Reports » India

Indian stock market and companies daily report (September 13, 2012, Thursday)

Contributed by Angel Broking

The Indian markets are expected to open flat today tracking flat to positive opening in most of the Asian markets, as investors positioned themselves ahead of a Federal Reserve decision later in the day, shrugging off a positive lead from Wall Street after a German court ruled Europe's new bailout fund as legal.

The US markets ended modestly higher yesterday as German court declined to block a euro-area rescue fund and investors mulled the possibility of further stimulus from Federal Reserve. The modest strength in global markets was due to news that Germany's Federal Constitutional Court cleared the way for the ratification of the European Stability Mechanism, rejecting temporary injunctions against the European bailout fund. At the same time, the court imposed certain conditions, including capping GermanyRs.s bailout fund liability at 190bn euros.

Meanwhile the Indian markets extended their recent gains on Wednesday, as firm global cues outweighed government data showing anemic pace of expansion in industrial output; July IIP came in at 0.1%.

Markets Today

The trend deciding level for the day is 17,966 / 5,420 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18,047 - 18,094 / 5,446 - 5,462 levels. However, if NIFTY trades below 17,799 / 5,372 levels for the first half-an-hour of trade then it may correct up to 17,91 9 - 17,808 / 5,405 - 5,379 levels.

July IIP reported a flat growth of 0.1%

As per the Quick Estimates on the Index of Industrial Production (IIP), industrial production reported a flat growth of 0.1% In July 2012 as compared to 3.7% in the corresponding period of the previous year. Growth in IIP recovered modestly after witnessing a contraction of 1.8% in June 2012. Cumulative growth in the April-July 2012-13 period declined by 0.1% as compared to 6.1% in the corresponding period in 2011-1 2.

On a y-o-y basis, Mining reported de-growth of 0.7%, continuing the weak trend witnessed in the preceding months on account of regulatory hurdles in the sector. The Manufacturing sector, with the highest weightage of 75.5%, recovered with a marginal contraction of 0.2% as compared to a de-growth of 3.1% in June 2012. Electricity growth slipped to 2.8% after witnessing robust growth of 8.8% for the month of June 2012.

Under the Use-based classification, on a y-o-y basis, Basic goods and Intermediate goods reported tepid growth of 1.5% and 1.1% respectively for July 2012. Growth in Capital goods decelerated by 5% as compared to a staggering de-growth of 27.9% in the previous month, mainly due to a low base effect. Consumer goods sector reported an overall growth of 0.7% as compared to 4.1% growth in June 2012. Growth in consumer durables declined to 1.4% as compared to a growth of 9.2% in the previous month and 9% growth in July 2011. Consumer non-durables reported a growth of 0.1% as compared to a contraction in growth of 0.1% in June 2012.

In spite of sluggish industrial growth, we believe that the Reserve Bank of India is unlikely to ease monetary policy on September 17, 2012 since inflation continues to remain at elevated levels with persistent upside risks.

German court ratifies Eurozone bailout fund with conditions

The German Constitutional Court on September 12, 2012 cleared the way for a permanent euro-zone bailout rescue fund - the European Stability Mechanism (ESM). The court ruled against a temporary injunction which argued that the ESM committed Germany to potentially unlimited financial liability. The court rejected the injunction against the ESM; however, it has imposed certain conditions on the ratification of the EurozoneRs.s rescue fund.

It stipulated that a cap of about Euro190bn be set on German liabilities before ESM ratification and that any increase in liabilities beyond the limit must be approved by the lower house of parliament. It also ruled that ESM decisions must be submitted to both houses of parliament for approval thereby rejecting a confidentiality clause in the ESM treaty. Germany is expected to contribute about 27% to the Euro700bn bailout which includes the ESM and the temporary European Financial Stability Facility (EFSF). The court is still in the process of delivering a full ruling but the ruling against the temporary injunction is likely to pave the way for a positive outcome of the case.

This development comes on the back of the European Central BankRs.s (ECB's) agreement to launch unlimited bond purchases to lower borrowing costs for struggling Eurozone countries. In its monetary policy meeting last week, the ECB stipulated that strict and effective conditionality would be necessary for countries signing up for Outright Monetary Transactions. The conditionality of the program aimed at maintaining stability and fiscal compact in the euro area is expected to be designed and monitored by the EurozoneRs.s rescue fund and the IMF.

We believe that the debt-ridden countries are likely to accept the austerity measures prescribed in spite of the increase in unemployment due to fiscal austerity. This is because the high median age of the population in countries like Greece, Portugal, Spain, Italy and Ireland implies a greater proportion of retiring people as compared to a young workforce. Hence it is important for majority of the population to preserve the purchasing power of their savings by remaining within the strong currency union as indicated by the referendum in Ireland and election results in Greece. Put together, this corroborates our view that decisionmakers in the Euro area are committed to handling the sovereign debt crisis in an orderly fashion and the risks emanating from the Eurozone crisis are materially diminishing.

