Journal of Finance : Tick by Tick

ET NOW Shiv-Vani, Selan good bets in oil exploration

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Thu, 13 Jan 2011 08:32:00 +0000

Do you believe there is a direct correlation to the price performance with the price of crude and two, if at all you were to pick and choose from amongst the three or four listed stocks, which one would you pick?

Jagannadham Thunuguntla: Going forward crude oil prices can also be expected to be in three digits very shortly, that should be helping all these companies. Shiv-Vani Oil Exploration is appearing to be a very sensible play in this oil exploration game because 1500 crores of top line and very strong order book of about 2.5 times that of order book. We are talking about a clear visibility of the next upcoming 2-3 years that is quite strong and going forward the projects that are coming up and heavy investments by the ONGC and Oil India should be helping the companies order book further and also the companies trading relatively at a reasonable valuation in comparison to many other companies in the space.

The company makes a compelling case of investment if somebody is looking to play the crude oil game. One more good company in the space is Selan Exploration, this company is also appearing to be quite a sensible play considering their continuous investment on their R&D and the seismic vibration studies they are doing, however, nothing has happened in the company in the last 1-2 years in terms of any new developments. However, their research end should be helping them to getting into some of the new things to help in the coming future, so Selan Exploration and Shiv-Vani makes good bets, so does the HOEC, all three are mid-caps, Shiv-Vani scores a little ahead.

D-Street gives thumbs down to Infy numbers

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Thu, 13 Jan 2011 08:24:00 +0000

MUMBAI: The much-awaited third quarter numbers of the IT honcho Infosys Technologies kicked off the result season on a muted note on below-than-expected earnings with investors now betting on TCS and Wipro, say experts.

Infosys Technologies today reported a 14.17 per cent growth in consolidated net profit at Rs 1,780 crore for the third quarter ended December 31, 2010, which according to market observers has failed to cheer the street.

"The IT major has disappointed the street with the muted December quarter results. Market, which was expecting much better numbers, will now look forward to smart numbers from other major players in the sector, including TCS and Wipro," Religare Securities Executive Vice-President Rajesh Jain said.

Markets, which are grappling with concerns over rising inflation and poor IIP numbers, were keenly looking at the IT giant's Q3 results and retreated on the outcome.

The benchmark Sensex opened the day on a subdued note plummeting by nearly 182 points to trade at 19,352.24 in the early trade.

Heavy-weight Infosys counter plunged by about 4 per cent and was instrumental in the overall Sensex fall.

Voicing Jain's opinion, SMC Capitals Strategist and Head of Research Jagannadham Thunuguntla said that Infosys numbers have not been up to the mark and turned out to be conservative.

But this may not be the end of the story for other IT majors, TCS is expected to outperform Infosys in its third quarter earnings, he added.

Software major TCS is set to announce its third quarter results on January 17, while Wipro will come out with its numbers on January 21.

Analysts also said that market was not expecting great surprises from IT companies as they remained under pressure due to appreciating rupee against the US dollar, and less number of working days in the December quarter.

Infosys was, however, expected to report at least 16-17 per cent quarter-on-quarter growth.

"The Q3 results of Infosys were marginally lower than our expectations. The management commentary reflects caution on the back of macro economic concerns. Thus, the Q4 and FY11 guidance are below market expectations. The underlying fundamentals remain strong, in our opinion," Kotak Securities Senior Vice President(PCG Research) Dipen Shah said.

Infosys is expecting revenues to be in the range of Rs 7,157-Rs 7,230 crore for the fourth quarter ended March, 2011.

Q3 numbers fail to cheer D-Street

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Thu, 13 Jan 2011 08:22:00 +0000

Market will look forward to TCS, Wipro results: Experts

MUMBAI: The much-awaited third quarter numbers of Infosys Technologies kicked off the results season on a muted note on below-than-expected earnings with investors now betting on TCS and Wipro, say experts.

The company has reported a 14.17 per cent growth in consolidated net profit at Rs 1,780 crore for the third quarter ended December 31, 2010, which according to market observers has failed to cheer the Street.

