Friday, 31 August, 2007

Weekly Newsletter

All the talk of higher interest rates slowing down the Indian economy took a backseat after the Government released the GDP data for the first quarter ended June. Apart from the minor dip in the growth rate for Mining and Manufacturing, all other engines of the Indian economy remained in healthy condition. Overall, the GDP growth in the April-June quarter was 9.3% as against 9.6% in the same quarter last year. Compared with the previous quarter's (Q4 FY07) growth rate of 9.1%, economic growth in Q1 FY08 was slightly on the higher side. The data also beat all optimistic expectations by various economists, who had been looking for a growth rate of around 9%.

At 3.8%, agriculture growth rate was better than 2.8% in the year-ago level while mining output slid, from 3.7% to 3.2%. Growth rate of the manufacturing sector declined to 11.9% in the first quarter of the current fiscal year versus 12.3% last year. Output in Electricity and Construction sectors improved, to 8.3% and 10.7%, respectively, from 5.8% and 10.5% in the first quarter last year. Other sub-segments that registered significant growth in Q1 FY08 over the previous year included Trade, Hotels, Transport & Communications (12% vs 12.4%), and finance, insurance, real estate and business services (11% vs 10.8%).

Asia's fourth-largest economy grew by 9.4% in the fiscal year ended March 2007, its fastest rate in 18 years, and the central bank expects expansion of 8.5% this fiscal year. Finance Minister P. Chidambaram said the GDP growth of 9.3% in the April-June quarter was 'satisfactory', and that the Government would ensure investment and credit flows remained strong. "Despite compulsions of a tight monetary policy, we will ensure that credit flow to the productive sectors of the economy remains strong," Chidambaram told reporters in New Delhi.

The Reserve Bank of India (RBI) expects India's economic growth to accelerate further notwithstanding the threat of inflationary pressure and external shocks like the recent sub-prime crisis in the US. Though the central bank cautioned that the turmoil in the global credit markets could cause further outflow of capital from India, it remains hopeful that the Indian economy will remain resilient to global shocks. In its 2006-07 annual report, the RBI has asked commercial banks, financial institutions and corporates to be vigilant and well-prepared with appropriate risk mitigation strategies to deal with significantly higher volatility than before.

"Steady increases in the rate of gross domestic saving and investment, consumption demand, addition of new capacity as well as more intensive and efficient utilisation/capitalisation of existing capacity are expected to provide support to growth during 2007-08," the RBI said. The central bank's GDP growth estimate for FY08 stands at 8.5%. "There is growing evidence that the economy is on the threshold of a step-up in the growth trajectory, provided the vigil on price stability, including financial stability is intensified in a convincing manner," the RBI said.

But, the turmoil caused by the subprime mortgages in the US remains one of the biggest underlying concerns for the RBI. "Further deterioration in subprime delinquencies could lead to reassessment of risk by investors across products and markets and retrenchment of capital from the emerging market economies (EMEs), given the contagion and herd mentality," the RBI said. A higher volatility could also emanate from the behaviour of private equity funds, according to the central bank. Any further monetary tightening in major economies has the potential to accentuate volatility in global markets, feels the RBI.

Bulls finally found a week to rejoice. Value buying in index heavyweights like RIL, Tata Steel, Hindalco, BHEL and L&T enabled the Sensex post its longest winning streak this year. Also, lower inflation and impressive GDP growth figures spurred the sentiment, lifting the benchmark BSE Sensex higher by 6.2% or 894 points to close the week at 15319. The NSE Nifty ended higher by 6.5% or 274 points to close at 4464.

The current rally in the market was supported by gains in Metals, Banking, IT, Auto and Oil & Gas stocks. Interestingly, the activity was also seen in the mid-cap counters. On the political front, sentiment improved after the ruling coalition agreed to set up a panel for examining the implications of the Indo-US nuclear deal, putting to rest, the concerns of Communist parties pulling away from the Centre.

Bulls had more reason to cheer with India's economy growing at 9.3% in the three months to June 30 from a year earlier. Also, inflation declined to 3.94% in the week ended August 18, from 4.1% in the previous week, as prices of some manufactured products fell. It was the first time annual inflation fell below 4% since the end of April 2006.

Firm metal prices on LME and strong demand from the domestic as well as overseas market boosted the metal stocks with Tata Steel, leading from the front. Tata Steel was the star performer over the week, advancing by 18% to Rs689 after Corus Group Plc's consolidated operations for the June quarter almost tripled. Operating profit climbed to Rs49.04bn. Revenue surged more than five-fold to Rs311.55bn. SAIL surged by over 15% to Rs168 and JSW Steel jumped by over 12% to Rs643.