CRISIL expects another Rs.90,000cr of SEB loans to restructure in balance quarters of FY2013

CRISIL expects another ~Rs.1,65,000cr of banksRs. loan to restructure in remaining three quarters of FY2013, thereby taking the total restructuring in FY2013 to Rs.2,05,000cr. Out of above mentioned Rs.1,65,000, around Rs.90,000cr is expected to be on account of restructuring of loans to state electricity boards (SEBs). Considering the involvement and interest shown by both central and state government, CRISIL does not expect any slippage out of the restructuring done in case of SEB loans. However, considering media reports regarding the SEB loan bailout proposals, banks might still feel some pain. Draft proposals require conversion of 50% of SEB short term debt into state government bonds, while the balance would remain in books of banks, though backed by State government guarantee.

In case of the bonds issued by state governments, banks would be affected as it would imply swapping of high yielding SEB loans with low yielding state government bonds. They might also face marked to market (MTM) losses on those bonds, in case they are classified in the AFS (available for sale) category. Therefore, restructuring of SEB loans is expected to largely affect mid and small PSU banks as they have a relatively higher exposure to these loans.

MOEF suspends Environmental clearances of Goa mines

The Ministry of Environmental and Forest Clearance (MOEF) has suspended environmental clearance to 93 iron ore mines in Goa. State government had already ordered halt on all mining operations in the state on September 11,2012. MOEF has stated that as per Justice M B Shah Commission report, many environmental clearances (which were issued) were based on wrong facts. Mine owners will have to submit their documents to MOEF for verification. MOEF will verify the documents and if it finds no violations, it will issue clearances. We believe that this process could take its own time. Hence, we maintain our Neutral view on Sesa Goa and Sterlite Industries.

ICICI and HDFC bank cut retail term deposit rates

ICICI Bank has slashed interest rates on retail term deposits by up to 50bp. The revised rates are with effect from September 11, 2012. The bank has cut rates across maturities ranging from 91 days to less than five years. The bank now offers a maximum 8.75% interest on retail term deposits compared to 9.25% earlier. In the shorter tenure ranging between seven days to 45 days, however, the bank increased interest rates by 50-75bp. HDFC bank also slashed its retail term deposit rates in maturities ranging from 1 year to 5 years by 25-50bp. Similar to ICICI Bank, HDFC BankRs.s maximum offering on retail term deposits now stands at 8.75% as compared to 9.25% earlier. The new rates will be effective September 12, 2012.

State Bank of India (SBI), one week ago, had cut its retail term deposit rates by 50-100bp across all maturities except five years and above. With both ICICI Bank and HDFC Bank following suit, we expect other smaller banks to also start cutting their deposit rates in the coming few weeks.

Coal India reports robust production growth for April to August 2012

Coal India (CIL) reported a robust 6.8% yoy growth in the production during April -August 2012. The production stood increased to 163mn tonnes, compared to 153mn tonnes during April- August 2011. The off-take rose by 5.4% yoy to 182mn tonnes, however both production and off-take were below the targets set by CIL. The companyRs.s FY2013 production target stands at 464mn tonnes (our estimate 458mn tonnes). CIL stock has surged 10% during the past three months. At the current market price, it is trading at 7.6x FY2014 EV/EBITDA which fairly discounts its anticipated volume growth in our view. Hence, we recommend Neutral rating on the stock.

L&T bags orders worth Rs.1,065cr

Larsen & Toubro (L&T) Construction has bagged orders worth Rs.1,065cr across business segments in the month of September 2012. In the Water and Effluent Treatment business unit, L&T Construction has secured new orders worth Rs.793cr. Two of the major engineering, procurement and construction (EPC) contracts were secured from Gujarat Industrial Development Corporation. The Power Transmission and Distribution IC has secured new orders worth Rs.122cr from the Power Grid Corporation for supply, erection, testing and commissioning of substation extension packages at Thiruvalam, Kurnool, Hosur, Nellore and Vijayawada. L&T Construction has also secured additional orders worth Rs.150cr from various ongoing projects across business units.

Further, L&T Heavy Engineering has bagged a prestigious order for manufacture and installation of ITERRs.s Cryostat for the worldRs.s largest experimental Thermonuclear Fusion Reactor, coming up in Cadarache, south of France. L&TRs.s scope includes detailed engineering, procurement, manufacture & installation of the Cryostat. This large-value order will be executed over a period of 8 years.

At the CMP of Rs.1,409, the stock is trading at PE of 1 3.9x FY2014E earnings, after adjusting for investments, which is below the historical trading multiple for L&T. We have used the sum-of-the-parts (SOTP) methodology to value the company to capture all its business initiatives and investments/stakes in the different businesses. Ascribing separate values to its parent business on a P/E basis and investments in subsidiaries on P/E, P/BV and mcap basis, our target price works out to Rs.1,568. We recommend Accumulate on the stock.

Economic and Political News

- BJP demands PresidentRs.s intervention on coal issue

- CBI to file chargesheet in excess spectrum allocation case of 2002 by month end

Corporate News

- Aurobindo Pharma gets USFDA approval for anti-depressant

- DoT to refund Rs.50cr fine imposed on Airtel, Vodafone, Idea or allegedly issuing bulk SIM cards to Matrix Cellular without proper verification

- Hero to drop Honda tag from all models this month

- RIL plans to convert two sick oil wells into gas wells

- Wipro Infotech inks deal with Qatar Airways