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Indian stock market and companies daily report (August 30, 2012, Thursday)

Contributed by Angel Broking

Indian markets are expected to open on a negative note following weak opening to most of the Asian indices as weak Japanese retail sales data and South Korean business confidence adds to signs of an economic slowdown.

The US markets showed a lack of direction over the course of the trading day on Wednesday, as traders largely ignored upbeat US economic data, including a report from the Commerce Department showing slightly stronger than previously estimated US economic growth in the second quarter. The report showed that the GDP increased by 1.7% in the second quarter compared to the 1.5% growth previously reported. A separate report from the National Association of Realtors showed that pending home sales rose by 2.4% which was more than expected in the month of July, reaching their highest level in over two years. Additionally, the Federal Reserve released its Beige Book which indicated that US economic activity continued to expand gradually in July and early August.

Going ahead, trading on Thursday is likely to be impacted by the release of reports on weekly jobless claims and personal income and spending. Nonetheless, trading activity globally may be somewhat subdued as traders wait on BernankeRs.s Jackson Hole speech.

Markets Today

The trend deciding level for the day is 17,539 / 5,305 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 17,606 - 17,721 / 5,328 - 5,368 levels. However, if NIFTY trades below 17,539 / 5,305 levels for the first half-an-hour of trade then it may correct up to 1 7,423 - 1 7,356 / 5,265 - 5,243 levels.

New bank license rules may apply to existing banks

As per the media reports, the finance ministry is not expecting any movement on the issue of new bank licenses given the current distrust atmosphere. Meanwhile, they have taken up the review of the banking licenses norms and are pressing the RBI for applicability of some of the liberal parts of the new rules to existing banks. Even, RBI has clearly indicated that it does not want to move on bank licenses till the passing of the banking regulation amendment act in the parliament. In the amended act, RBI is seeking huge power to look at the books of any group entity of a group, which has a banking license. Hence, considering the current the parliament impasse; the issue of new banking licenses is likely to take time, which would be favorable for the incumbent banks.

BT may sell ~5% stake in Tech Mahindra

As per media reports, BT might be selling ~5% stake in Tech Mahindra for at a price band of Rs.735 - Rs.790 each, a discount of 5 -12% from its yesterdayRs.s closing price of Rs.835, which might give the stock price some downward push in the nearterm. BT has said that it may consider selling Tech Mahindra shares in the future if markets proved attractive. BT has been looking at part-sale of its stake in Tech Mahindra for quite some time, but has been waiting for right market conditions to go ahead. At the end of last quarter, the total promoter holding in Tech Mahindra stood at 70.78%, which included 47.57% with Mahindra & Mahindra, 23.16% with BT and 0.05% with Mahindra BT Investment Company Mauritius Ltd. Media had earlier reported that some global private equity firms had shown interest in buying the British company's stake in Tech Mahindra. We maintain Neutral rating on Tech Mahindra given recent stock run-up.

Orchid sells drugs units to Hospira

A debt overhang coupled with the inability to raise equity has forced Orchid Pharma to sell its Penicillin and Penem active pharmaceutical ingredient (API), including its plant in Aurangabad, to US-based Hospira for around $200 million (Rs.1,200 crore). Orchid Pharma, the pharmaceutical division of Orchid Chemicals and Pharmaceuticals, said on Wednesday that it had entered into a business transfer agreement (BTA) with Hospira for the sale and transfer of Penicillin and Penem API business and the API facility located in Aurangabad (Maharashtra) together with an associated process R&D infrastructure in Chennai. The sale includes the related Penicillin and Penem product portfolio and pipeline. Nearly 830 employees would be transferred to Hospira as part of the business transfer.

The funds raised from this sale will be used to repay high-cost debt. The company has nearly Rs.2,200 crore as debt on its books. Orchid intends to repay Rs.800 crore from the sale proceeds of nearly Rs. 1,200 crore and use the balance to fund working capital requirements and invest in newer businesses. Assuming all necessary approvals are secured, the transaction is expected to be completed in the third quarter of 2012-13.

At current valuations, the deal has been done at attractive valuations and the sale of the unit will entail a loss of revenues to the extent of Rs.450cr annually and Rs. 100cr on the EBDIT levels. However, the management expects to make up for the same through the savings on the interest component on back of debt repayment. On the EBDITA front, the EBDITA post the deal is expected to be around 14-15% and consequent to the same the companyRs.s sales mix would be API: Formulation of 70:30 and the EPS for FY2014 is expected to come down to Rs.12-13. Thus, at the current market price, the stock trades at 8.6xFY2014E earnings, leaving little room for further upsides and hence we recommend a Neutral stance on the stock.

Result Review

Mphasis - 3QFY2012 (CMP: Rs. 370 / TP: Under review)

Mphasis announced its 3QFY2012 numbers which underperformed our expectation on revenue front however came higher than expectations on the net profit front. The dollar revenues came in at US$252mn, down 3.5% qoq, due to softness in developed markets which led to ramp down in some projects from HP channel. In INR terms revenues came in at Rs.1,355cr, up merely 1.9% qoq. The company again witnessed headcount reduction in Application as well as ITO business, which led to increase in the respective utilization levels. EBITDA margin of the company remained almost flat qoq at 19.7% as gains from INR depreciation were absorbed due to wage hikes given during the quarter. PAT came in at Rs.209cr, aided by other income of Rs.48cr. The company added 24 new clients during the quarter, out of which 20 were added in direct channel. The stock is currently under review.

Economic and Political News

- Inflation still key threat: Subbarao

- Indian monsoon may not be hit by El Nino: Ashish Bahuguna

- Government approves US$4.1bn plan to spur electric and hybrid vehicle sales

- Banks may get more time to meet priority sector target

Corporate News

- Business environment remains subdued: SD Shibulal, Infosys

- Jet, IndiGo fares above industry average: DGCA

- SKS Microfinance allots 44.5 lk shares to Kumaon investment