Value buying emerged across the auto stocks on expectations that revenue will increase in the coming quarter after inflation fell below 4%. Expectations are that interest rates won't rise further. Hindustan Motors skyrocketed by over 29%, M&M raced ahead by 10% to Rs708, Maruti rose nearly by 10% to Rs867, Tata Motors surged nearly by 7% to Rs701 and Ashok Leyland added 8.5% to Rs38.

IT stocks staged smart recovery during the week. The rupee appears to have stabilized against the US$ around the $41 mark. Wipro surged nearly 6% to Rs482, TCS rose over 4.5% to Rs1065, Satyam gained 2.5% to Rs447 and Infosys added 1.7% to Rs1885. Financial Technologies was the star performer, advancing by over 20% to Rs2463.

Fertilizer stocks hogged the limelight during the week on expectations of sops & subsidy. Nagarjuna Fertilizer was the top gainer, rallying by over 21% to Rs40.3, Chambal Fertilizer surged by over 7% to Rs49.8 and Deepak Fertilizer rose over 4% to Rs105.

Banking stocks also gained momentum on hopes that interest rates wont be increased given the lower inflation rates. Axis Bank surged by over 11% to Rs635 as the scrip witnessed strong fund buying. Heavyweights also recorded smart gains. SBI rose over 9% to Rs1600, HDFC Bank was up by 6.7% to Rs1171 and ICICI Bank added .5% to Rs888.

Reliance Industries, India’s most valuable company and world’s third biggest refinery was among the leading gainers in the 30-share Sensex index. The scrip rose over 10% hitting 52-week high of Rs1970 finally closing at Rs1959.

Global cues to drive local mood

Friday's impressive and unexpected rally has left the bears wondering what struck them. The markets surged higher defying all negative cues and overcoming the volatility of F&O expiry. Could it be a one-week wonder or signs of things to come? In the absence of any major triggers, we expect some consolidation in the market before a further upmove kicks in. A lot will depend on the speech by Fed chief Ben Bernanke on housing and monetary policy. President Bush is also set to unveil a slew of steps aimed at addressing the problems facing the American housing sector. As always, global cues will again provide the much needed direction to the bulls. Action is likely to be stock specific with mid-cap stocks appearing to have got back into action. However, one needs to adopt a cautious approach. Stocks like IFCI and Escorts are expected to witness action in the coming week. Ranbaxy is another counter which can be considered for the medium to long term.

Tackling a rising home loan EMI with ease

The usually smiling Ravi Raman wasn't his usual self a few days ago. He was seen walking restlessly across his office. The IT company for which he was working informed him that his salary would be credited a little late into his account.

Mr Raman was worried since it meant his home loan cheque could probably bounce. In the past few years, the Ramans have been facing the arduous task of trying to eke out a living, thanks to rising EMIs (Equated monthly Installments).

This wasn't the case two years ago when he took the loan. Coping with higher EMIs for many is something but a bitter truth that one has to live with. ET takes you through smart measures to befriend higher EMIs.

Managing rising EMIs
There are two ways to cope with increasing home loan EMIs. One way could be to lower your consumption needs. Then you could cough up some funds to prepay the home loan. Explains certified financial planner and wealth advisor Gaurav Mashruwala,

"You have two variants in the expenses category, mandatory and voluntary. You have to spend on food but you can cut down on eating in restaurants and entertainment. The idea is to cut down on your lifestyle. Start buying a Cambridge shirt instead of a Tommy Hilfiger. There is always scope to tone down your lifestyle and expenses to accommodate the increase in EMIs. Another way to partly prepay your loan could be to liquidate your low-yielding assets.

All you need to evaluate is how much net return does your investment fetch you. If it's lower than the interest outgo on your home loan, it makes financial sense for you to liquidate that investment to repay a part of your housing loan.

"You can look to break your bank fixed deposits or liquidate some debt-based products. Touch your equity investments only if you are in dire need," advises Mr Mashruwala. Typically, equity earns more than 16% annually (more than home loan rates of 12% pa) and historically, has been the best performing asset.

You need not liquidate all your investments. You can liquidate around 30-50% of your low-yielding investments, which will also take care that you have a balanced portfolio of investments. However, you have to evaluate this option very carefully. You cannot liquidate those investments which have the ability to beat inflation in the long run.

