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Indian stock market and companies daily report (September 14, 2012, Friday)

Contributed by Angel Broking

The Indian markets are expected to have a gap up opening today tracking sharp gains in the opening of the Asian markets, as investors cheered after the Federal Reserve unveiled a fresh round of major quantitative easing. Also, diesel price hike undertaken by CCEA has added to the positive sentiment.

The US markets rallied yesterday lifting the S&P 500 to its highest finish since 2007, after the Federal Reserve opted for a third round of quantitative easing to boost economic growth. The central bank said it would purchase US$40bn of mortgage-backed securities every month until the labor market improves. The Federal Open Market Committee also said it would likely keep the federal funds rate near zero through at least the middle of 2015. The Fed also announced the continuation of its Operation Twist program, saying that the actions taken together will increase the central bankRs.s holdings of longer-term securities by ~US$85bn each month through the end of the year.

Meanwhile the Indian markets ended largely unchanged yesterday, as lackluster global cues ahead of FOMC decision and the rupeeRs.s weakness despite continued foreign fund inflows offset fresh hopes for fiscal reforms. Domestic investors will now watch out for the August inflation data (Bloomberg estimate - 7.1%) due to be released today.

Markets Today

The trend deciding level for the day is 18,020 / 5,435 levels. If Nifty trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18,064 - 18,106 / 5,448 - 5,460 levels. However, if Nifty trades below 18,020 / 5,435 levels for the first half-an-hour of trade then it may correct up to 17,977-17,934/5,422-5,409 levels.

Federal Reserve undertakes QE3, will launch US$40bn monthly MBS purchases

The Federal Reserve in its Federal Open Market Committee (FOMC) meeting on September 13, 2012 agreed to an open-ended purchase of agency mortgage-backed securities (MBS) to the extent of US$40 billion per month until the outlook for jobs improves. Thus, the Fed has stipulated a highly accommodative monetary policy stance by launching a third-round of quantitative easing (QE3) measures that are expected to support its recovering economy, boost employment and maintain price stability in the economy.

The Fed will also continue its Operation Twist program to extend the average maturity of its holdings of securities as announced in June. Put together, these actions are expected to increase the bankRs.s holdings of longer-term securities by about US$85 billion each month through the end of the year thereby putting downward pressure on longer-term interest rates, supporting mortgage markets, and easing broader financial conditions.

The FOMC also decided to keep the target range for the federal funds rate at exceptionally low level of near-zero percent, at least through mid-2015 in a bid to maintain its accommodative policy stance.

The Fed's economic forecasts expect the job market to improve by 2014, with unemployment forecast falling to 6.7% - 7.3% as compared with 7% - 7.7% in their June projections. In 2015, unemployment is expected to fall further to 6% to 6.8%. Growth is expected to improve to as much as 3% next year and 3.8% in 2014, up from estimates of 2.8% and 3.5% in the FedRs.s previous forecasts.

We expect markets to see this as a major positive development and further fuel the risk-on trade led liquidity rally witnessed since July following positive global cues from the ECB and Federal Reserve.

Diesel price hiked by Rs.5/litre, caps on LPG cylinder

The Cabinet Committee of Economic Affairs (CCEA) has raised price of diesel steeply by Rs.5/litre. Out of this, Rs.1.50/litre will be on account of increase in excise duty. The balance increase of Rs.3.50/litre is expected to reduce the underrecoveries of Oil Marketing Companies (OMCs) by Rs.15,000cr for the remaining part of FY2013. Further, CCEA has decided to cap the number of subsidized cylinders to six per household in a year. This will help in reducing the underrecoveries by approximately Rs.5,300cr for the remaining part of FY2013. CCEA has also lowered excise duty on petrol by Rs.5.3/litre to make up for the losses of OMCs. As per Petroleum Planning & Analysis Cell (PPAC), as on September 1, 201 2, OMCs were losing Rs.551cr per day (annualized run-rate of Rs.201,115cr) due to selling diesel, kerosene and LPG at lower prices. Approximately 60% of these under-recoveries were on account of selling diesel at lower prices. For the fortnight ended September 13, 2012, OMCs were losing Rs.17.1/litre, Rs.347/cylinder and Rs.32.7/litre on account of selling diesel, LPG cylinder and kerosene, respectively, at lower prices. While this steep hike in diesel is expected to cover up partial underrecoveries, we had modeled under-recoveries of Rs.155,332cr for FY2013. Hence, we maintain our estimates. Nevertheless, this move is likely to have a short-term positive movement in stock prices of both upstream and downstream companies.

