13 March 2011

Macquarie Research, Global Property Insight- Developed regions favoured

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Global Property Insight
Developed regions favoured


⇒ Global real estate in line in February
In an equity market driven by inflation concerns and where the more positive
“delta” of growth in developed markets led to weakness in developing markets
global property managed to keep pace, with the UK being the star performer,
and Hong Kong bringing up the rear.

Adani Power — Factor-in Coal price & MAT hit :BofA Merrill Lynch

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Adani Power — Factor-in Coal price & MAT hit
Price Objective Change
Cut EPS & PO on 18.8% coal price hike and MAT; Maintain Buy
We cut our FY12-13E consolidated EPS of Adani Power (APL) by 16-24% to
factor in 18.8% coal price hike on MCL linkages and the proposed Minimum
Alternate tax (MAT) @ 20% on SEZs in the Budget, which impacts APL’s Mundra
plant. An 18.8% price hike by Mahanadi coalfields (MCL), to align its price with
SECL, shall impact APL’s ~8mtpa of F grade coal linkage from MCL. Cut PO to
Rs140 (153) to factor in EPS cut. Buy on (1) a 4.7x scale-up in capacity by
FY14E via an unregulated business model (no cap on RoE) and (2) visibility of
3.7x EPS over FY11-13E led by 77% power pre-sold at remunerative tariff,
secured fuel/funding, location advantage & business model - front-loaded
merchant power with assured shift to PPAs from FY13E (see Chart 8).

JP Morgan- Automobile Sales Feb-11 - Unit sales growth (+22% yoy) aided by prebuying

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'Milestones' - India Automobile
Sales Tracker
Feb-11 - Unit sales growth (+22% yoy) aided by prebuying


• Sales trend over the month: Passenger car sales grew +20.8% yoy vs.
24.3% YTD; commercial vehicle sales were up +13% vs. 32% YTD
and two-wheeler sales were up 22.9% vs.27.7% YTD. While unit sales
growth was partially aided by pre-buying ahead of the budget (in
anticipation of an excise duty hike), the growth momentum appears to
be moderating given a demanding base effect.

ITC – Hybrid tax structure remains a concern:: RBS

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Rajasthan's move to raise VAT on cigarettes from 20% to 40% will not have a material impact on
ITC as it accounts for just 2% of its sales. The impact would be more adverse for ITC's
competitors, but we are worried about the hybrid structure where excise duty is linked to volumes
sold, and VAT levy to price.

Shriram City Union Fin - takeaways from management meeting :Macquarie Research

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India Banks
Shriram City Union Fin - takeaways from management meeting
Event
􀂃 We met with management of Shriram City Union Finance (SCUF IN, Rs500,
Not rated) to get an update on the company.

Negative bias in Tata Steel, Bank of India :Business Line

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Tata Steel (Rs 583.9): The outlook turned bearish for Tata Steel, after last week's fall.
The stock finds crucial resistance at Rs 644 and as long it rules below that level, the outlook remains negative. One more conclusive close below the crucial support level of Rs 585 could drag the stock towards Rs 535 and even to Rs 480.
F&O pointers: The Tata Steel futures added fresh short position on Friday. Option trading also indicates a negative bias as calls witnessed heavy accumulation of open interest. On the other hand, puts also witnessed unwinding of open interest.
Strategy: Traders could consider going short on Tata Steel futures (market lot is 500) keeping the stop-loss at Rs 600 for an initial target of Rs 535.
If the stock opens on negative note, shift the stop-loss to Rs 585.
Traders could also consider buying 580 put, which closed on Friday at Rs 17.
Trades with a penchant of risk appetite can also consider selling Tata Steel 600 call that closed on Friday at Rs 12. While the maximum profit in this strategy is the premium collected, the loss could be unlimited if Tata Steel stock moves up. Besides, this strategy requires higher margin commitments.
Bank of India (Rs 457): The stock has been moving in a range of Rs 395-495 in the last four months.
A break from this range could set a clear trend for Bank of India. We expect the stock to pursue in the negative direction in the short-term. Bank of India finds an immediate resistance Rs 469 and support at Rs 417.
A dip below Rs 417 has the potential to weaken the stock towards Rs 382 and even to Rs 339. Only a close above Rs 513 would change the outlook positive for Bank of India.
F&O pointers: The Bank of India March futures (market lot is 500) closed Rs 457 on Friday and witnessed a marginal accumulation of open interest positions. Options are not active to discern any view.
Strategy: Traders can consider going short on Bank of India with a stop-loss at Rs 469 for an initial target of Rs 382.
Follow-up: Last week, we had advised three strategies on IFCI – Short on IFCI futures; short straddle using 50-strike; and writing 55 call. While the first strategy could have triggered the stop-loss, the other two are ruling at-the-money.
Traders can continue to hold on to the strategies. We had also recommended short on Voltas and it moved on expected lines. Traders can hold it with revised stop-loss at Rs 154.

India Strategy : Looking for Dividends? Morgan Stanley Research,

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India Strategy
Chart Focus: Looking for
Dividends?
Key Debate: India companies are buying back more
stock than before. Will they also pay more dividends?
Market dividend payout unlikely to rise: Indian
companies’ payout ratio appears to track capex cycles.
Historically, Indian companies have raised payouts in
low capex periods. Thus, the two big periods of declining
payout ratio (mid-90s and 2006-08) coincided with big
corporate capex cycles. Normally, Indian companies
tend to conserve cash and sparingly use buybacks to
signal their view on share price (as they are doing right
now) rather than raise dividends. MS analysts forecast
that the payout ratio for the Sensex companies on an
aggregate will fall in the coming 12 months consistent
with a slightly better investment cycle.
India’s dividend yield has improved due to a cyclical rise
in payout ratios and the recent fall in share prices. This is
not too different from where India’s P/B or P/E is – the
absolute level is close to or below long-term averages
whereas the relative number is still slightly above.
For investors who may be worried about growth and
hence stock markets, dividends may be a good way to
protect returns. We have filtered our coverage universe
for stocks that have current dividend yield in excess of
the market level (1.5%), a rising payout ratio in F2012
and double digit profit growth (based on MS forecasts).
Interestingly, all the stocks filtered using these criteria
are rated “Overweight” by MS analysts.
Conclusion: Whilst it appears that the market payout
may not rise and companies will continue to hoard cash
if they do not invest, there are certainly some interesting
bottom-up dividend ideas for investors to trade.