“The IT major has disappointed the Street with the muted December quarter results. Market, which was expecting much better numbers, will now look forward to smart numbers from other major players in the sector, including TCS and Wipro,” the Religare Secu rities Executive Vice-President, Mr Rajesh Jain, said.

Markets, which are grappling with concerns over rising inflation and poor IIP numbers, were keenly looking at the IT giant’s Q3 results and retreated on the outcome.

The benchmark Sensex opened the day on a subdued note plummeting by nearly 182 points to trade at 19,352.24 points in the early trade. Heavy-weight Infosys counter plunged by about 4 per cent and was instrumental in the overall Sensex fall.

Voicing Mr Jain’s opinion, the SMC Capitals Strategist and Head of Research, Mr Jagannadham Thunuguntla, said that the numbers have not been up to the mark and turned out to be conservative.

But this may not be the end of the story for other IT majors. TCS is expected to outperform Infosys in its third quarter earnings, he added.

Software major TCS is set to announce its third quarter results on January 17, while Wipro will come out with its numbers on January 21.

Analysts also said that the market was not expecting great surprises from IT companies as they remained under pressure due to appreciating rupee against the US dollar, and less number of working days in the December quarter.

Infosys was, however, expected to report at least 16-17 per cent quarter-on-quarter growth.

“The Q3 results of Infosys were marginally lower than our expectations. The management commentary reflects caution on the back of macro economic concerns. Thus, the Q4 and FY11 guidance are below market expectations. The underlying fundamentals remain st rong, in our opinion,” the Kotak Securities Senior Vice-President (PCG Research), Mr Dipen Shah, said.

Over-the-counter drug brands pop ad pill

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Thu, 13 Jan 2011 08:16:00 +0000

Look whose ads are getting bigger, smarter and savvier! After telecom services rushed in to take the place of fast moving consumer goods (FMCG) as a high-profile category in television ads, a new wave seems to be emerging in the form of over-the-counter (OTC) medicines. TAM media research data confirms what you might already have noticed on your screens. TV ads for OTC drugs rose 44 per cent during the January-October 2009 period, the latest for which data is available, over the comparable period a year earlier. While banking, realty and consumer durables were slinking back in an economic downturn, drugs and pharmaceutical makers came second after FMCGs in loosening the purses to build brands.

The catch could lie in the fact that condoms, contraceptives and oral hygiene products - with strong FMCG elements in them - led the OTC category ads, although everything from headache pills to digestives also count in the game. The advertisement for condoms grew by 13 times whereas contraceptive pills escalated by 7 times during this period.

The mantra of drug advertisement has undergone a change, mainly for the lifestyle drugs and health supplements. It features happy people, beautiful faces, sunny days and glossy sets. Leading advertising creator Prasoon Joshi of McCann Erickson said, "The psyche of Indian consumer is averse to the idea of medication. So, the right tune for the drug advertisement is to take away the perception of selling a medicine".

According to consulting firm PricewaterhouseCoopers, India's OTC drug industry was worth $1.8 billion in 2009 and is expected to grow by a compounded 18 per cent every year until 2012.

"Brand building is becoming essential than ever before in pharmaceutical industry," said Jagannadham Thunuguntla, equity head at SMC Capital. "Cipla's sell-out of i-Pill to Piramal Health care for Rs. 95 crore (approximately) signifies the importance and value of a nurtured brand in today's health industry scenario. On the other hand, the nature of the sector is quite recession proof."

Market watchers say that India's desi penchant for self-medication, grandma's remedies and "kitchen cures" also helps the industry. Smithkline Beecham has been a leading OTC advertiser. Rubs and balms are the top sub-category in OTC, with its Iodex a key brand. Shubhajit Sen, executive vice-president, Marketing, Glaxo Smithkline(GSK) says, "Iodex underwent a restage in July 2009 where the long-present glass bottle was replaced with a contemporary plastic jar and new graphics. The brand also took to market a new claim. Hence we invested behind the brand."

The TAM report also noted the regional channels were more vital for the sector than national TV channels. More than half of the OTC sector advertisement was on regional channels against national channels in the ratio of 52:48 where 'West Bengal', 'Maharashtra' and 'Tamil Nadu' telecasted maximum ads on regional channels.

