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Monday 31 December, 2007

Happy New Year....


No entry load on Mutual Funds from Jan 4 2008

As a New Year gift to mutual fund investors, market regulator Sebi on Monday exempted them from payment of entry fee on applications filed directly to the asset management companies (AMC).

"It has now been decided that no entry load shall be charged for direct applications received by the AMCs i.e. applications received through Internet, submitted to AMCs or collection centre/ investor service centres that are not routed through any distributor/agent/broker," Securities and Exchange Board of India said in a circular.

The exemption would apply for investments in existing schemes with affect from January 4, 2008 and in new schemes to be launched thereafter.

The Sebi circular further said, the entry fee exemption would also apply to additional purchases made directly by the investors under the same folio or for switching from one scheme to the other.

These exemptions, the SEBI said, were intended "to protect the interests of investors' securities and to promote the development of, and to regulate the securities market".

"This is good and positive move and will help the mutual fund industry," said managing director of the Delhi-based Taurus Asset Management Company R K Gupta while commenting on the SEBI notification.

Gupta further said that this decision was overdue and "for the past five years we have been pressing for this exemption".

Sebi's move, however, would have adverse implications for the intermediaries who have been involved with the mutual fund industry.

Fund houses say market fairy valued: CNBC-TV18 poll




CNBC-TV18 has polled around 13-15 fund houses barring Reliance, Franklin Mutual Fund. 82% of fund houses said that the market is fairly valued and rest said it is overvalued at current levels. 55% of them have kept target of 20000-22000. 33% said that the Sensex will go upto 22000-24000.


CNBC-TV18 has polled around 13-15 fund houses barring Reliance, Franklin Mutual Fund.

CNBC TV18 analyst Varinder Bansal reports that according to Mutual Funds poll, 82% of fund houses said that the market is fairly valued and rest said it is overvalued at current levels. Not a single fund house is saying that it is undervalued.

For the year-end Sensex target, 55% of them have kept target of 20000-22000. 33% said that the Sensex will go upto 22000-24000 while only 12% believe that it is likely to see 24000 mark as well.

Not a single fund house is seeing the Sensex around 18000-20000 or below 18000.

33% of polled fund houses will prefer midcap stocks under current circumstances while 28% prefer index stocks. Only 17% will favour small cap shares and balance 22% will have preference to non-Index large cap stocks.

According to the CNBC-TV18 poll, most bullish sector for 2008 will be banks, ferrous metal and construction while IT, sugar, cement sectors will be neutral. In the case of bearish to neutral will be power, telecom and pharma.

Sector View (%)

View on the sectors

Bullish

Bearish

Neutral

Banking

100

0

0

Ferrous Metal

88

13

0

Construction

86

14

0

Infra

86

0

14

Cap Goods

75

0

25

Real Estate

63

25

13

Non-ferrous metal

57

14

29

Power

44

33

22

Cement

33

22

44

Auto

50

0

50

Sugar

38

13

50

Media

50

17

33

FMCG

60

0

40

IT

22

22

56

Oil & Gas

29

29

43

Telecom

14

43

43

Pharma

13

38

50

80% fund houses believe that equity diversified funds will do better whereas 10% favoured to sector specific and balance to thematic funds.

The last question of the poll - How much money will the fund house raise in 2008?

About 75% fund houses polled that they will raise more than 50% of the money raised in 2007 and 12.5% fund houses of total polled said that they will garnered 25%-50% more money that in 2007. The balance will raise 10%-25% more than in 2007.

Mutual Fund Poll Questionnaire and Answers

1) Market is
Fairly Valued: 82%
Over valued: 18%
Undervalued: Nil

2) What is year-end Sensex target?
20-22K: 55%
22-24K: 33%
Above 24: 12%
18-20K: NA
Below 18K: NA

3) Which stocks will the fund prefer under current circumstances?
Midcap: 33%
Index Stocks: 28%
Non-Index large cap: 22%
Small-cap: 17%

4) Sector views
Most Bullish Sector: Banks, Ferrous Metal & Constrcution
Neutral: IT, Sugar, Cement
Bearish to Neutral: Power, Telecom, Pharma

5) Which funds will do better?
Equity Diversified: 80%
Sector Specific: 10%
Thematic Funds: 10%

6) How much money will the fund houses raise in 2008?
More than 50% 2007: 75%
25%-50% more than in 2007: 12.5%
10%-25% more than in 2007: 12.5%
10%-25% more than in 2007: NA
Less than 2007: NA

By Varinder Bansal

Mute welcome to the new year

The Sensex opened 116 points above its previous close tracking positive Asian markets. But, the market could not hold on to its gains as trading progressed on lack of buying support. However, the presence of bullish sentiment helped the market to remain in a range with a positive bias in the latter part of the session with buying in consumer durables, PSU and FMCG stocks. However, selling in frontline stocks towards the close saw the Sensex touch its day's low of 20,240. The Sensex finally closed the session with a gain of 80 points at 20,286, while the Nifty added 59 points at 6,139.