Zee: GRP data comforts GEC story:: Macquarie Research

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India Media
Zee: GRP data comforts GEC story
Event
 We analyse the trends in weekly viewership (GRP) for Hindi general
entertainment channels (GECs) and regional GECs for the week-ended 5 March.
For detailed channel GRPs and viewership share across genres, please see Fig
1–4. We like Zee for the secular growth but the stock return in the near term might
be subdued because of a lack of momentum in subscription revenues and cost
pressure from the sports segment. Dish TV is our preferred pick in the space.

JP Morgan: Analyzing the government's borrowing program

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India Equity Strategy
Color of Money: Analyzing the government's borrowing program


• Special focus: The Street has been sceptical about the government’s
aggressive fiscal consolidation target for FY12 and the budgeted
borrowing program. The government’s track record on this count has,
however, been creditable. In six of the past 10 years, the borrowing
program has been contained at less than budgeted levels. There was a
substanial overshoot on only one occasion – in FY09, during the
global financial crisis. Separately, the borrowing program is typically
front-loaded, early in the fiscal year, implying that any issues will
come to the fore only later in the year.

UBS ::United Phosphorus to acquire 50% in Sipcam Isagro Brazil

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UBS Investment Research
United Phosphorus Limited
UPL to acquire 50% in Sipcam Isagro Brazil
􀂄 UPL to acquire 50% stake in SIB; price, as per media reports, seems high
United Phosphorus (UPL) is to acquire a 50% stake in Sipcam Isagro Brazil (SIB)
from Isagro SpA. SIB is a 50-50 JV between Sipcam-Oxon Group and Isagro. UPL
expects the acquisition to close in a month. Media reports peg it at US$600m. UPL
has not provided any details. However, Isagro’s January 2011 presentation
estimated cash effect of €35m from SIB and Isagro Italia, and debt deconsolidation
of €54m. Hence, implied EV of both is €90m. We estimate the acquisition size at
EV/sales of 1.5-2.0x.

Pivotals: Reliance Industries,State Bank of India, Tata Steel, Infosys :Business Line

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Reliance Industries (Rs 991.6)
Though the stock rose one per cent with good volumes for the week, it is still consolidating sideways in the range between Rs 955 and Rs 1,010. Short-term traders should initiate fresh long position only if the stock breaches its immediate ceiling at Rs 1,010 with a stiff stop-loss.
Targets are in the Rs 1,040-1,050 band. Subsequent key resistance for RIL is at Rs 1,080. Inability to move above Rs 1,010 will prolong the sideways movement in the ensuing week. A dive below Rs 955 can drag the stock down to Rs 935 and then to Rs 900. Medium-term trend for the stock remains sideways between Rs 880 and Rs 1,160.
State Bank of India (Rs 2,571.5)
The stock started the week on a negative note by slipping 2.8 per cent on Monday. This bearish trend continued over the week and the stock tumbled almost 5 per cent, breaching its 21 and 50-day moving averages. Traders can initiate fresh short position with tight stoploss at Rs 2,618. .
Downward targets for the stock are at Rs 2,530 and Rs 2,500. Important resistances for the upcoming week are pegged at Rs 2,680 and Rs 2,755. Next key resistance is at Rs 2,850.
SBI has been on a medium-term downtrend from the November 2010 peak of Rs 3,515 levels. We reiterate that an emphatic dive below the stock’s significant support level of Rs 2,500 will reinforce its downtrend and pull the stock lower to Rs 2,200 or to Rs 1,900 in the mediumterm.
Tata Steel (Rs 582)
Tata Steel plunged 5.7 per cent for the week with good volumes. However, the stock is currently testing its lower boundary (Rs 590) and its 200-day moving average around Rs 586. A close below Rs 590 in two more trading sessions will imply decisive penetration of the support level and the stock can decline further to Rs 550 and then to Rs 520 in the forthcoming weeks.
Short-term traders should tread with caution and initiate fresh short position with tight stop-loss only if the stock fails to surpass Rs 590.
Key resistances are at Rs 605, Rs 620 and Rs 640.
Medium-term trend has changed and the stock has been in a downtrend from its January peak of Rs 714. Only a strong move above Rs 660 will mitigate this trend.
Infosys Technologies (Rs 3,054.4)
The stock was volatile during last week and lost Rs 8. It is slipping towards its key support level of Rs 3,000 once again; its 200-day moving average is also positioned around this level. Traders can initiate fresh long position with strict stop-loss only if the stock bounces up from its immediate support range between Rs 3,000 and Rs 3,025. Upward targets are Rs 3,114 and Rs 3,160. Key resistance for the stock is at Rs 3,200. Nevertheless, a slump below Rs 3,000 will strengthen the downtrend which is in place since its January peak of Rs 3,493 . The stock can decline to Rs 2,950 and then to Rs 2,800 in the week ahead in this case

IDFC: Roadshow feedback: CLSA

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Roadshow feedback
We hosted Mr. Rajiv Lall (MD and CEO of IDFC) for a roadshow in London.
He foresees a risk of slowdown to the near-term investment cycle due to
unstable political situation, rise in commodity prices and interest rates.
While IDFC can not be fully isolated from macro trends, he is confident of
achieving 30-40% annualised asset growth over 3-4 years supported by
its pipeline of sanctions and underlying demand for infrastructure. He is
also confident of asset quality trends and highlighted negligible exposure
to risky segments and high NPL coverage. Spreads are likely to be stable
and ROE will improve as balance sheet is leveraged.