Higher EMI or tenure?
Whenever a bank/HFC hikes lending rate, you either see a rise in your EMI or an extension in the tenure. Industry experts recommend increasing the EMI than tweaking the tenure of the loan. Approximately, when a bank/HFC hikes the lending rate by 0.5%, the tenure of your loan is increased by almost 25 months. If you take a housing loan at the age of 30, you would have planned to repay by the time you complete 50 years of age. The idea would have been to spend a debt-free retired life.

Now, if you postpone the termination of loan at 52 years of age, that would impact your personal finances even more, especially if you retire, says Akhilesh Tilotia, financial advisor and director of PARK Financial Advisors. Secondly, a series of rate hikes could further postpone the closure of your home loan. So it's better to take the EMI hit right now than postpone the impact of rate hike. The idea is you are able to realise the hike in interest rates upfront.

Even the compounding effect has huge impact on long-tenure loans. For example, if you take a Rs 30-lakh loan for a period of 15 years at 12%, then your EMI works to a tad above Rs 36,000. Essentially, you will be paying close to Rs 65 lakhs on your house, including your interest outgo. The longer you extend the tenure of the loan, this number will increase. In other words, your interest outgo is another party's income. Why do you want to earn for a third party? Settle the loan repayment at the committed tenure.

Facts you must know

Watch your EMI
Banks say they can lend up to 48 times your monthly salary. But you should see how much can you afford by looking at the EMI as percentage of your salary. EMIs should not increase beyond 35-40% of you take home salary for a housing loan. Any other loan EMI should not go beyond 25%. Banks may recommend an EMI up to 60% of your disposable income. But you have to provide for contingencies such as a job slow down, change of job or mere liquidity needs, Mr Tilotia adds.

Don't read too much into penalty
It's not wise to save on the 2% prepayment penalty on your housing loan. You are actually spending 12-14% on the same loan as interest cost. Even if you take into account the tax benefit, you cannot discount the forthcoming rate hikes in the years to come. Always get out of your debt as soon as possible.

Your first house is a consumption asset
You will never sell that for money. If you look at your salary as a pie, your ideal break should be 30% EMIs, 30% to the government in terms of taxes, 20% for consumption needs and the balance 20% should be savings.

Govt-Left smoke peace pipe for now

For the moment, it seems that the storm over the Indo-US nuclear deal has receded. In a last ditch attempt to save the fragile coalition in New Delhi, the Government and the Left parties agreed to set up a committee to address some of the apprehensions of the Left parties over the civilian nuclear cooperation between India and the US. As part of the truce, the Government will hold no negotiations with IAEA - the first of the three steps crucial for operationalising the deal - till the panel comes out with its findings. The committee will have 14 members - eight from UPA and six from the Left - with the likelihood of External Affairs Minister Pranab Mukherjee as its convenor. The temporary settlement will enable the Left Front to back off, for some time, from their brinkmanship that had put the Government’s survival in danger

RBI expresses caution on holding company

The Reserve Bank of India (RBI) has raised some uncomfortable questions about the proposed intermediate holding companies proposed by ICICI Bank and SBI. The RBI has made a strong case against intermediate holding companies. "It will be desirable to avoid intermediate holding company structures (a structure in which a bank owns a holding company for various non-bank businesses)," the banking sector regulator said in a discussion paper on holding companies in banking groups. Any clearance for foreign investment in such a holding company by other regulators could be subject to a legal review, the RBI said. The creation of an intermediary financial holding company may lead to a problem of regulation, it added. The announcement from the RBI comes notwithstanding the clearance granted by the Finance Ministry to ICICI Bank's proposal for setting up a holding company for its insurance and mutual fund business. SBI has also proposed a similar holding company for its insurance and mutual fund businesses.

TRAI in favour of more players per circle

In a bid to shore up competition and encourage mergers and acquisitions in the telecom sector, the Telecom Regulatory Authority of India (TRAI) suggested that the limit on the number of operators in a particular circle should go. It also recommended relaxation of stringent M&A norms, technology neutrality for telecom licences, besides suggesting that both GSM and CDMA players should pay an entry fee and higher spectrum fee additional 2G radio frequency allocation. The telecom regulator suggested a one-time fee from operators for allocation of spectrum beyond 10 MHz. At present, a company pays 1% of its revenue to the Government for additional spectrum, being allocated based on subscribers. On M&As, TRAI said the combined market share of the merged entities should not exceed 40%, either in terms of subscribers or revenue against 67% now. It proposed that an operator should be allowed to acquire up to 20% equity in the target licensee company in the same circle against the present cap of 10%.

