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Indian stock market and companies daily report (September 24, 2012, Monday)

Contributed by Angel Broking

Indian markets are expected to open lower tracking weak global cues. Most of the Asian markets are trading in the negative zone down ~0.4-1%. SGX Nifty too is trading lower by 0.5%.

Globally, US markets failed to sustain an early upward move and gave back the ground to end the trading session nearly flat on Friday. Lingering uncertainty about the outlook for the markets helped to keep trading activity subdued. However, most of the European bourses ended the trading session on Friday in positive territory, after reports that the government of Spain is engaged in discussions over a potential bailout.

Meanwhile, Indian markets soared to their highest level in last fourteen months on Friday after the government notified all FDI decisions taken last week and signaled its readiness to move forward swiftly with more reforms. Indian Government reduced withholding tax rate to 5% from 20% earlier, on overseas borrowing by local companies and also abolished import and excise duties on non-subsidized LPG cylinders, sparking hopes that more economic reforms are on the anvil to boost investor confidence and revive the sagging economy.

Markets Today

The trend deciding level for the day is 18,677 / 5,662 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18,943 - 19,133 / 5,749 - 5,807 levels. However, if NIFTY trades below 18,677 / 5,662 levels for the first half-an-hour of trade then it may correct up to 18,487 - 18,221 / 5,604 - 5,518 levels.

Markets gain further momentum on policy reforms

Markets extended their gains on Friday following positive developments on the domestic political and policy reform front. The finance minister announced reduction in withholding tax for local companies on overseas borrowings from 20% to 5%. The reduced tax rates will be applicable to overseas funds borrowed between July 201 2 and June 2015. The move is likely to lower the cost of foreign borrowings by Indian companies especially those with high debt burden.

In addition, government approved the Rajiv Gandhi Equity Savings Scheme (RGESS), which aims to give tax benefits to new investors who invest up to Rs.50,000 in the stock markets and whose annual income is below Rs.10 lakh. Under the scheme, eligible investors would get 50% tax deduction on their investments and the total lock-in period is 3 years including an initial blanket lock-in period of 1 year. The RGESS will also include investments in mutual funds and exchange-traded funds. The Scheme was announced in the FY2013 budget speech by then Finance Minister Pranab Mukherjee. It seeks to encourage investment in financial assets as opposed to physical assets such as gold and also to widen the base of retail investors in the country.

Government bans sale or export of iron ore from captive mines

The central government has banned states from allowing sale or export of iron ore by companies who are granted mining leases for own steel production. The order states that the entire ore produced in the mining operations from these captive mines shall be used exclusively for own consumption in making steel and cannot be either sold in India or exported to other countries. Since export of iron ore fines for companies with captive iron ore (such as Tata Steel and Sail) contributes only a minuscule portion of their top and bottom lines, we do not expect any impact on financials of these companies. Moreover, these companies are setting up sinter/pellet plants to make use of these fines.

Removal of customs and excise duty on non-subsidized LPG cylinders

The Finance Ministry announced removal of customs duty and VAT on nonsubsidized domestic LPG cylinders. Some state governments decided to raise the cap on the number of subsidized LPG cylinders from 6 to 9 cylinders per household. Non-subsidized commercial LPG cylinders will continue to attract customs duty of 5% and excise duty of 8%. Bihar has reduced tax on diesel from 18% to 16% making it cheaper by 85 paise in the state.

JLR receives regulatory approval to form JV in China

As per media reports, Jaguar Land Rover (JLR) and Chery Automobile Company (Chery) have received regulatory approval to form a joint venture (JV) to manufacture Jaguar and Land Rover branded vehicles in China. The JV which entails an investment of US$1.9bn (12.1bn Yuan) will be based out of Changshu city (near Shanghai) with an annual capacity of 130,000 vehicles. The scope of the JV includes manufacturing JLR and JV branded vehicles, manufacturing engines and establishing a research and development facility. We see this as a positive development for JLR as local production (will lead to zero import duty as against 25% currently) along with localization of components and lower labor cost will result in lower cost of production and therefore higher profitability. We believe that localization will pave way for faster growth for JLR in China which accounted for ~22% of companyRs.s volumes in 1QFY2013. JLR is also in the process of increasing its dealer network in China, which is likely to increase to 1 50 by end of FY2013. We expect JLR to sustain its volume momentum (expect a ~14% volume growth in FY2013) driven by the success of Evoque and new XF 2.2 coupled with the launch of new Range Rover and Jaguar XE in FY2013. At the current market price of Rs.275, the stock is trading at 6.3x and 3.3x FY2014E earnings and EV/EBITDA, respectively. We maintain our Accumulate rating on the stock with an SOTP based target price of ?292.