Steel Authority of India – Rocky road ::RBS

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With imported hard coking coal prices spiking and Coal India raising prices c30%, we expect
SAIL to continue to face cost pressure. IISCO should add 2mt to FY13 volumes, but
remaining expansion is unlikely to raise volumes till FY14. We revisit our model assumptions
and cut FY12/13F EBITDA 18%/21%. Hold

UTI Dividend Yield Fund: Invest :Business Line

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Investors can buy units of UTI Dividend Yield Fund (UTI Dividend), given its long-term track record of delivering steady returns. Over one-, three- and five-year time frames, the fund has managed to outpace its benchmark – BSE 100.
The compounded annual return generated by the fund over five years , at 16.5 per cent, places it among the top-quartile of diversified equity funds. This is also higher than peers such as Birla Sun Life Dividend Yield Plus and Principal Dividend Yield in the short term.
UTI Dividend predominantly takes exposure to large-cap stocks, while also taking relatively higher dividend yielding stocks from the mid-cap pack.
The fund contains downsides well during market falls and manages to deliver as much as its benchmark when markets race ahead. It is, therefore, more suitable for conservative investors.
The fund would be an ideal choice during periods marked by high volatility such as the present one, when even blue-chip stocks witness steep declines.
Investors can consider accumulating units through SIPs to average costs.
Performance and strategy: During periods when markets correct significantly, the fund manages to contain downsides much better than its benchmark. During early 2007, in the protracted correction of 2008-09 and even in the recent fall over the last few months, UTI Dividend Yield managed to contain erosion in its NAV to the tune of 2-14 percentage points better than the BSE-100.
When markets are on an upswing, such as those witnessed in late 2007 and in the rally that started from March 2009, the fund managed to match the returns of its benchmark.
The fund moved into deposits and cash to the tune of nearly 30 per cent of its portfolio during the heavy market fall of 2008-09, which mitigated the erosion in its NAV.
Even during periods of upswings in the markets, the fund remains invested in equity only to the tune of about 90-92 per cent, suggesting a conservative approach.
Banks and software have always figured among the top sectors held by the fund. In late 2009 and early 2010, the fund had significant exposure to automobile and consumer non-durable sectors, which helped it gain from the substantial rallies that these sectors witnessed.
Cement, oil and gas and fertilisers — sectors that typically have stocks that offer high dividend yields — besides mid-cap stocks in these sectors figure in the portfolio. With about 50 stocks in its portfolio, UTI Dividend Yield provides ample diversification

UBS :: India Real Estate0 Fundamentals aren’t bad as stocks suggest

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UBS Investment Research
India Real Estate
Fundamentals aren’t bad as stocks suggest
􀂄 Physical property market much better than past crisis
1) Resi pre-sales vols across 7-key cities Q3CY10 were healthy at 94msf up 2x vs.
past crisis, 2) Commercial staged a strong recovery with 8.1msf leased compared
to 3.2msf leased in crisis period; 3) Resi inventory are also well below crisis levels
of 380msf; which ensures better markets and 4) Though Q3FY11 was below
expectations, the sector performed better than similar qtr in the crisis period