Ranjit Shahani, vice-chairman of Novartis and president of the Organisation of Pharmaceutical Producers of India, said, "India is a diverse market with unique regional habits. Due to this, marketers focus on their new launches or growth from specific geographical areas using regional media". He added "National media is expensive and requires deeper pockets. It also requires a perfect oiled distribution network to make products available countrywide. Regional media provides a unique opportunity to local entrepreneurs to enter the market with relatively lower budgets"

The top ten list of new OTC brands advertised on TV last year, comprised of 2 brands each of 'Rubs/Balms', 'Acne Preparations' and 'Vitamins/Tonics/Health Supplement' category. Also, Unwanted-72, Moov Neck Shoulder and Vicco Narayani Cream were the Top 3 new brands under the sector advertised on TV.

Pharmaceutical industry officials say advertisements are a way to keep consumers informed. Sen said overall economic growth and market competition will push OTC ads higher in 2010. "Going forward, the industry is likely to register healthy growth year after year," he said.

Profits fail to quench firms’ thirst for sops

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Thu, 13 Jan 2011 08:12:00 +0000

Corporate India has seen a strong growth in profits in the first half of this fiscal, but it is still looking at government for sops. In a pre-budget representation to the finance minister on Tuesday, top Indian businessmen asked him to continue with the stimulus measures that had been introduced during the economic slowdown.

Speaking to the media afterwards, the Ficci president, Mr Rajan Mittal, said, “The government should continue with the stimulus measures as the global economy is not out of the woods.” Interestingly, while India Inc. asks the government for sops, it has seen a strong growth in sales and profits so far this fiscal. Companies in Sensex and Nifty – the top Indian corporates, have seen their profits increase by 18-20 per cent in the first six months of FY11, says Mr. Jagannadham Thunuguntla of SMC Capitals. For the quarter ended September 2010, the BSE 500 companies – a group of 500 medium and large firms, have seen net profit increase by 22 per cent over the last year.

Industry bodies however, say that they need these sops for one more year. “The fiscal measures should be continued for one more year as we hope by then the US would have seen recovery and Euro-pean countries market will have seen a U-turn,” says Mr D.S. Rawat, secretary general of Assocham.

During the financial crisis, government had cut excise duty from 12 per cent to 8 per cent and service tax from 12 per cent to 10 in a bid to provide economic stimulus. However, in the last budget, the finance minister, Mr Pranab Mukherjee, partially withdrew the stimulus by increasing excise duty to 10 per cent but kept service tax at 10 per cent.

iGate's acquisition of patni a win-win for all

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Tue, 11 Jan 2011 07:49:00 +0000

While iGate leaps into the $1-billion club, the combined entity will have a larger offering, better pricing power and scope to improve margins.

Nasdaq-listed software firm iGate’s acquisition of Patni Computer Systems was received positively by the market. On a day when the Sensex was down 2.4 per cent, the Patni scrip closed 0.8 per cent higher at Rs 463.85. While the two companies are yet to provide the finer details regarding the integration of their operations, etc, analysts believe there is room to gain for the duo, besides wide synergies. More so, analysts indicate the deal’s valuations appear fair, though below the Rs 525-550 a share expected earlier, and they believe Patni’s shareholders stand to gain in the near term as well as the long run.

Says Rohit Kumar Anand of Pinc Research, “The deal is a fair value and is not bad from the shareholders’ perspective. While the deal will enable iGate to achieve scale, it will aid top line growth for Patni, given iGate’s aggressive approach towards bagging the deal. Major rerating in the Patni stock will happen now as growth accelerates. I don’t think investors should participate in the open offer.”

COMPLEMENTARY PORTFOLIO
As a % of revenues	Patni
Insurance	31
Manufacturing, Retail and Distribution	30
Financial Services	11
Communications, Media & Utilities	11
Product Engg. Services	17
As a % of revenues	iGate
BFSI	61
Manufacturing	18
Media	10
Services	5
Healthcare	4
Others	2
As on September 30, 2010 Source: Company

However, Jagannadham Thunuguntla, strategist and head of research, SMC Global, believes if the market provides an exit opportunity in the near term, investors should grab it. “It is a fair deal for all the parties involved. If the market price reaches Rs 480-490 in the near term, investors with a shorter horizon can sell, else they can tender in the open offer,” he says.