Breadth of the market was extremely positive on the Bombay Stock Exchange (BSE) with gainers outpacing losers in the ratio of 7.02:1. Of the 2,930 stocks traded on the BSE 2,551 stocks advanced, 363 stocks declined and 16 stocks ended unchanged. Except the BSE IT index, all sectoral indices ended in positive territory. The BSE CD index ended firm with gains of 5.37% at 6,957, while the BSE PSU index rose 2.18% at 10,468, the BSE HC index added 1.84% at 4,419, the BSE FMCG index added 1.72% at 2,320 and the BSE Teck index moved up by 1.64% at 4,015.

Action in several index heavyweights lifted the market. Bharti Airtel led the pack and shot up by 5.72% at Rs995. NTPC soared 3.58% at Rs250, M&M surged 3.16% at Rs861, Ranbaxy flared up by 2.49% at Rs426, ITC jumped by 2.34% at Rs210, Reliance Communication added 1.90% at Rs747, ACC advanced by 1.59% at Rs1,025, Tata Motors was up 1.55% at Rs742. However, HDFC dropped 1.76% at Rs2,827, Ambuja Cement slipped 1.54% at Rs147, Infosys lost 1.52% at Rs1,768 and Cipla dipped 1.07% at Rs213 while Reliance Energy, HLL, Wipro, Reliance Industries, SBI and HDFC Bank slipped marginally.

Over 3.48 crore IFCI shares changed hands on the BSE followed by GV Films (2.54 crore shares), Ispat Industries (1.67 crore shares), GTL Infrastructure (1.63 crore shares), and Tata Teleservices (1.42 crore shares).

Valuewise, IFCI registered a turnover of Rs314 crore on the BSE followed by Eclerx (Rs275 crore), RNRL (Rs215 crore), Transformers & Rectifiers India (Rs191 crore) and Brigade Enterprises (Rs183 crore).

20 great stocks to buy in 2008

Stock selection will be the key factor in determining returns in 2008, given concerns of a global slowdown and premium valuations in domestic markets.

Year 2007 saw the market deliver good returns amidst volatility, especially in the second half, thanks to global concerns. The BSE Sensex was up a good 46.6 per cent, helped by strong foreign and domestic inflows.

And what led to these inflows was none other than a strong performance by India Inc. For investors, the moot question is how will 2008 be? The answer is not simple given that none of the global concerns have eased, while the Indian rupee is still firm and India Inc is experiencing a deceleration in growth rates.

"Year 2008 will be difficult globally, although it is not yet known how deep the US downturn will be," says Andrew Holland, managing director -- strategic risk group, DSP Merrill Lynch.
While India's vulnerability to global shocks has been put to test adequately over the past year, the overall macroeconomic growth remained strong owing to infrastructure, capital goods and real estate sectors.

Notably, the story is not likely to be very different in 2008 barring drastic surprises, which means that domestic consumption plays should remain in flavour.

By this logic, the most certain sectors are capital goods, financial services, infrastructure, power, logistics and oil, gas and energy sectors among others. Even among these sectors, not all stocks can be expected to do well, owing to the differences in business models and the individual strengths and weaknesses.

Further, in our selection, we have looked at the fundamentals of companies and their potential to deliver earnings growth of over 20-25 per cent.

But, while growth is a must, valuations too need to be fair, which is why we kept a tab on the price earnings to growth (PEG) ratio. Here, most stocks are trading at a PEG of less than 1 times based on FY09 earnings estimates, which ensures that the price is not exorbitant.

To ease your effort of picking the juiciest fruits from the orchard, we have handpicked a few likely winners of 2008. Read on.

Adlabs Films [Get Quote]
With a strong presence across the entertainment industry value chain of content production, distribution, and exhibition, Adlabs becomes the choicest pick.
Domestic consumption and leisure spends will remain buoyant as disposable incomes rise across the country fuelling growth at Adlabs.

Adlabs produces and distributes films, and is a dominant player in the multiplex segment. It has also acquired 51 per cent stake in television content producer Synergy Communications, the maker of Jhalak Dikhhla Jaa and Kaun Banega Crorepati.

In the FM radio business, its subsidiary, which runs Big FM has 44 FM licenses across India. This could also become a value unlocking opportunity going forward.

Over the past three years, Adlabs has impeccably delivered a top line growth of over 100 per cent y-o-y, along with high profitability. In the September 2007 quarter, it raked in a whopping 69 per cent operating profit margin.

But going by the past numbers, operating margins have remained in excess of 50 per cent consistently, with net profit margins at over 22 per cent. The stock has appreciated three-fold since January 2007 and should do well.

Bank of Baroda [Get Quote]
Bank of Baroda has a strong presence in western India -- a key zone for retail and industrial growth-- with equally good rural network.

Further, the bank is one of the few banks having a substantial international presence, which contributes 18-20 per cent to total business and 30 per cent to profits. This business is expected to rise further with the bank growing its global presence.

The bank has improved its fundamentals over the past several years on key parameters such as net interest margins (NIMs) and asset quality despite growing at a robust pace (asset growth CAGR of 19 per cent in FY04-07). Going ahead, the bank's focus on NIMs backed by moderate growth augurs well.