Index Outlook: Shackled in a trading range :Business Line

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Sensex (18,174.1)
It was an apocalyptic scene that unfolded before our eyes on Friday as live cameras caught the wall of sea water moving in to Japan, wreaking devastation, the economic impact of which is yet to unfold. But investors' confidence in Japan to rebuild itself is aptly reflected in the modest 1.7 per cent decline in Nikkei on Friday. Other global markets too took the catastrophe in their stride with Dow Jones and S&P 500 ending the day in the green.
The week started on an edgy note for the equity markets due to the shenanigans of our ruling party and its allies. Robust exports and slowing food inflation lent some cheer to an otherwise sombre mood weighed down by high crude oil prices and continuing violence in Libya. The WPI number due in the early part of the week and the RBI's monetary policy meeting on Thursday will influence stock price movement next week.
FIIs were seen buying in some sessions and selling in others. But they have net purchased $400 million this month. Volumes were subdued in both the cash and derivative segment as investors appeared undecided regarding the market direction in near term. Open interest at Rs 1,25,000 crore denotes that traders are still not confident enough to increase positions.
Oscillators in the weekly chart continue to move sideways in the negative zone implying that the medium-term downtrend from November peak continues to hold sway. The 50-day moving average crossing below the 200-DMA is also a signal that the current downtrend can not be wished away just yet. On the daily time-frame however, the downtrend appears to be losing momentum.
The Sensex moved sideways with a bearish bias last week. As explained in our last column, the medium-term trend in the index is down. As long as it trades below 18,750, the possibility of a decline to 17,243, 16,600 or 16,300 remain open. Strong rally above 18,750 will mitigate this negative view and take the index higher to 19,200 or 19,650.
With many of the other global indices too beginning a down-trend, it is hard to envisage a run-away rally to the previous peak in the ensuing months. But the positive for our market is that the correction in our market began much earlier than the others and the magnitude is also much larger than others.
Simple retracement of the entire up-move from March 2009 low to the November peak gives us medium term targets at 17,189, 16,758 and 16,118. In other words, we could be closer to the bottom than the rest.
Short-term trend in the Sensex is ambivalent. The index is yet to breach the key short-term support at Rs 17,952. Reversal above this zone can pull the index to 18,735 or 18,846. The presence of the 200-DMA at the second target would ensure that the index finds it a tough struggle to get past it. Subsequent target is 19,200. Breach of the 17,952 support on the other hand will pull the index down to 17,800, 17,470 and 17,295.  
Nifty (5,445.4)
The Nifty recorded the peak of 5,563 before giving up the gains to close at 5,445. The index is halting just above the key support at 5,419 and fresh short positions are recommended only on a strong move below this level. Subsequent targets for the index would be 5,335, 5,233 and 5,178.
If the index bounces from current level, it can move on to 5,600 and then to 5,670 where the 200-DMA is positioned. The strong resistance in the zone between 5,600 and 5,700 can prove to be hard to surpass just yet. But if the index manages that feat, next target is 5,716.
We stay with the view that the medium-term view stays under a cloud as long as the index trades below 5,621. Unless the index manages a strong move beyond this level, there will remain open the possibility of decline to 5,165, 4,970 and 4,891.
Retracement targets of the upmove from March 2009 low for Nifty are 5,198, 5,084 and 4,886.
Global Cues
Global equities underwent a turbulent time last week with many benchmarks recording steep declines. European indices such as the FTSE, CAC and DAX closed over 3 per cent lower extending the downtrend that is in place over the past month. The VIX spiked to 22.2 on Thursday before closing at 20 implying that investors are getting a trifle jittery.
The Dow recorded the low of 11,936 on Friday but ended the week above the 12,000 level. As explained before, a close below 11,800 is required to make the short-term view negative. The medium-term uptrend will be under threat only if the index closes below 11,258; that is the peak formed on April 2010.
Many of the agri-commodities such as cocoa, wheat, corn, bean-oil and so on recorded sharp declines last week ending a multi-week uptrend that has taken them to record highs. Gold recorded the peak of $1,444 before ending at $1,417. Short-term supports for the precious metal are at $1,396 and $1,364. If the metal holds above the first support, it will indicate a propensity to head higher in the upcoming sessions.
NYMEX Light crude futures are closed the week in the negative after attempting to get past the resistance at $105. The movement next week should help us understand if this is a serious reversal or just a mild consolidation

Macquarie Research, What’s more important; countries or sectors?

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Dynamics
Asia Quant Strategy
What’s more important; countries or sectors?
A common question we hear from investors is what is more important, countries
or sectors? We investigate this issue in the Asia ex Japan universe and show
that for the broader Asia, country effects clearly dominate sector effects.
Further, we show that sectors only become dominant when smaller regions are
isolated.

Macquarie Research, Commodities -The slow steel consolidation grind

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Commodities Comment
The slow steel consolidation grind
 We review the recent publication of the top 20 steelmakers in 2010 (by Steel
Business Briefing). The ex-China recovery is prominent; however, despite an
all-time high top-twenty producer share of 43% of output, steel continues to
lag well behind its raw material peers in terms of consolidation. The focus
remains very much on the Chinese steel industry, where we are cautiously
more optimistic on consolidation in the medium term; however this is likely in
steps rather than leaps.

Deutsche bank, HUL Hold -Namaste India Conference Highlights

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HUL Hold
Namaste India Conference Highlights


Namaste India conference highlights:
* Volume growth higher than the market volume growth, will likely continue
to be the key focus area for HUL going forward. The above average volume
growth will result from new products from existing categories and increased usage for existing products.
* For achieving above average growth, HUL would be willing to sacrifice
operating margins in the short term for long term market share gain.
* The focus would be on masstige brands which fill the gap between prestige and mass market.
* HUL will likely continue to spend on the brands and invest in creation of
new products in existing categories. The average advertisement to sales
ratio over the last 5 quarters has been 14.5% and should continue to remain
around that range.
* The company is increasingly focusing and allocating resources at the premium end of product categories relative to the lower end of the range as
the premium products have higher margins.
* Price war in laundry category continues. Despite that, the company has
been able to grow laundry revenues by 7% (double digit volume growth
with a price cut).
* The volume growth in HPC categories has been lower than some of the
newer categories.
* The management believes that at some point in time FDI in retail will be
allowed.
* Implementation of GST is still 12-18 months away. Realizing the benefits
of GST would take another 3 years.
Maintain HOLD with a target price of INR 266.