We maintain our Accumulate rating on ONGC with a target price of ?315 while we maintain our Neutral rating on GAIL.

For the automotive sector, we believe that the recent hike in diesel prices will not have any major impact on customer preference for diesel passenger vehicles versus petrol vehicles as the running cost benefits for diesel cars is still significant as compared to petrol cars. With this hike however, the price difference between petrol and diesel has narrowed to Rs.22/litre from Rs.27/litre earlier. For the commercial vehicle sector, increase in diesel prices will increase the ownership cost of the fleet operators which could probably impact the demand for trucks. We maintain our Buy rating on Ashok Leyland and Mahindra and Mahindra with target price of Rs.30 and Rs.879 respectively, while we maintain our Accumulate rating on Tata Motors with target price of ?292.

The government has finally bitten the bullet on hiking subsidized fuel prices but it has refrained from increasing prices of petrol and kerosene. A hike in diesel and LPG prices is positive for fiscal consolidation since it will aid the government to narrow the fiscal deficit by reducing its subsidy burden. The markets are expected to react positively to this move since the government has taken a material step towards indicating its stand on policy reform front. However, it is likely to adversely impact inflation on account of the pass-through effect of the increase in diesel prices in generalized inflation. This move is expected to reduce room for the RBI to ease policy rates in its Mid-Quarter Review of the Monetary Policy on September 17, 2012 since it continues to maintain a hawkish stance on inflation.

Hero MotoCorp ties up with Engines Engineering

Hero MotoCorp (HMCL) has tied up with Engines Engineering, an Italian designer company to design its future range of two-wheeler models. Engines Engineering provides end-to-end product development technology to its customers which include Honda, Yamaha, Ducati, Gilera, and Mahindra and Mahindra, among others. This recent tie-up comes on the heels of strategic alliances with Erik Buell Racing and AVL which the company forged earlier in the year to strengthen its technological knowhow including the engine development capability. We see this as a positive development and is also on the expected lines as HMCL intends to develop its own research and development (R&D) team. HMCL intends to spend Rs.400cr to set up a state-of-the-art integrated R&D centre in Jaipur by 2QFY2014. At Rs.1,819 the stock is attractively valued at 12x FY2014E earnings. We maintain our Buy rating on the stock with a target price of Rs.2,428.

Hindustan Zinc - Delicately poised

Chinese zinc smelters (40% of world capacity) have cut production (Exhibit 2) over the past one year on the back of decline in zinc prices. On the cost front, mining costs have risen over the past three years on the back of higher energy and labor costs. Further, ore contained in zinc concentrate has declined from 7.0% in CY2000 to 5.5% in CY201 1. These factors are likely to support zinc prices in the near-term. Hence, we maintain our positive view on Hindustan Zinc; at the current market price, it is trading at an inexpensive valuation of 3.7x FY2014 EV/EBITDA. We recommend Accumulate on the stock with a target price of Rs.144.

Economic and Political News

- Fraud coal block allotments would be cancelled: Government

- HSBC cuts IndiaRs.s growth forecast to 5.7%

- Plan panel pegs Rs.9.2lakh cr expenditure for roads in 1 2th Plan

Corporate News

- Idea Cellular raises prepaid tariffs by 20% in MP, Chhattisgarh

- Lupin gets US FDA approval for generic lexapro tablets

- SpiceJet in talks with Gulf airline for investment

- Tech Mahindra and KPN form international partnership to develop business software apps