SEZs...Govt allows purchase of 30% land

The Group of Ministers (GoM) set up to frame a rehabilitation and resettlement policy for those affected by industrial projects, including SEZs, suggested that state governments be given a discretion to acquire up to 30% of the land required for such projects provided the developer has acquired the balance land. The GoM recommendation would now go to the Cabinet for its approval. "The decision is not specific to SEZs but would apply to all industrial projects," Science & Technology Minister Kapil Sibal said after the GoM meeting. Separately, the Government cleared 20 new SEZs, including two IT and IT enabled service based SEZs of Tata Consultancy Services (TCS) and Cognizant Technology. It also gave in-principle approval to seven SEZs. In April, the Empowered Group of Ministers on SEZs headed by External Affairs Minister Pranab Mukherjee had imposed a ban on compulsory acquisition of land, while fixing an upper limit of 5,000 hectares for multi-product zones.

Bajaj family feud continues

Warring Bajaj brothers - Rahul and Shishir failed to reach a settlement on the division of the group within the time allotted by the Company Law Board (CLB). The two brothers sought some more time from the principal bench of the CLB. Counsels representing Rahul and Shishir told the bench they would carry on negotiations to settle the matter. CLB Chairman S. Balasubramanian adjourned the matter to the third week of October. The Shishir-Rahul feud erupted in March 2003, with the former approaching the CLB alleging there was a move by the Rahul camp to oust him from the chairmanship of Bajaj Sevashram, a key holding company of the Bajaj group. The battle intensified this year when the Shishir camp moved the CLB for a stay on the induction of Rahul Bajaj's son Sanjiv and cousin Neeraj in the boards of Bajaj Sevashram and Jamnalal Sons. Admitting the application by the Shishir faction, the principal bench of the CLB stayed all board meetings of the two holding companies Bajaj Sevashram and Jamnalal Sons.

Firstsource acquires MedAssist

Firstsource Solutions acquired MedAssist Holding, a leading provider of revenue cycle management in the healthcare industry in the US, for US$330mn. There would be no change in the management of MedAssist and all 1,400 employees would continue in their current jobs. MedAssist provides Eligibility Services, Receivables Management Services and Post-default Collections services for healthcare providers. The company has over 1,000 clients, including hospitals, large physician groups and alternate site providers. MedAssist's revenue for year ended December 31, 2006 was US$99mn. Firstsource's US subsidiary will raise US$275mn through debt for the deal while the balance will be funded through internal accruals, Managing Director and CEO, Ananda Mukerji said.

Puravankara Projects falls below issue price

Shares of Bangalore-based real estate major Puravankara Projects slipped below the issue price amid uncertainty about the growth prospects of the housing industry. The stock listed on the Bombay Stock Exchange (BSE) at Rs399, on Aug. 30, as against the issue price of Rs400. Soon it hit a low of Rs357 before ending the maiden trading day at Rs361. It gained about 3.9% on the next day to close the week at Rs375. Puravankara raised Rs8.6bn from its 21.5-million-share public offer, to part-fund land acquisition and to repay debt. The company had entered capital market with an IPO of 21,467,610 shares of Rs5 each in a price band of Rs400-450. The issue was subscribed 1.91 times despite the company cutting the price band, from 450-500 and extending the duration of the IPO.

Power Grid Corp IPO opens on Sept. 10

ndia’s principal power transmission company and Mini-Ratna Category- I public sector undertaking, Power Grid Corporation of India Limited ("the Company") is entering the capital markets with an Initial Public Offering (IPO) of 573,932,895 equity shares of Rs 10 each ("Equity Shares") for cash (the "Issue") at a price to be decided through a 100% book building process. The issue comprises a fresh issue of up to 382,621,930 equity shares by the Company and an Offer for sale of up to 191,310,965 equity shares by The President Of India acting through The Ministry Of Power, Government of India. The issue comprises a net issue to the public of up to 559,954,895 equity shares and a reservation of up to 13,978,000 equity shares for subscription by employees of the Company. The Issue shall constitute approximately 13.64% of the fully diluted post- issue capital of the Company. After the Issue, the Government of India, through the Ministry of Power will continue to hold 86.36% of the diluted post-Issue paid-up equity capital of the Company.

Nicholas Piramal to spin off R&D unit

Nicholas Piramal India Ltd. announced that its Board had approved the proposal to de-merge its New Chemical Entity (NCE) Research Unit into a separate company. The NCE pipeline has expanded from 5 compounds in 2002 to 13 compounds in 2007. Out of this, 4 are in clinical trials. Nicholas Piramal expects to have 8 compounds in clinical trials by end of the current financial year. It wishes to complete development upto proof-of-concept (end of Phase II) for all its compounds and bring to market certain niche ones on its own. Nicholas Piramal will hold equity capital of Rs45.5mn in the new NCE Research Unit. This move will facilitate induction of strategic or financial investors in future who may wish to invest directly in the NCE research program. The new company will issue fully paid up equity shares aggregating to Rs209mn to the shareholders of Nicholas Piramal in the ratio of 1:10. Post de-merger, Nicholas Piramal will hold 18% equity capital of the new company and the remaining 82% will be held by the shareholders of Nicholas Piramal. The new company will be listed on the BSE and NSE in the future.

