyam (5.3%), TCS (4.5%), ACC (4.5%) and Tata Motors (4.4%). ONGC (1.8%) and Ranbaxy (0.6%).

With the selling presure arround the market seems to be heading towards 9,800 - 9,900 levels. The markets have been falling constantly for two three days now and the buying had disappeared even for stocks like ACC. The net profit of ACC increased in last quarter but the stock price fell to Rs. 779.95 (4.5 %). Index heavyweight Reliance Ind. Ltd. fell 5.5% to Rs. 982.10 and Infosys by 1.5% to 1,605.9 points.

Still long term fundamentals for the Indian Economy and Business stay intact. Just recently JPMorgan Asset Management concluded that China, India, and Singapore offer Asia's best stock market investment oppurtunity. The expectaion is that a stong catalyst like change in the interest rate policy by the Federal Reserve. The valuations of the Indian stock markets have actually become more attractive after the selloff.