The deal
iGate along with private equity player Apax will acquire 63 per cent stake (46 per cent from Patni’s promoters and 17 per cent from General Atlantic) in Patni Computer Systems in a deal worth up to $1.22 billion. This includes the cost of the mandatory open offer for garnering 20 per cent more at a price of Rs 503.5 a share.

iGate has committed debt financing of $750 million for the acquisition, which will take its net debt to around two times the fully consolidated, adjusted Ebitda. The combined entity’s (iGate plus Patni) anticipated free cash flow generation would not only enable iGate to service the debt comfortably, but also reduce its net leverage levels going forward. Further, Apax has committed equity financing between $270-480 million. Overall, the iGate management expects the deal to be accretive by 2012 on a cash earnings per share basis.

The deal is likely to be completed by June 2011 and Patni will be listed on the Indian bourses till its completion, post which the new promoters would look at a US listing of the company.

Synergies

In the IT industry, size matters. The Patni-iGate combined entity would have annual revenues close to $1 billion, enabling it to bid for large-scale deals. The combined entity will also have better pricing power given the increased basket of offerings, even as their combined costs would remain largely unchanged. The combined Ebitda for the last 12 months stood at around $215 million and cash and equivalents close to $450 million (including Patni’s $318 million). With Patni generating quarterly Ebitda of $38 million and iGate $17 million, expect the cash kitty to grow bigger over the coming quarters.

The business synergies, too, will be significant. While iGate’s strength is in the banking and financial services domain, Patni has expertise in insurance, manufacturing, retail & distribution, communications, media & utilities verticals. With just two common clients, one being a large revenue contributor (GE), the client overlap is negligible for both the companies. This will enable the tech companies to tap in significant cross-sell opportunities. On the flip side, analysts believe retention of clients (of Patni) remains a key monitorable as Patni does not undertake critical work for its clients, making it easier for them to switch vendors.
At the broad level, they believe the integration of the two companies will take two to three quarters by the completion of the deal in around June 2011.

With both the managements speeding up employee interaction and holding workshops to address employee concerns about the deal, retaining the combined workforce of over 24,000 people should not be a significant issue. The companies can also use tools like wage hikes to curb the high attrition rate. Also, a stronger employer brand will also mean more growth avenues for the employees.

Better to sell Patni shares before open offer

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Tue, 11 Jan 2011 07:44:00 +0000

The acceptance ratio for shares to be tendered in the open offer by iGate for public shareholders in Patni is 52-55 per cent, which will go up further by 73 per cent if ADS shareholders do not tender their shares during the offer, said analysts.

Considering that it will take at least three to four months for the open offer to get started due to the regulatory clearances required, investors who plan to tender their shares are advised to book profit if the stock trades around the open offer price, they said.

Indian public hold 25.29 per cent stake in Patni, which include 15.14 per cent by foreign institutions, 4 per cent by domestic institutions and 10.15 per cent by non-institutional investors, as per BSE website.

“The acceptance ratio for Patni’s public shareholders in the open offer is 52 per cent. If ADS shareholders do not tender, then the acceptance ratio increases to 75-78 per cent. The premium to the market price is about eight-odd per cent. With the new management coming in and having laid out plans, the prospects appear good for Patni. This will also improve valuations,” said Yogesh Radke, head of quantitative research at Edelweiss Securities.

Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities, pegged the acceptance ratio for public shareholders a bit higher at 55 per cent. “If the shares are traded near the Rs 484-490 levels, it is better to sell it in the market. Why wait for another four months for just Rs 5-10 a share. Also, there are execution risks during the open offer.”

If the stock falls below the open offer price, there will be an arbitrage opportunity for short-term traders, he said.

For long-term investors, there are better prospects for the company under the new management, Thunu-guntla felt. “Investors are advised to book profit if the stock trades around open offer price,” he said.

Appreciating rupee to plague IT companies Q3 numbers: experts

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Mon, 10 Jan 2011 06:31:00 +0000

Grappling with the impact of appreciating rupee, the third quarter numbers of IT companies are unlikely to bring any “great surprises” for the street, feel experts.