Spread investments across equity, debt and gold :Business Line

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I am 45 and my wife is 42. Both are architects who have returned to India after working abroad for six years. We are employed and our combined income is Rs 60,000 after tax. We have boys aged 13 and 9. I have aged parents who manage their monthly expenses on their own. But I give them Rs 5,000 a month.
Our monthly expenditure is Rs 45,000 inclusive car EMI (Rs 6,250) and rent (Rs 5,000). Our monthly surplus of Rs 15,000 is invested in fixed deposits. We are planning to work for 13 more years. Our assets are predominantly invested in debt. We have fixed deposits for Rs 40 lakh. We hold another Rs 40 lakh in our savings bank account and Rs 5 lakh in shares. My wife has a life insurance policy for a sum assured of Rs 5 lakh and the premium outgo is Rs 25,000. We need to pay the premium till 2017 and the policy matures in 2027 with a value of Rs 18 lakh. We have three inherited plots and the value is Rs 2 crore. In our village, I have a property (valued at Rs 15 lakh) where my parents are living. We want our children to study engineering and MBA. How much will we need to provision from our savings.
We need to spend at least Rs 3 lakh in today's value for our sons' marriage.
How much should we save for our retirement, taking into consideration our current monthly expenses?
We expect our life expectancy to be 85 years.
In our company we are not covered by health insurance; do suggest how much cover we need to have for our family of four. Do we need to take life insurance and if so what is the apt cover?
— Harish Bhatia (name changed on request)
Solutions: To achieve financial goals, it is paramount to have prudent asset allocation. If one wishes to meet all financial goals through debt investments, the capital required will be higher.
As you have inherited immovable assets, you need to balance your investments between debt, equity and gold. With your current earning and savings, most of your goals are achievable. To protect all your goals you need to take term insurance besides health insurance for any medical emergency.
Education: For your elder son's engineering, you may require Rs 8.6 lakh. As the time left for his engineering days is short, it is better to invest a lump sum from your cash position. You need to invest Rs 6.5 lakh in fixed deposits at post-tax yield of 6.5 per cent. For his MBA you may require Rs 8.5 lakh after seven years. So start investing Rs 6,200 a month for 84 months and it should earn a return of 12 per cent.
For your second son, monthly saving can help meet the requirement. To pursue engineering Rs 12 lakh is needed and you ought to save Rs 7,650 a month for the next 96 months. For our calculation, we have assumed inflation at 7 per cent. For his MBA, your requirement will be Rs 11.5 lakh in 12 years . To reach that, save Rs 3,600 for next 144 months.
These monthly savings should earn 12 per cent.
Retirement: If you live till 85, to meet inflation-adjusted current monthly expenses of Rs 40,000, at the time of retirement you should have a corpus of Rs 2.8 crore. This corpus should earn an inflation-adjusted return of one per cent.
Due to your constraints on monthly surplus, we suggest you invest lump sum of Rs 70 lakh at 10 per cent yield for 13 years to reach a sum of Rs 2.4 crore. To meet the shortfall, utilise the LIC proceeds of Rs 18 lakh and proceeds from direct equity investments.
If you do not meet the required returns, you may face a financial burden at the fag end of your life. In such a case, you can dispose any of your plots for your annual living expenses.
Insurance: To protect all your goals you need to take a term insurance for Rs 2.5 crore for which the annual premium will work out to Rs 60,000. You cannot meet the requirement with your monthly cash flows. After spending Rs 66.5 lakh for financial goals you have investable surplus of Rs 13 lakh, which you can use to repay your car loan and use surplus to meet the annual premium payments. If some money is still left, you can keep it as an emergency fund to meet parents' medical needs. For a family of four a health insurance of Rs 4 lakh will cost you Rs 11,800.
Investment strategy: Follow an asset allocation pattern of 60:30:10 in favour of equity, debt and gold. Go for direct equity exposure if you have the time and the expertise. Else, route investment through mutual funds.
Follow our mutual fund recommendations and invest in suggested large-cap, mid-cap, debt and gold funds. Investment in equity should earn a return of 15 per cent and an 8 per cent returns should be pocketed from debt and gold

Reliance Industries -Upgrade PX margin, oil & GRM; more EPS upside possible :BofA Merrill Lynch

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Reliance Industries Ltd. — Upgrade PX margin, oil & GRM; more EPS upside possible


Price Objective Change
Strong earnings growth after flat earnings for 2-year; Buy
Singapore GRM is at an 11 quarter high and polyester chain margins at an all
time high. We have raised oil price, PX margins and GRM of Reliance Industries
(RIL). FY11-FY12 EPS is now expected to rise by 29-30% YoY after flat EPS in
FY09-FY10. Growth would be stronger if prevailing strength in polyester margins
and GRM sustain. Thus there may be further EPS upgrades. Deal to sell BP Plc
30% stake in 23 blocks at US$7.2bn has addressed investor concerns in E&P.
We therefore expect RIL’s under-performance to end. We retain Buy on RIL.

Vetri Subramaniam, Head, Equity Funds, Religare Mutual Fund ‘Valuations are below long-term average' :Business Line