Besides, its initiatives such as online trading services, and joint ventures in insurance and asset management, will help it create value for its shareholders.

Additional triggers could be in the form of consolidation within the public sector bank space. All this put together makes this stock, which is reasonably valued at 1.4 times its FY09 estimated book value, an attractive investment opportunity.

Bharat Bijlee [Get Quote]
Though Bharat Bijlee has risen by a whopping 228.5 per cent in the last one year, even at current levels, it is inexpensive.

Consider this: The company has investment in various companies including Siemens, HDFC [Get Quote] and ICICI Bank [Get Quote].

At current rates, their combined value works out to Rs 317 crore (Rs 3.17 billion), or about Rs 560 per share.

Excluding this, the core business is valued at attractive valuations of 20 times FY08 earnings and 15 times FY09 estimated earnings.

The company is capitalising on the emerging opportunities in the power transformer sector, which accounts for 65 per cent of its total revenues with the balance from motors.

In the Eleventh Five Year Plan, a total power generation capacity of 78,000 mw is planned. This augurs well for transformer manufacturers such as Bharat Bijlee.

The company on its part has recently expanded its transformer capacity to 11,000 MVA from 8,000 MVA. The motors business is also witnessing 25 per cent growth and Bharat Bijlee has forayed into higher frame motors of up to 400 kw. All this put together make Bharat Bijlee a good pick.

Bharati Shipyard [Get Quote]
Stocks of shipbuilding companies have been re-rated on the back of rising order book-to-sales to over seven times. The stock price of ABG Shipyard [Get Quote] has gone up 267 per cent, while Bharati Shipyard is up 107 per cent over the last one year.

The gain has been higher in the case of ABG Shipyard, thus stretching its valuation at 33 times its FY08 estimated earnings. Bharati Shipyard is still trading at a comfortable 18 times estimated FY08 EPS and 13 times FY09 EPS.

Also, its current order book of about Rs 4,639 crore (Rs 46.39 billion) (11 times its FY07 revenue) is strong enough for maintaining 50 per cent growth for the next three years.
Bharati is building a greenfield shipyard which will enable it to build six vessels up to 60,000 dwt (dead weight tonne) against 15,000 dwt currently by December 2008. This will enable Bharati to improve its execution speed and bid for more projects.

Besides, it is planning to invest Rs 2,000 crore (Rs 20 billion) along with Apeejay Shipping to set up a shipbuilding yard on the eastern coast, which will be commissioned in FY 2011. A relatively lower valuation and strong earnings visibility makes this stock an attractive investment.

BHEL

Today, the biggest constraint in the power sector is the supply of equipment, especially the critical power equipment required for the larger projects.

But, for Bhel, which commands about 65 per cent market share in the domestic power equipment industry, this provides long-term earnings visibility.

While competition is rising with new players like L&T and Chinese companies vying for a share, Bhel's order book of Rs 62,400 crore (Rs 624 billion), almost 3.6 times its FY07 revenues, instils confidence. The successful acquisition of orders for super critical boilers and high technology gas turbines required for the bigger projects would only improve its order book further.

Considering the huge order backlog and the orders in pipeline, Bhel is expanding its capacities by 67 per cent to 10,000 mw by January 2008, which will further increase to 15,000 mw by December 2009.

Bhel is also expanding its forging and casting capacities and a new fabrication plant to help reduce its dependence on imports. These should also help lower costs in the years to come. Overall, a better industry outlook, strong order book and expansion of existing capacities will drive the stock from the current levels.

Bharti Airtel [Get Quote]
With a mobile subscriber base of 51 million, Bharti Airtel is India's largest mobile service provider. While it has added an average of 2 million subscribers a month in Q2, it is expected to crack the 100 million subscriber mark by FY10.

While the company has experienced good growth, its ARPU has fallen by 10 per cent over the last three quarters, much ahead of the 4 per cent decline experienced by Reliance Communications [Get Quote]. Even then, operating margins have improved, on the back of higher margin in broadband business and cost reduction.

Going forward, increase in scale of operations will keep costs in check. Capital and operating expenditure is also likely to come down after the formation of Indus, a tower infrastructure company, which will manage the tower infrastructure of Bharti, Vodafone and Idea.
A trigger for the stock could be the listing of Bharti Infratel, the tower division and which holds 42 per cent in Indus. Bharti Infratel already has 20,000 towers and plans to set up more.

RCOM will be the biggest threat for the company if it manages to soon roll out its GSM services across 15 circles. Additionally, any unfavourable outcome over the spectrum issue will have its impact; it could lead to increased investments in upgradation of existing equipment.

To conclude, Bharti's revenues should grow by 35 per cent in the next two years on the back of subscriber expansion, start of Sri Lankan operations by March 2008, and launch of IPTV and DTH. A sum-of-parts valuation puts the per share value of Bharti at Rs 1,200, a 27 per cent upside from the current levels.

Blue Star [Get Quote]
The central air conditioning major, Blue Star, is a key beneficiary of the economic boom in the country across sectors like IT/ITES, retail and telecom.