Market is curiously waiting for a boost from Infosys Technologies and TCS, when these two honchos will announce their respective October-December quarter earnings on January 13 and 17, respectively.

“With the rupee appreciating against dollar and fewer billing days in view of the holidays in the December quarter, the market is not expecting any blockbuster performance from the IT companies,” SMC Capitals Strategist and Head of Research Jagannathan Thunuguntla said.

Brokerage houses are expecting a revenue growth in a range of 2.4-6 per cent from the frontline IT companies including Infosys, TCS and Wipro, which would be largely driven by volumes.

“Volumes for the blue chip IT companies are expected to rise by 5-8 per cent, which is impressive in the backdrop of a seasonally soft quarter. While cross currency volatility should help, the appreciation of rupee against the dollar and GBP (Pound) should set off those gains,” a report by Kotak Securities said.

It also has hopes of an upward revision of guidance by bellwether Infosys on the back of a supportive macro scenario.

However, it said that the fourth quarter growth guidance may be conservative due to lack of complete information on calendar year 2011’s client spending budgets, rupee appreciation and the still hazy scenario in Europe.

Experts feel that the performance of most of the IT firms will be in-line with their respective numbers in the second quarter of the fiscal.

“Barring the impact of fewer working days during the December quarter, performance is expected to be similar to Q2FY11. The trend of stable pricing and high attrition will remain unchanged.

“While broadening of the employee pyramid (salaries) will be favourable, rupee appreciation against dollar and pound will be a margin headwind,” Edelweiss said in a note.

Commenting on the performance of mid-cap IT stocks, marketmen said the large caps are expected to outperform them, as they are better equipped to counter the impact of appreciating rupee, high attrition and any potential economic slowdown globally.

Infosys result hopes to check depressed D-Street sentiment

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Mon, 10 Jan 2011 06:27:00 +0000

The stock markets are banking on information technology giant Infosys’ quarterly results, slated for this week, to lift the sentiment, battered by fears of interest rate rises in view of rising inflation, say experts.

The Bombay Stock Exchange’s benchmark, the Sensex, lost nearly four per cent last week.
Analysts feel the markets, grappling with the dearth of positive news flow, will keenly look at the October-December quarter numbers of Infosys, which will mark the beginning of the results season on Thursday.

"The overall mood of the market is nervous, with a string of negative cues, including rate hike fears in view of rising inflation and the widening current account deficit," SMC Capitals’ head of research, Jagannathan Thunuguntla, said.

The first week of the year was disappointing for the markets. The Sensex fell by 817 points. News of food inflation having jumped to 18.32 per cent for the week ended December 25 due to rocketing prices of vegetables was a major dampener. And, the country’s current account deficit, which represents the net flow of income out of the country, barring capital movements, surged by a whopping 72 per cent in the July-September quarter over the same period last year. It hit the sentiment of both, foreign institutional investors and retail investors.

Market observers feel Dalal Street will continue its southward journey in the coming week, with FIIs withdrawing money. “Inflation and scams have made the short-term outlook very uncertain. Foreigners have been selling every day. Markets would be fearing anti-inflationary action from the government,” said Motilal Oswal Financial Services’ co-founder and joint MD, Raamdeo Agrawal.

Ashika Stock Brokers’ research head, Paras Bothra, said the lacklustre street may get "some" direction from the third-quarter earnings of Infosys. However, market observers also said Infosys was unlikely to bring any great surprises as the IT sector is under pressure due to the rupee’s appreciation against the dollar and the pound.

PSUs leave govt poorer by Rs 1.47 lakh crore in 2010

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Fri, 07 Jan 2011 06:02:00 +0000

Despite the market rally, the government was a significant loser with about 47 state-run entities (excluding banks and NBFCs) losing Rs 1.47 lakh crore in market value since January 4, 2010.

As per an analysis of share price movements since January 4, 2010, market capitalisation of companies with promoter holdings of central or state governments slipped 11.8% from Rs 12.41 lakh crore on January 4, 2010 to Rs 10.94 lakh crore on January 3, 2011.