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When we last spoke to him in July 2010, Vetri Subramaniam, Head, Equity Funds, Religare Mutual Fund, took the unconventional stance that stock valuations had already run up too much and that mid-cap stocks were unlikely to outperform. Now that both these calls have proved correct, we caught up with him for an update on the markets and how the Religare funds are navigating them.
Excerpts from an interview:
In July, you took the view that market valuations had captured much of the upside and that there was a risk of earnings downgrades to Indian companies. Have those downgrades happened?
I think the risks to earnings of Indian companies have gone up in recent months, with high inflation and fears of further monetary tightening to curb that inflation. I don't yet see that fully reflecting in the consensus earnings estimates.
Rising commodity prices for instance, have really increased input costs for companies across-the-board. You are already seeing signs of margin pressures in the earnings of the past quarter.
Smaller and mid-sized companies and companies operating in highly competitive segments may find it difficult to pass on those increases to their consumers.
There is also the risk of an increase in interest rates. Indian companies, especially small and mid-sized ones have always been quite sensitive to higher interest costs.
The way I see it is that the change in the global scenario calls for an upgrade in the earnings estimates for the commodity companies in the index basket and a downgrade in the estimates for the users of those materials.
However, as cyclicals typically enjoy lower valuations than other sectors, the overall PE multiple of the market has trended down.
Is this correction then a good opportunity to invest, for people with a five year view?
Yes, I think so. Valuations currently are below their long term average. The Sensex is now trading at 14.3 times one year forward consensus earnings. Assuming that the consensus estimates will be cut, which we believe is likely; earnings are still likely to grow at about 15 per cent in FY12 versus consensus estimates of 19 per cent growth.
Based on this reduced estimate the market is at about 15 times one-year forward earnings which compares well to the 15-year average PE multiple of 14.5 times. From this level of valuations, investors can benefit not just from the growth in corporate earnings but also an expansion in PE multiples at some point in the future.
How will rising oil prices play out for listed Indian stocks, if sustained? Are you altering your sector weights owing to this development?
The rise in oil prices is more negative for the Indian fiscal deficit than it is for Indian corporate earnings due to the lack of pass-through. But the public sector oil marketing companies will likely do poorly even though the government will provide them with compensation.
The cost structure of the airline companies would also be negatively impacted. The pass-through of the hike to petrol and diesel prices would be incrementally negative for the auto sector. We have made slight adjustments in our sector positioning based on these views.
Religare Contra Fund has a good three year record, but has underperformed the markets in 2010. What explains the slowdown in performance?
Religare Contra is typically the kind of fund that has a “value” approach to stock selection.
After the correction in 2008, the broader markets were trading at very attractive levels, with a large number of stocks available at throwaway prices.
The initial part of any up move, after a big correction is usually led by value stocks and Religare Contra capitalised on that. However, as the rally continues, growth stocks begin to outperform, and that is when the environment becomes more challenging for value stock pickers.
Even recently, though, you will find that this fund has contained downside quite well whenever the market corrected. That will continue to be its key advantage as we head into more volatile market conditions.
The top sector choices in many of your funds include technology and financials. Can you explain why?
If you look at our sector weights relative to the benchmark, you may find us a little underweight on financials. On technology stocks, yes we would be somewhat overweight, basically on account of the improving global environment which suggests good volumes and pricing for IT companies. In some of our funds, materials have a significant overweight position as well.
The call there is that if the global environment continues to improve, metal prices would continue to rise. With many metal companies seeing huge volumes coming onstream, volumes would remain quite strong too.
What is the outlook for Religare PSU Equity Fund?
PSUs did do well for a period, but premium valuations were not the norm. Only a few PSU stocks with very low liquidity enjoyed premium valuations. At this point of time, PSUs are vulnerable to a further fall because they are dominated by rate-sensitives and oil marketing companies. However, from a valuation and growth perspective, the PSU is one portfolio we think is quite attractive.
The growth expectations for the PSU basket too are quite resilient compared to the rest of the market. PSU stocks also enjoy advantages of low leverage and fairly strong cash coffers, except for the oil companies where the subsidy related issues really reduce visibility.
Which fund would you buy from your bouquet of funds in today's market environment?
The Religare Business Leaders Fund is very well positioned because it has the kind of companies that can survive these challenges. Large companies which don't have debt issues and have a lot of pricing power. They may not suffer margin damage that smaller companies do when input costs rise.
The other fund which we would recommend at all times is the Religare Growth Fund, given its balance between large cap and mid cap companies.
If the markets were to go down sharply from here, the Religare Contra portfolio too will get much stronger. It's a good fund to contain downside.

DB Corp: Buy: Business Line

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As consumption and the inherent growth story in India gathers momentum, much of its sustainability is expected to be on account of the thrust that companies across sectors lay on increased penetration of rural, tier-two and tier-three areas.
In reaching out to such regions there is an ever expanding advertising market that is being created. For investors with a two-year horizon, DB Corp, with a strong Hindi language newspaper under its belt, appears to be a well-positioned to play on this trend.
At Rs 242, the stock trades at 15 times its likely FY12 per share earnings, which is at a slight discount to its peer Jagran Prakashan.

Karur Vysya Bank — Rights offer: Invest:Business Line

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Superior profitability ratios, robust net interest margins and strong provision coverage, pegging the non-performing ratio at low levels, make the stock attractive.
Shareholders of Karur Vysya Bank (KVB) can subscribe to its rights offer. The rights are at a steep 62 per cent discount to the current market price. KVB is a small sized private sector bank with more than half its branches located in Tamil Nadu.
At the current price of Rs 394, the stock trades at 1.6 times its estimated FY-12 book value, after adjusting for the rights issue. The price-to-earnings (FY12 earnings) multiple of the KVB stock works out to eight times.
On book value basis, the stock trades at a premium to most of the old private sector banks. However, the premium is justified, given that KVB has superior profitability ratios, robust net interest margins (NIM) and strong provision coverage, pegging the non-performing ratio at low levels.
The return on assets for the nine month ended December 2010 stood at 1.6 per cent (annualised). The provision coverage was in excess of 87 per cent as of December 2010.
Additionally, improving operating efficiency parameters of KVB are comparable to that of new-age private banks. The net interest margin of KVB was at 3.43 per cent for the nine months ended December 2010. The cost-to-income ratio during the same period was at 40 per cent as compared to 43 per cent for the nine months ended FY10.
The profit per employee of the bank improved from Rs 4.8 crore per employee in 2006-07 to Rs 5.95 crore in 2008-09 and further trended up to Rs 8 crore in 2009-10.

STRONG CAPITALISATION

The current capital raising of Rs 455 crore by way of rights issue would improve the bank's Tier-1 capital ratio to more than 13.5 per cent as against the RBI's comfort level of 8 per cent. Even before the rights issue, the Tier-1 ratio was at 10.17 per cent (December 2010). KVB's move to enhance capital through Tier-1 capital instead of Tier-II capital (debt) will help it contain interest costs.
This will shield it from the the current interest rate scenario. Going forward, we expect the bank's deposit rising to improve leverage which would enhance shareholder returns.
The current capital infusion will also support margins. During the 2008-09 fiscal, when banks saw major hardening in the interest rates due to monetary tightening and liquidity crunch, KVB saw net interest margins shrink to 2.95 per cent.
This time around, the liquidity situation is slightly better and the short-term rates are near peak.
Market experts feel that these elevated short-term rates will come off over the next couple of quarters. Karur Vysya Bank raises majority of its deposits in the shorter end of maturity therefore it may get some relief as the rates moderate.
With KVB concentrating on high-yielding small and medium enterprises segment and retail segments, margins will get further support.
One concern with old private banks, in general, and KVB, in particular, is that the cost of deposits tend to be high. However, given the maturity patterns on the assets and the liabilities are evenly matched, the risk of the rising interest rate may be mitigated to some extent.
The low-cost deposit ratio of the bank stood at 25 per cent. An expansion in branch network (360 as of December 2010) would improve the retail deposit base.