This is reflected in the strong CAGR of 32 per cent and 40 per cent in sales and operating profit respectively in the past three years.

Notably, such strong growth traction is expected to continue as the company is sitting on a strong order book position, which is at Rs 1,030 crore (Rs 10.30 billion) as on September 2007. It is likely to get repeat orders from its existing customers as they expand operations.

It is expanding its capacities by investing about Rs 60-70 crore (Rs 60-700 million), which will lead to economies of scale and rationalisation of costs leading to margin expansion. Its return on equity and return on capital employed, which were at 34 per cent and 26 per cent, respectively, in FY07, will only improve.

However, the full benefits will be reflected only from the next financial year. The macro factors too continue to be robust, with huge investments planned in all the above mentioned sectors.

Dishman [Get Quote] Pharmaceuticals
Dishman, a pharma outsourcing player, is moving up the value chain from being a commoditised chemicals supplier to a research partner for innovator companies.

Its acquisition of Swiss-based Carbogen-Amcis (CA), which offers drug development and commercialisation services, has helped it tap into the client base of CA that includes seven of the top ten US drug companies.

With three projects in phase-III development, and likely to hit commercial production in two years, CA's revenues are expected to grow 15 per cent annually to Rs 400 crore (Rs 4 billion) by December 2008.

Dishman caters to 50 per cent of Dutch pharma major Solvay Pharma's requirement of eposartan mesylate, an anti-hypertension medication. Its acquisition of Solvay's Vitamin-D business will boost revenues. Its foray into China to manufacture Quats, a catalyst, is also seen positively.

All these should help reduce Solvay's share of 25 per cent in Dishman's revenues going forward. With earnings expected to grow between 25-30 per cent in the next two years (Rs 12 in FY08, Rs 15 in FY09 and Rs 20 in FY10), the stock can deliver 28-30 per cent returns in one year.

Educomp Solutions [Get Quote]
Educomp, the market leader in Kindergarten-12 education products, is a successful niche player. It has made some smart acquisitions, entered new areas. and garnered a client base of almost 6,000 schools across India besides, a small presence in Singapore and the US. Its first mover advantage makes it difficult for competition to catch up anytime soon.

Besides, the company has so far acquired and built the abilities to design and create content for schools, learning and school infrastructure management solutions, online teaching solutions, community building solutions and more recently into setting up its own schools.

Financially, Educomp's top line has almost doubled every year and operating margins have been maintained above 50 per cent.

Considering the growth potential in the Indian education industry, Educomp is likely to keep its juggernaut rolling for the coming few years. In FY09, Educomp will double its top line again and grow its earnings by 75 per cent. Although there has been a concern over valuations, the consistent earnings growth justify the same.

HDFC
HDFC is an ideal play on the gamut of financial services. Besides market dominance in housing finance, it provides huge potential for value unlocking from its investment in banking, insurance and mutual fund subsidiaries.

The proposed UTI Mutual Fund IPO, stake sale by Reliance Capital [Get Quote] in its mutual fund entity and the probability of listing of insurance companies though in the long term, should provide triggers. Moreover, there is a possibility of a merger with HDFC Bank.

Its core business--housing finance will continue to do well. Its loan book is expected to witness a CAGR of 25 per cent over the next two years. Its net interest margins are expected to remain stable at around 3 per cent.

And, HDFC is known for its asset quality. HDFC's stock trades at about 5 times FY09 estimated book value (adjusted for the value of its subsidiaries, which is about 30 per cent of HDFC's market capitalisation), and is a worthy pick.

India Infoline [Get Quote]
India Infoline is another company representing financial services, except the lending business.
Its stock price has grown more than fourfold in the last one year amid many positive triggers like capital raising for expansions, tie-up with strategic investors for investments in subsidiaries and restructuring of its various businesses.

Besides equity broking, it has expanded its product basket to include institutional equities broking, commodities broking, margin finance, investment banking and, distribution of life insurance, mutual fund and loans products.

It is investing towards building a strong distribution network (596 branches in 345 cities) and customer base (5 lakh clients) for its various services. Accordingly, the share of its traditional broking business of about 56 per cent in FY07 revenues is expected to come down over the years.

The stock trades at 51 times and 44 times estimated earnings for FY08 and FY09, respectively. While it looks cheaper than Edelweiss, in terms of market capitalisation to revenues, it trades at a higher P/E than Indiabulls [Get Quote].

However, it has the most de-risked business model compared to other players. Given India Infoline's aggressive growth strategy, the stock is ideal for long term investors.

Jain Irrigation

Jain Irrigation, which is in the businesses of micro irrigation systems, food processing and plastic pipes and sheets, is a direct play on the growing emphasis on agriculture. Irrigation systems account for 30 per cent of its revenue. It's revenues from micro irrigation have grown at 70 per cent annually.

Growth will be maintained on the back of its plans to launch new irrigation systems, higher replacement demand, focus on geographical diversification.

Jain's five overseas acquisitions, including a 50 per cent stake in NaanDan of Israel, the world's fifth largest micro-irrigation company, will help in terms of access to technology and access to large markets such as South Africa, US, and Europe.