Parsvnath Developers to foray into telecom

Real estate major Parsvnath Developers plans to launch mobile services in the country. The company has expressed the intention to apply for licences in 22 out of 23 telecom circles in the country. It has identified two partners - one domestic investor and other a well known global telecom giant. Though the company has not yet declared any funding structure, it is likely to hold a minority stake of 26% in the proposed joint venture while the foreign players will hold around 51 per cent and the balance will be with the financial investors. "Despite increasing number of subscribers, the penetration of mobile telephony in India is still very low," Chairman Pradeep Jain told reporters in New Delhi. Parsvnath will set up a special purpose vehicle, a company that's being created for the proposed diversification

Bush bailout for subprime mess
After the central banks, it's now the turn of the US Government to come to the rescue of the crumbling housing sector. President George W. Bush, in his first response to the subprime mortgage crisis, plans to announce several steps aimed at helping Americans with credit difficulties to meet the rising cost of their housing loans, administration officials said. According to published reports, Bush will let the Federal Housing Administration (FHA), which insures mortgages for low- and middle-income borrowers, guarantee loans for delinquent borrowers, allowing them to avoid foreclosure and refinance at more favorable rates. FHA mortgage insurance program will be changed to allow more people to refinance with FHA insurance if they fall behind on adjustable-rate mortgages. The change would affect borrowers who are at least 90 days behind in payments and let them stay in their homes. Stocks in Europe and Asia rose, led by mining companies and exporters, before Bush's announcement. The yen fell against all of the world's 16 most-active currencies.
US economy picks up pace in Q2

The US economy grew at a much faster pace in the second quarter than previously estimated, but tepid consumer spending, slowing housing activity and credit-market turmoil suggested that growth will slow significantly into next year. America's Gross Domestic Product (GDP) expanded at a 4% annual rate in the second quarter, the Commerce Department said. That was up from a previous estimate of 3.4%, largely because exports and business investment during the period were stronger than previously thought. The GDP revised number was in line with Wall Street forecasts and far outstripped the first quarter's anemic 0.6% rate of expansion.

US consumer confidence dives

Consumer confidence in the US fell more sharply in August than in any month since the aftermath of Hurricane Katrina two years ago, according to the Conference Board. The GfK index of German consumer confidence also dropped, for the first time in six months. House prices in America fell by 3.2% in the year to the second quarter, according to the S&P/Case-Shiller national home-price index. It was the largest decrease in the period covered by the index, which runs back to 1987. On a month-by-month basis, in June metropolitan areas in California and the south-west continued to see some of the steepest declines in property prices. The housing market in the Pacific north-west, however, remained buoyant.

Home Depot sells unit at steep discount

Home Depot Inc. said it had closed the sale of HD Supply to three private-equity firms for about US$8.5bn, nearly US$2bn below the original offer for the unit. In June, Home Depot announced that it had agreed to sell its supply business to Bain Capital, Carlyle Group and Clayton Dubilier & Rice for US$10.3bn. Under the revised terms announced earlier this week, Atlanta-based Home Depot will pay US$325mn for a 12.5% equity interest in HD Supply and guarantee a US$1bn senior secured loan of HD Supply. The sale was one of the first big buyouts to be renegotiated because of the recent tightening of credit and problems in the housing market. Because the deal relies heavily on debt, investors and bankers have been watching closely for signs of how new stringent standards on credit could affect other large buyouts, collectively worth nearly US $400bn, that are pending.

Taiwan's Acer to buy Gateway for US $710mn

Taiwan PC maker Acer Inc., the world's fourth-largest computer supplier, said it would acquire Gateway Inc., the fourth-largest PC company in the US, for US$710mn. Acer will pay US$1.90 a share for Irvine, California-based Gateway. The price represents a 57% premium over Gateway's closing price of US$1.21 on Aug. 24. The deal has been unanimously approved by both Boards of Directors and should create pretax synergies of at least US$150mn. Separately, Gateway announced it intends to exercise its right of first refusal to acquire all of the shares of PB Holding, the parent company of European PC vendor Packard Bell BV. Gateway is also currently in discussions with a third party over the potential sale of its US-based professional business.