ADVANCE BOOK GROWTH

The rights issue is to support future credit growth at a higher rate. During the period between FY2007 and FY2010, the loan book grew at a compounded rate of 24 per cent. KVB clocked a 30 per cent loan book growth during the first nine months thanks to revived demand from retail and SME segments.
Without any further capital raising, post-rights capital adequacy ratio would be maintained at more than 12 per cent even as the loan book grows at 30 per cent annually over the next two years.
The credit-deposit ratio of the bank at 73 per cent, as of December 2010, is slightly lower than the aggregate scheduled commercial banks' ratio 75 per cent ratio.
As the RBI wants the deposit growth to match the credit growth, this ratio may come down for the banking system as a whole. However, KVB can maintain the ratio at the current levels given the capital infusion.
While high exposure to the booming infrastructure sector is less of a concern, exposure to the textile sector, which is not yet out of woods, continues to be a worry, especially in the current rising rate scenario. High proportion of restructured assets is another risk. However, the bank has done well in provisioning adequately. The net non-performing asset of the bank, as of December 2010, was 0.19 per cent.
The bank has an ambitious growth targets for its loan and deposit books. Focus on retail deposits, especially the low-cost deposits will help the bank reduce the volatility in the margins. KVB given its high cost of funds and low savings account and current account proportion will benefit from the possible savings rate de-regulation.

ISSUE DETAILS

For every five shares held, shareholders are entitled to two through this rights issue. The issue closes on March 17, 2010.

JP Morgan: Infosys Technologies - Manufacturing vertical is humming well on the back of distinctive positioning and revival of IT spending

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Infosys Technologies Neutral
INFY.BO, INFO IN
Manufacturing vertical is humming well on the back of
distinctive positioning and revival of IT spending


• Infosys has a strong, differentiated competitive positioning in the
manufacturing vertical. Revenue growth in this vertical has been impressive
in FY09 at 50%, above-company average in YTD FY11 at 24%, signifying
the consistency of performance. How are the dynamics in this vertical
playing out in CY11 and is Infosys likely to repeat this performance in
CY11/FY12 as well? We spoke to Mr. B.G. Srinivas who heads
Manufacturing, Product development and Europe for Infosys. Our impression
is that the advantage Infosys enjoys in this vertical is likely to sustain in
CY11. Together with BFSI and retail, manufacturing would help Infosys meet
consensus USD revenue growth expectations of near-25% in FY12.

Power - Generation : SEB Health-check 1: Tamilnadu: Losses peaked, tariff hike imminent: Goldman Sachs

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India: Utilities: Power - Generation
Equity Research
SEB Health-check 1: Tamilnadu: Losses peaked, tariff hike imminent
State electricity boards(SEB) health check; starting with Tamilnadu
We believe weak finances of state owned utilities will remain a key overhang
on the sector and reason for our cautious stance. We are meeting regulators
and various officials of state boards to assess current loss levels, underlying
reasons and corrective measures that states plan to take to improve their
finances. We started with Tamilnadu (TN) which is one of highest loss making
state boards in India and consumes 9.3% of total power generated in India.
Efficient, but not making money; accumulated losses of ~US$6-7bn
TN has low AT&C losses (19% for FY09 vs national average of 26%) and
has almost 100% collection efficiency. Absence of tariff revision for 2003-
2010 coupled with dependence on expensive sources of power supply is
primary reason for peak losses in FY11, in our view. With availability of
cheaper power over next 2 years, we believe the revenue gap may narrow.

Ahluwalia Contracts (India): Book Profits :Business Line

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Reliance on the tepid real-estate market and slow execution of projects may constrain revenues for a few quarters.
Skewed as its order book is towards real-estate projects, Ahluwalia Contracts' pace of execution slowed in late 2010 . At Rs 123, the stock trades at 11 times its trailing 12-month earnings, a slight premium to peers such as Man Infraconstruction.
Investors can book profits on their holdings in the stock of Ahluwalia Contracts. An order book reliant on the tepid real-estate market and slow execution may constrain revenues and earnings growth for a few quarters while diversification into the infrastructure space is fairly nascent. The current order-book of Rs 5,500 crore is also just a shade higher than the Rs 5,300 crore at end-March 2010.
Investors who bought the stock on our ‘buy' recommendation in May 2009 stand to make an absolute return of 96 per cent.

ORDER-BOOK COMPOSITION

As of November 2010, about 36 per cent of the Rs 3,130 crore order book came from residential contracts. Commercial real estate, including hospitals and hotels, totalled a further 37 per cent of the order book, leaving the company vulnerable to the ongoing sluggishness of the real-estate market.
Slow execution in real estate contracts led to a mere 0.6 per cent revenue growth for the nine months ending December '10. Near-term revenue growth is likely to be subdued as the real-estate market itself is not in the healthy growth mode. To broad-base operations, the company diversified into infrastructure. Accounting for just about 18 per cent of the order book, the segment is unlikely to compensate for real-estate. Besides, in the infrastructure space as well, players have been grappling with slower execution even as order inflows are healthy.
While the segment does sport a few large-size contracts , there are a large number of smaller-size contracts. This, and its being more of a contractor than a developer, indicates that significant margin expansion is unlikely in the near term. The company may also require consortiums to bid for larger-sized development projects. Industrial projects make up 9 per cent of the order book.