In food processing, which accounts for 14 per cent of total income and grew by 74 per cent in FY07, Jain produces juices and dehydrated vegetables for companies like Coco Cola, Nestle [Get Quote], etc. This business to grow at healthy from hereon.

In plastic pipes and sheets, its products find application in agriculture (30 per cent market share) and telecom (70% share) among others and, should continue to grow at a healthy pace.
To sum up, Jain is operating in high growth areas, while exports too are expected to grow rapidly, which makes it a good investment case.

Jindal Saw [Get Quote]
Jindal Saw, the most diversified Indian pipe manufacturer, makes submerged arc welded (Saw), seamless and ductile iron spun pipes, which are used in diverse applications like oil & gas and water-based infrastructure.

The company is expanding its capacities in phases which will bring economies of scale-- longitudinal Saw pipes (by 25 per cent), helical Saw pipes (233 per cent) and seamless pipes (150 per cent) -- by FY09. These expansions are well-timed due to strong demand for pipes on account of surging demand for oil and gas globally.

Over the next three-four years, global demand (including India), for Saw pipes is estimated at 200,000 km involving an investment of $60 billion.

Jindal Saw is likely to gain due to restructuring of the investment holdings in Jindal Group companies, wherein it has substantial investments in Nalwa Sons, Jindal Stainless [Get Quote], JSW Steel [Get Quote] and Jindal Steel & Power, are worth about Rs 2,200 crore (Rs 22 billion). Excluding the value of investments, the stock trades at 9 times its FY09 estimated earnings, which is attractive as compared with 17 times for Welspun Gujarat.

Larsen & Toubro
Reinventing itself and successfully developing new businesses are among L&T's key strengths. That, along with the domestic infrastructure and global hydrocarbon investments, is responsible for the rising revenues and order book. It is now targeting a turnover of Rs 30,000 crore (Rs 300 billion) by FY10 as compared with Rs 18,363 crore (Rs 183.63 billion) in FY07.

Going forward, there is more business to come, as the government has estimated an infrastructure investment of $500 billion during the Eleventh Five Year Plan. Besides, a lot of money will also be spent by domestic players in the metal, oil and gas, power and other industries.

Little wonder, L&T's order book has been rising. As of September 2007, the engineering and construction division had an order book of Rs 42,000 crore (Rs 420 billion).
Going forward, L&T is also focusing on the overseas markets and has targeted exports to increase to 25 per cent of 2010 sales. It is entering shipbuilding, railway locomotives, power generation and power equipment as well.

While all these investments in different businesses will help sustain future growth, the medium term continues to be robust. Some of it is already rubbing off positively on the share price. Although the stock seems richly valued, it can fetch good returns.

Maruti [Get Quote] Suzuki
On the back of a sound foundation of existing products (13 models priced between Rs 2 lakh and Rs 15 lakh), strong distribution, efficient service network and new product launches, Maruti Suzuki will maintain its dominant position.

The company has 52 per cent market share by volume of the Indian car market and 62.5 per cent of the small car segment, which is commendable given the stiff competition from global majors.

Maruti grew at a scorching 18 per cent, compared with the 13 per cent recorded by passenger car market in H1 FY08. For eight months ended November 2007, sales volume was up 19.7 per cent to 500,108 vehicles led by 49 per cent growth in exports. Notably, exports are expected to grow 40 per cent annually for the next two years; its share in total sales is likely to move up to 12 per cent in 2010 from 7 per cent in FY07.

Maruti is already augmenting capacities by 3 lakh in a phased manner by FY10 to a million units. Besides, it has lined up Splash (A2 segment) and the concept car A-Star (A1 segment), while a Swift sedan is on the cards. These will help earnings grow by 20 per cent annually in the next two years. Aggressive pricing, enhanced margins on the back of improved product mix, indigenisation and scale benefits, will help Maruti do well.

ONGC [Get Quote]
Oil exploration companies are set to benefit from the current high oil prices and firm outlook. India's largest oil exploration company, ONGC is the best bet in this space. ONGC with interest in 85 domestic blocks including 52 offshore fields, has made 28 discoveries in the past two years, of which, 14 were made in FY08 itself.

Further, its 100 per cent subsidiary, ONGC Videsh has stakes in 26 blocks across 15 countries and is expected to be the key growth driver with its share in ONGC's consolidated revenues and profits expected to rise to 20 per cent (14 per cent now) and 14 per cent (9 per cent now), respectively.

ONGC's substantial interests in MRPL, Petronet LNG [Get Quote], GAIL and Indian Oil Corporation [Get Quote] are the topping. Moreover, the IPO of Oil India in the next few months could provide further triggers.

What also makes ONGC attractive is that it is the cheapest among its Asian peers trading at 10.1 times estimated FY09 earnings and enterprise value per barrel oil equivalent of about 7.5 times for FY09.

Going ahead, exploration successes especially in the KG basin and favourable announcement on various issues like sharing of subsidy burden, cess and deregulation in gas prices will be big positives.

Patel Engineering [Get Quote]
Patel Engineering, which is having an order book of Rs 5,400 crore (Rs 54 billion) almost 4.8 times its FY07 revenues, would be the key beneficiary of the boom in the construction, power and real estate sectors.