Diageo closes in on United Spirits stake

As per media reports, Diageo plc (Diageo), the worldRs.s biggest distiller is in advanced talks to buy UB groupRs.s stake in United Spirits (USL). The deal is expected to be announced next month. UB group is the promoter of USL with a 28% stake. USLRs.s market capitalization stands currently at ~Rs.13,000cr. As part of the deal Diageo will be given the right to appoint a majority of United Spirits board members. The talks between UB group and Diageo which fell apart in 2009 resumed in early 2012. The deal is expected to go through this time as UB group is looking to raise funds for repaying the debts of its other group company Kingfisher Airlines, which is struggling with losses and cash shortage. We continue to remain neutral on USL.

RCom hikes calling rates by 25%

Reliance Communications (RCom) has raised call rates by 25% in four circles (Madhya Pradesh, Himachal Pradesh, Bihar and Gujarat) for both post-paid and pre-paid customers. The company said it has revised its base price from 1.2 paise per second to 1.5 paise and this has initially been implemented in four states and be rolled out across the rest of the county within a month. The company is looking to shore up margins as it has lost 20mn subscribers, or 13% of its user base of 162mn, in July and was staring at flat growth from new and active subscribers as well. As per media reports, RCom is facing a Rs.64cr revenue loss due to its enterprise customers being blocked by Airtel on account of differences in the interconnect fee. RCom has actually implemented this tariff hike in their GSM band, which has much fewer subscribers, as compared to those on the CDMA band. Besides, RCom really needed to take this step to improve its margins urgently, since its active profile is among the lowest in the industry incumbents right now. The impact on the companyRs.s subscriber base will depend on whether other operators also decide to go in for a hike in tariffs, which is not clear yet. We maintain our Neutral rating on the stock.

KEC wins new orders worth Rs.602cr

KEC International Ltd. (KEC) has secured new orders worth Rs.602cr in its Transmission, Railways and Cables businesses.

Transmission Business:
The Company has secured new orders from India, Philippines and America. In India, the company has secured order from PGCIL for establishment of 765 kV transmission line between Rihand-Vindhyachal in the state of Uttar Pradesh on turnkey basis. The order value is Rs.114cr and project duration is 12 months. In Philippines, it has won order for establishment of a 1 38kV transmission line from National Grid Corporation of the Philippines (NGCP) on a turnkey basis. The order value is Rs.38cr and project duration is approx. 15 months. In America, SAE Towers, the wholly owned subsidiary of the Company, has secured various orders for supply of lattice towers and poles to Brazil, Mexico and United States. The total value of these orders is Rs.174cr.

Railways Business:
The Company has secured Rs.162cr order on turnkey basis. The scope of the project includes railway electrification, signaling and telecommunication works. The order is received from Rail Vikas Nigam Limited (RVNL) and the project duration is 30 months.

Cable Business:
The Company has secured various orders for supply of Power Cables and Telecom Cables. The total value of these orders is Rs.114 cr.

At CMP, the stock is trading at 5.9x FY2014E EPS. We maintain our BUY rating on the stock with target price of ?80.

Economic and Political News

- FDI will help curb inflation: Rangarajan

- FM asks states to share fuel subsidy

- PNB chief K R Kamath to become new chairman of Indian BanksRs. Association

Corporate News

- NTPC to raise $750mn through bonds, syndicate loans

- TCS eyes new deals and structure even at lower margins

- RIL-BP to give up 2 blocks on bad outlook