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Indian stock market and companies daily report (August 17, 2010, Tuesday)

Contributed by Angel Broking

By Angel Broking

The benchmark indices witnessed a bout of volatility in the initial trade. However, the benchmark indices recovered after erasing entire intraday gains in early afternoon trade after the monthly inflation data hit the market. The market slipped into the red zone in afternoon trade and slumped to a fresh intraday low in mid-afternoon trade as European stocks turned negative and as US index futures edged lower. The market ended the session in red on the first day of the week on doubts over the global economic recovery. The Sensex and Nifty closed down by 0.6% each. However, the BSE mid-cap index outperformed the benchmark indices to close with gain of 0.1%, while the BSE small-cap index closed low by 0.3%. Among the front liners, HUL, ITC, Hero Honda, Maruti Suzuki and NTPC gained 0–2%, while Cipla, Reliance Infra., RCOM, JP Associates and ICICI Bank lost 2–4%. Among mid caps, Wockhardt, Trent, Tube Investment, Tata Chemicals and BF Utilities gained 5–18%, while Gammon India, Hindusthan National Glass, Essar Shipping, Pipavav Shipyard and Shree Cement lost 4–5%.

Markets Today

The trend deciding level for the day is 17964/5389 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18084–18171/5427– 5457 levels. However, if NIFTY trades below 17964/5389 levels for the first half-an-hour of trade then it may correct up to 17878–18051/5359–5418 levels.

SBI hikes lending and deposit rates

SBI has raised BPLR by 50bp to 12.25% from 11.75%, with effect from August 16, 2010. Among PSU banks, Bank of Baroda, Corporation Bank, Oriental Bank of Commerce, Union Bank and IDBI Bank have already increased their PLR by 50bp each. The deposit rates have also been increased by 25–150bp across tenures by SBI. SBI has also launched floating rate term deposits, which will be linked to the bank’s base rate to be effective from September 6, 2010. The move is in line with our expectations; we have factored in an NIM improvement of 30bp in FY2011E to 2.8%.

At the CMP, the stock is trading at 1.7x FY2012E ABV (while excluding value of insurance and capital market subsidiaries) v/s its five-year range of 1.3–2.0x and median of 1.7x. We believe this provides reasonable upside to the stock, especially in light of its dominant position and reach, strong growth and superior earnings quality. We maintain an Accumulate rating on the stock with a Target Price of Rs3,185.

Vedanta buys majority stake in Cairn India

Deal details: Cairn Energy Plc has entered into an agreement with Vedanta Resources Plc for sale of 40-51% stake in Cairn India. The success of the 20% mandatory open offer to minorities will determine the extent of stake sale by Cairn Energy Plc. The all-cash deal is being executed at Rs405/share, wherein Rs355/share will be towards the sale and purchase agreement and the balance Rs50/share constituting the non-compete fee. Thus, the open offer to the minorities will be at the lower price of Rs355/share, which is at 6.7% premium to the close price. Thus, the minority shareholders are at a disadvantage. The offer is subject to the government approval. The open offer will be made through Sesa Goa. Post the transaction, Sesa Goa will hold 20% in Cairn India, with Vedanta holding 31- 40%.

Acceptance ratio contingent on Petronas stance: If Petronas tenders its share, the acceptance ratio in case of 100% success, will be 53%. However, if Petronas does not tender its share, the acceptance ratio would be higher at 88%. Under both scenarios, at our target price for the stock, we believe that there are limited upsides from current levels in case one decides to tender the shares. Thus, one should be indifferent between tendering the shares in the open offer or retaining them.

Outlook and valuation: We believe the transfer of the ownership of Cairn India from Cairn Energy Plc to Vedanta Resources Plc is unlikely to impact the company’s financials. However, the key risk is Vedanta’s lack of experience in managing the E&P asset portfolio being a new player in the segment. Further, we believe that returns to investors will be quite similar in case of tendering the share in the open offer or otherwise. Our NAV-based Fair Value of Rs315 assumes long-term crude oil price of US $75/bbl, whereas the current stock price is discounting long-term average crude price of US $79.1/bbl. Thus, upsides from current levels are limited. We recommend Neutral on the stock.

Vedanta (Sesa Goa) enters into an agreement with Cairn Energy

Deal structure: Vedanta Resources Plc has entered into an agreement with Cairn Energy Plc to acquire a 51–60% stake (along with Sesa Goa) in its Indian subsidiary Cairn India Ltd. at a price of Rs405 per share. While Rs355 per share is being paid towards the sale and purchase agreement, the balance Rs50 per share is being paid as non-compete fee. The non-compete fee will be paid in consideration for Cairn Energy agreeing not to engage in the business of oil or gas extraction in India, Sri Lanka, Pakistan and Bhutan, or any other business that competes with the business of Cairn India and its subsidiaries, for a period of three years. Vedanta along with Sesa Goa will make the 20% mandatory open offer to other shareholders (except Cairn Energy Plc) of Cairn India Ltd. at Rs355 per share and Sesa Goa will make a strategic investment of 20% in Cairn India Ltd. The 20% stake will be acquired through a combination of share purchase from Vedanta (at a price of Rs405 per share) less the number of Cairn India shares acquired under the open offer (at a price of Rs355 per share).

Our take: While the past track record of Mr. Anil Aggarwal is exemplary in acquiring assets and turning it around (Hindustan Zinc, Balco and Sesa Goa), Sesa Goa’s diversification into an unrelated business to utilise its excess cash raises potential concerns on the growth prospects of its core iron ore business and the stock can take a beating in the short term. While the management has reiterated that it expects to increase its iron ore sales volume to 50mn tonnes by FY2014E and expects the deal to be EPS accretive from FY2011E, we believe that with the cushion of excess cash gone away, any potential acquisition in its iron ore business in the future will leverage its balance sheet. Also, cash, which was 80% of its FY2010 balance sheet, will be replaced by a strategic investment in Cairn India, which is expected to form ~81% of its balance sheet in FY2011E. As the deal is still subject to regulatory approvals and cash outflow is dependent upon open offer acceptance, we maintain our Neutral view on the stock

Tata Motors’ global sales rise 36% in July 2010

Tata Motors reported its global sales numbers for July 2010, which increased 36% yoy to 90,646 units on strong demand from the commercial and passenger vehicles segments. While sales of commercial vehicles grew 30% yoy, sales of passenger vehicles grew by 42% yoy in July 2010. The marquee brands Jaguar and Land Rover (JLR) continue to sustain sales momentum, growing 30% yoy to 19,386 units. Jaguar sales stood at 5,676 units, higher by 26% yoy, while Land Rover sales stood at 13,710 units, higher by 31% yoy. JLR continues to benefit from strong demand in the UK, US, China and Russia. We expect Tata Motors to post encouraging volume growth going ahead. We maintain our Buy rating on the stock with a Target Price of Rs1,214.

Economic and Political News
- Moderating prices pull down inflation to 9.97%
- Government hikes ethanol prices for OMCs to Rs27/litre
- Centre rules out banning export of iron ore

Corporate News
- HDFC picks up 2.44% stake in Raymond
- Glenmark receives US FDA nod for generic Trospium tablets
- Baring PE to pick 10% stake in Shilpa Medicare for US $17mn