Within power sector, the 11th Five Year Plan has an outlay of Rs 70,000 crore (Rs 700 billion), adding another 18,000 mw in hydropower generation. Patel Engineering has 22 per cent market share in the domestic hydropower construction, which accounts for 60 per cent of its current order book.

Also, the company has pre-qualified for new projects worth over Rs 6,000 crore (Rs 60 billion) as on September 30, 2007.

Besides, its entry into own power generation setting up of 1,200 mw thermal power plant at an investment of Rs 5,000 crore (Rs 50 billion) are positive triggers. Meanwhile, its core businesses including construction of dams, transportation and micro-tunneling are growing at a faster pace thus providing sustainable earnings growth.

The immediate trigger would come from its real estate business. Patel Engineering has transferred a land bank of about 1,000 acres spread across Bangalore, Chennai, Hyderabad and Mumbai to Patel Realty India, a 100 per cent subsidiary.

According to estimates, the real estate business is valued between Rs 500-520 per share. All of these make Patel Engineering an attractive investment.

Reliance Communications
Reliance Communications (RCOM) has a mobile telephony market share of 18 per cent and subscriber base of 38 million, which is rising by a million every month. And this should continue to rise as RCOM penetrates into smaller towns.

What's more interesting is that despite concerns over declining, operating margins have improved to 42.2 per cent in Q2 FY08, thanks to the benefits of larger scale.

This is expected to improve further if RCOM gets the go-ahead to operate an additional 15 GSM circles as 65 per cent of passive infrastructure such as telecom towers, is common to both GSM and CDMA technologies and the investments in its existing networks will be incremental.
Additionally, it is the value unlocking in its subsidiaries that are likely to provide further triggers.

In 2008, RCOM is likely to announce a stake sale and subsequently list its tower subsidiary, Reliance Telecom Infrastructure, list its submarine cable subsidiary, FLAG Telecom, hive off of its SEZ and BPO businesses and the launch IPTV and DTH services by the first quarter of 2008.

Analysts estimate that a conservative sum-of-parts valuation based on FY09 numbers for RCOM comes to Rs 850-Rs 900 per share, which indicates an appreciation of 17-24 per cent from current levels.

Reliance Industries [Get Quote]
In 2008, Reliance Industries' (RIL) exploration and production (E&P) division, which accounts for 50 per cent of its sum-of-parts valuation, will start selling gas from the KG Basin. The only ambiguous aspect here seems to be the pricing of gas and settlement with the ADA group and NTPC.

Within a few months, Reliance Petroleum [Get Quote] will also start operations, all of which should lead to a jump in RIL's profits.

Also, the bids for NELP VII will be awarded by July 2008. While further wins will add to reserves, new discoveries at existing reserves should further add to valuations and the possible de-merger of RIL's E&P division would unlock value.

While the company is yet to prove its mettle in its retail and SEZ initiatives, given its track record managing mammoth projects, one can hope to see positive results here as well.
Notably, analysts maintain their bullish outlook on the core businesses. Refining margins for RIL, already the best among global players, should remain firm until FY11, while petrochemical margins are expected to be stable with good growth in volumes. At a P/E of under 12 times FY09 estimated core earnings, RIL is a worthy investment.

State Bank of India [Get Quote]
SBI's move to merge State Bank of [Get Quote] Saurashtra with itself has the potential to trigger the re-rating of public sector banking stocks by pushing the much needed consolidation process.

To further expedite consolidation, the boards of SBI and its other six associate banks are meeting in January to consider merger. Should that happen, SBI's standalone balance sheet size will grow 1.5 times to Rs 8.20 lakh crore (Rs 8.20 trillion), almost double the size of ICICI Bank's.

Also, its branch network will jump 50 per cent to 14,400 branches. But, the improvement in valuations (re-rating) should get a boost when the merged entity is able to rationalise costs and extract benefits from the merger.

SBI will raise Rs 17,000 crore (Rs 170 billion) through a rights issue that should provide fuel for future growth. In a competitive Indian banking business, it is important for banks to achieve size and scale to be globally competitive.

And for investors, it is more important to find such banks at reasonable valuations. SBI meets both these criteria. SBI's stock trades at 2.2 times and 2 times its estimated consolidated book value for FY08 and FY09, respectively.

Further, SBI has investments in mutual fund and life insurance subsidiaries, which make valuations more compelling.


- BS Smart Investor Team

Sunday 30 December, 2007

Weekly Technicals

Bullish outlook on the market

The trading activity in the final hour on Friday signalled bullishness, going ahead. However, if the past is any indication, the markets tend to have one good week, only to follow it up with weakness in the subsequent week. What happens on Monday will thus be a trend setter.

The markets opened on a weak note on Friday, the first trading day of the new January series, with the bears pulling the benchmark indices close to their support levels.

The reversal came towards the close, with the Nifty moving up from the day’s low of 6,022 to close at 6,080. The late charge should continue on Monday, the last day of the calendar year.