FINANCIALS

Revenues and net profits clocked a compounded three-year growth of 33 per cent and 40 per cent to Rs 1,568 crore and Rs 82 crore in FY-10. In the December '10 quarter, revenues declined 16 per cent compared to the same period last year.
With an 18 and 13 per cent increase in operating and employee costs besides an increased interest outgo, net profits in the quarter tumbled 47 per cent. The September quarter had already seen flat revenues and a 12 per cent profit decline.
Operating margins had slipped to 11 per cent in FY-10 from the 13 per cent in the two previous years, also on higher operating costs. With prices of key raw materials on the rise, margins may remain under pressure. Net margins stood at 5 per cent for FY-10, and 5.3 per cent for the nine months ending December '10.
However, working capital turnover dropped to seven times in FY-10 from the 17 times in FY-08 while inventory turnover reduced from 14 to 11 times. With the company looking to increase order book size, working capital requirement and cycles may further increase. The slower execution it is currently facing may also lengthen cycles

52 week Blockbuster – Jamna Auto Industries: Business Line

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With about 65 per cent market share in the supply of springs for commercial vehicles (CVs), Jamna Auto (JAI) has been a beneficiary of the uptick in CV sales since the turnaround of the domestic auto industry in mid-2009.
JAI, which counts Tata Motors, Ashok Leyland, Eicher, AMW and Volvo among its clients, has seen its shares return 121 per cent in the last one year. This is attributable to, one, the shift in focus during 2009-10 to the high-margin parabolic springs, which have better load carrying capacity and are relatively lighter than leaf springs.
The company has started supply of parabolic springs to Tata Motors in 2010. From about 8 per cent of total revenues, the contribution from these springs is expected to go up to 20 per cent by 2012. Two, to move up the value chain and become a complete suspension system solutions provider, JAI has introduced lift axles and bogie suspensions during last year. This will enhance efficiency of CVs covering long distances. It is also making air suspension systems, which are used in low floor buses in cities to give better ride comfort.
Both these moves will better realizations and improve margins over the medium-term. Three, to de-risk from the domestic OE industry, JAI has announced entering into the OE segment in Europe and Japan. It is also setting up a dedicated plant for OE exports at Gwalior.
While these three moves put the company in a sweet spot, over the near-term, a moderation in CV sales due to higher interest rates may be a threat

Macquarie Research, US oil data -Adding more fuel to the blazing oil fire

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Weekly US oil data
Adding more fuel to the blazing oil fire
The latest DOE numbers are again mostly constructive. While the headline
crude oil inventory build may be seen as a bearish surprise, the underlying
trends are decidedly not. Indeed, the four-week rolling average for crude oil
imports fells further to 8.15million barrels per day, the lowest count for this time
of the year since 2003 – when the world was struggling with supply disruptions
from Venezuela and Nigeria, and a US-led coalition was about to invade Iraq.
What’s more, downstream data points look more and more encouraging as well.
Large inventory draws for the principal products extend the declines in
downstream inventory to four weeks (over which time levels have fallen by
nearly -40mbs), pulled along by steady, if not spectacular, demand growth.

EIH Rights Offer closes on March 15: Invest :Business Line

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Given the expected revival in the hospitality sector and the dilution in equity, post-offer, shareholders can subscribe to this offer.
It is not always that a rights offer of a company comes packed with a potential takeover angle. EIH, which has Reliance Industries and ITC as shareholders at little less than the 15 per cent holding each, is making a 5:11 rights offer at Rs 66 per share to raise Rs 1,179 crore. Both the potential bidders will get to retain their current stakes in EIH only if they subscribe to the rights offers. Any portion of the offer made to the public that remains unsubscribed may be picked up by promoters, increasing their holding in the company.
Retail shareholders who do not subscribe to the offer may suffer substantial equity dilution. With the stock close to its 52 week low and a revival likely in the hotels business over the medium term, the timing of the offer appears reasonable. As for valuations, the offer price, at a discount to the current market price of Rs 77, values the company at about 24 times its likely FY12 per share earnings, at a premium to Hotel Leela (15 times) and Indian Hotels (23 times). Manageable debt on books, improving outlook for the hotel industry (especially in Mumbai where it has a strong presence) and the heightened interest in EIH, however, justify the premium to some extent.

OFFER PROCEEDS

Of the offer proceeds, EIH plans to use Rs 900 crore to retire debt; Rs 100 crore towards setting up a flight kitchen facility at the Indira Gandhi International Airport in New Delhi and the balance towards issue-related and general corporate expenses. The company had an outstanding debt of about Rs 1,810 crore, as of September 2010 . With interest rates likely to harden further, EIH's plan to prepay debt promises to significantly bring down its interest burden; debt: equity ratio is expected to come down from 1.15 levels now to 0.27. The impact on earnings, however, would not be commensurate as the offer will also cause a 45 per cent expansion in the company's equity base.

TUG OF WAR

But what really makes the offer attractive is the prospect of an open offer or a price war between Reliance Industries and ITC, if either or both their shareholdings cross the 15 per cent mark. Note that Reliance Industries currently holds about 14.8 per cent in EIH, while ITC's shareholding is at 14.98 per cent. While ITC has long maintained that its interest in EIH is only strategic , it would be interesting to see if it participates in the offer. It would have to shell out about Rs 177 crore just to retain its shareholding.
What's also interesting is that while ITC has accumulated EIH shares over a period of a few years, RIL is a new entrant. It bought 14.2 per cent stake from EIH promoters at about Rs 182 apiece. Interestingly, the Oberoi family, which holds 32.31 per cent stake, has said that it would be subscribing to the rights shares that other shareholders relinquish. Subscribing to the rights, therefore, would let the retail shareholders make most of the possible upside in case of any open offer(s). The business environment is beginning to look up for the hospitality sector now. After the terrorist attack on its Mumbai property in 2008 and the subsequent recessionary trends, EIH has witnessed a growth in occupancies and room rents across its properties. The offer closes on March 15