The Nifty is expected to hit its all time high of 6,185 and the Sensex should surpass 20,500. Going ahead, the Nifty is likely to target 6,300 and 6,350 levels and the Sensex should see 21,400 and 21,600.

According to a technical analyst at Motilal Oswal, the uptrend is expected to resume from the January series. The Nifty is expected to move towards the initial target of 6,185 as the undercurrent is still strong.

On a weekly chart, the spot Nifty has already crossed the previous week’s close of 6,040 and is now at the verge of testing the all-time high of 6,185.

An increase in Call options OI was seen at 6,100, 6,200, 6,300 and 6,400 strikes, indicating that operators were buying at-the-money Calls and writing out-of-the-money Call options.

Put options added 5.96 lakh shares at the strike price of 6,000, pointing to this as the support base for the Nifty in the near future.

Among the Nifty stocks, long OI build-up was seen in stocks such as Hindustan Unilever, National Aluminium, Punjab National Bank, Ranbaxy Laboratories, Reliance Energy, Tata Power and Tata Steel. Fresh shorts were seen in Bharti Airtel, Dr Reddy’s Labs, GSK Pharmaceuticals, ICICI Bank, Infosys Technologies, ONGC and Suzlon Energy.

Saturday 29 December, 2007

How to invest your money most profitably

Understanding your objectives and your own nature is a large part of successful investing. These are two anchors in a sea of financial variables.

Before investing your first dollar, it helps to know what your time frame is. Are you investing for short-term, medium-term or long-term objectives? If you have previously invested, a glance at your transactions will reveal your tactics, though perhaps not your intentions.

Short-term speculations have a way of becoming long-term investments when the market moves the wrong way.

By definition, successful investing is a long-range endeavor. If you expect immediate results and instant gratification, you are by temperament unsuited to long-term investments.

The financial markets are but a reflection of the business world and its activities. Change in business conditions, product line and profit margins can be slow. It takes time to turn around an ailing company or to enhance the prospects of a successful one.

The perception of change can, sometimes, be agonizingly slow. Therefore, investing is a waiting game, one in which you will need more patience than money if you are to be successful.

Long-term investing can mean different things to different people, but in the financial world, long term commitments are those that made for at least five years. Middle-range investments are those between one and five years, while short-term commitments start tomorrow and last for a matter of months, a year or two years.

Many investors have great difficulty matching their investments with their objectives. There are two general goals for the investor to pursue: income and growth. These goals are conditioned by such factors as safety, diversification and speculation.

While investors' objectives fall into these two categories, not only are there dozens of investment vehicles -- common stock, preferred stock, bonds, debentures, pass-through certificates, warrants, futures, and so forth -- but thousands of companies, municipalities, governments and alternative issuers of negotiable and tradable securities. In brief, investment objectives are few, but the investment world is enormous.

How does one match the investment with one's objective? For the moment, it is important to understand what is meant by income and growth. Then it is appropriate to review how the characteristics of safety, diversification and speculation affect the selection of where to invest.

Investing for Income

Income is the yield (or return) from invested funds. In the case of common or preferred stock, income is derived from the dividend.

Dividends are that portion of net earnings a company passes on to its shareholders. Corporations usually pay dividends quarterly (four times a year) to stockholders of record as of a specific date.

Income from bonds is called interest, a kind of rent payment for the use of the money you lend. If bonds are registered, payment will come in the mail to the person whose name appears on the corporation's books. If the instruments are bearer bonds, a coupon must be presented to a bank or brokerage house in order to receive payment.

To make meaningful comparisons, you need to know the current yield rather than just the fixed interest rate. The other type of yield that concerns investors is yield to maturity.

Thus the yield to maturity will include the additional $50 that was the difference between the purchase price ($950) and the redeeming or par value ($1,000). The yield to maturity in this case is 8.6 per cent if the 8 per cent bond had 15 years to maturity.

An investor should ask either the bank or the brokerage house to supply the yield to maturity, or he or she should consult a table of bond values. Since bonds are constantly selling at premiums or discounts, it is imperative to know the yield to maturity in order to evaluate true income.

Bond interest remains fixed throughout the life of a bond, but dividend income from stocks can go up or down. Should a company decide to increase a dividend, that action will certainly increase your income.

Indeed, many companies, especially utilities, attempt to do just that. Bond income is more stable and predictable than stock dividend income. Nevertheless, some companies pride themselves on unbroken strings of dividend income. Investors traditionally buy the common stock of utilities and telephone companies when they want interest income.

Investing for Growth

The other reason for investing -- and some would say the chief reason -- is appreciation of capital, that is, seeing your money grow. Money in the bank does not appreciate: the bank only promises to pay you (in most types of accounts) what you originally deposited plus the accumulated interest.

Fixed-income investments promise essentially the same thing: to pay back your principal upon the maturity of the debt. Whether monthly or semi-annually, the debtor periodically pays interest on the borrowed sum.

Rarely does the debtor pay back more than what was originally promised. It is possible to buy bonds at a discount from par (less than face value) and to sell them at a premium (more than face value).

The ability to do this rests largely on timing and interest rate fluctuations. Most individual bond investors do not, however, trade bonds for capital appreciation; they buy them and hold them to maturity.

Therefore, common stock tends to be the main financial asset available for capital appreciation. Stocks bought specifically for appreciation are called growth stocks.

Growth stock investors are not interested in high dividend payouts.

For the investor desiring growth, the smaller the dividend payout, the greater the amount of earnings to be reinvested in the business.

This not only causes a stockholder's equity to increase in value but also enables the company to maximize its ability to grow. For example, it can then spend more on research and development or increase its sales force.

Regular growth stocks are riskier than blue chip securities, but they are not as risky as high-growth stocks. In the US over time blue chips have had a total return -- dividends plus capital appreciation -- of 7.5 per cent a year.

In comparison, the total return for regular growth stocks has been 9 to 9.5 per cent. High growth stocks, on average, returned something on the order of 11 per cent -- virtually all of it from capital appreciation.

High growth companies tend to be in start-up ventures and new technology; and even if they have earnings, they rarely use them for dividends. A sound growth investment is one in which earnings increase in an appreciable and constant fashion. The profits of such an investment increase in all types of economic weather and into the foreseeable future.

Some economists define a growth company as one that grows by at least 10 per cent a year, while others think the figure should be closer to 20 per cent. In brief, earnings growth is a dynamic process that can be expected to translate into an increase in a stock's market value. By intelligent research, you can find growth stocks in several industries.

Excerpt from: The Basics of Investing by Gerald Krefetz

Price: Rs 190

Gerald Krefetz is a principal of Krefetz Management and Research, he runs a private money management service for individuals in Manhattan, USA and has written more than twelve books.

Don’t Forget about Past Trades


Emotions control our decisions everyday and the greatest leaders and traders learn to harness these emotions and use them to their advantage. As soon as money is involved in a transaction, whether it be the stock market, real estate, art work or antiques; emotions ultimately set the final price. Some investors have greater control over their emotions while other investors are destroyed by their emotional reactions to certain situations and events.

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One common trait many novice and advanced investors share, including me, is placing a position in a stock at the wrong time. Years ago, I would study a stock’s chart, the fundamentals, the general market health and everything else that I felt necessary before placing a position behind my beliefs. When things went wrong and I was forced to sell based on my basic stop loss, I would drop the stock from my watch lists and remove it from my memory. This was one of the biggest mistakes that I was making during my earlier years of investing. The greatest investors study their mistakes and learn why they were wrong and have no problem getting back into a stock they just sold if another signal is given. If you don’t learn from your mistakes, you will continue to repeat them and never move to the next level. It is extremely importance to stay focused and emotionally stable when things don’t work out as expected.

I was typically correct with my overall stock analysis but many times I was too early with my entry point. Months later, I would come across the same stock in my screens but it was now up 25%, 50% or more from my initial buy point and stop loss. I was frustrated for selling my stock too soon and was getting tired of using basic CANSLIM sell rules and missing big winners that I sold for an 8% loss.

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I knew money could be made on Wall Street using the law of averages to my advantage by employing strong money management skills but I had to become more consistent in my approach and grasp a better understanding of how money management truly worked. I started to practice what I was taught by selling my losers quickly and allowing my stronger stocks to ride their trends. Over time, I was experiencing more losers than winners but my stake was growing because these losers were smaller in size than the winners. The words written by my book mentors were true; Jesse Livermore, Gerald Loeb and William O’Neil were all accurate with their lessons about cutting losses quickly. However, the light bulb didn’t truly shine until I read Trade your Way to Financial Freedom by Van K. Tharp. After reading the book, I became more confident and successful by learning to develop a risk to reward ratio for each trade and by setting detailed position sizing calculations.

More importantly, I learned to keep strong stocks on my radar even if I bought too soon and was forced to sell for a loss. My timing was wrong and my ego was shot because I was wrong, so I typically decided to stay away from that specific stock because it had already taken my cash and my pride. Emotionally, I was burned by the stock even though this was not entirely true. Investing is a game of trial and error. It is okay to buy a stock at the wrong time and sell, only to buy it again because they timing may be better. If you cut the losses small and allow winners to grow, your expectancy will ALWAYS work out, I promise. You must be honest with yourself to allow the averages to work out. You cannot allow a stock to drop past your sell point and you must try to always hold the strongest stocks without selling them during a premature pullback. This all sounds so easy but it is not! If it was so easy, we would all be extremely rich and the stock market would be everyone’s full time job.

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It is mentally and emotionally difficult to purchase a stock at a higher price now then it was at an earlier date but it can be the most rewarding strategy. Never look at a chart and toss away a candidate because it has moved up 50% or even doubled in recent months, the real move may just be beginning.

The moral of this article is to make you understand that timing may be your only issue when buying stocks so never throw away a possible superstar because you bought too soon. Keep it on your watch list and be prepared to initiate another position, even if it will cost you an extra point or two. If you buy again and it doesn’t work out; repeat the process as there is always a chance that the stock was not meant to be or your analysis was faulty. In either case, learn what you are doing right and wrong so you can be prepared to use those lessons with the next opportunity.