Jagannadham Thunuguntla, equity head at SMC Capitals, said: “The reasons for underperformance by few PSUs are based on case-to-case basis. For instance, the stocks such as NTPC and NHPC have underperformed as the whole power sector has been underperformed on the capital market last year on the back of long gestation period involved in the power projects. The stocks of the oil marketing companies have been lacklustre during the year owing to ongoing uncertainty in the government’s deregulation policy on fuel prices.

Further, the underperformance was seen in stocks such as MMTC. However, this may not be seen as an underperformance as the stock prices were based on very limited float available in the open market with the government holding in these companies as high as 99%.”

The promoters of three most valued PSU firms — MMTC, SAIL and NMDC — have lost significantly last year.

Government holding in MMTC is 99.33%, while in NMDC it is 90%. Its holding in SAIL is over 85%, and in NTPC it is 84.5%. Bhel and ONGC have government holdings of 67.72% and 74.14%, respectively.

Trading giant MMTC has lost significant amount of wealth with the government stake in the company now Rs 55,000 crore lower than it was on January 4, 2010. From a price of Rs 1,727.51 on January 4, 2010, the share is currently worth Rs 1,169.05.

The environment for PSU stocks has not been favourable with most of them recording substantially negative returns than the broad market. Nearly 50% of PSUs showed a decline in market capital during the period.

While Sensex rose 17% to 20,561.05 in the said period, the BSE PSU index lost 1.15%, to 9,516.36 from 9,627.49. Though the share price increase has been spectacular in some cases, this has not translated into larger wealth creation for the government given the inherently small size of the firms.

Fuel Reforms To Hinge On Political Will, Inflation

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Fri, 07 Jan 2011 05:59:00 +0000

(Government will have to cross the political hurdle on diesel price deregulation, even as it is saddled with the economic compulsion of keeping inflation low. This story is part of a series of TickerNews articles on likely trends in India's markets and economy in 2011.)

By Atrayee Lahiri
NEW DELHI, JAN 6 (TickerNews Service): Year 2011 will be a litmus test for government aiming to spark off the second round of fuel price reforms, auction of more oil blocks and firm up rules for shale gas explorations.
The United Progressive Alliance government will have to cross the political hurdle on diesel price deregulation, even as it is saddled with the economic compulsion of keeping inflation low.
Keeping fuel prices artificially low will continue to hurt oil companies in 2011 and keep their share prices subdued as global crude oil passes the psychological barrier of $100 a barrel.
The cash-strapped government too wants to reduce its fuel subsidy in 2011 to cut its fiscal deficit to 4.8% of gross domestic product from 5.5% in 2010-11 (Apr-Mar).
While the proposal of full diesel price reforms is clouded with doubts, analysts expect a partial decontrol or just a mere price hike of say Rs 3 per litre.
Prime Minister's Economic Advisor C. Rangarajan said full diesel price decontrol can happen only when headline inflation eases to 4-5%.
"Deregulation of diesel prices depends on abating wholesale price number," he said.
Fitch Ratings Senior Director Abhinav Goel said he does not expect diesel price reform in 2011 as diesel has a higher impact on reported inflation, one of government's key economic concerns.
Oil ministry officials said hike in prices of diesel and cooking gas are inevitable in 2011 as oil marketing companies are suffering a loss of almost Rs 6.30 on sale of 1 litre of diesel and loss of Rs 275 on sale of 1 cylinder of liquefied petroleum gas.
Government is thinking of raising diesel price by Rs 3 per litre, but complete deregulation of diesel prices is unlikely because of political considerations and inflation, said an oil ministry official.
LPG prices may be hiked by not more than Rs 40, as anything more than that will reflect on voting patterns, the official said.

ENERGY SECURITY, NELP
In the absence of full diesel and LPG price deregulation, India will step up efforts to boost local supply and ensure energy security for 1.2 billion population.
So, the energy-starved country will step up oil and gas explorations in 2011.
Government will launch the ninth round of New Exploration Licensing Policy or NELP IX, which will see an auction of around 35 oil and gas blocks.
Some of these blocks could be from the eighth round, for which no bids were received.
Directorate General of Hydrocarbons, the country's upstream oil regulator, has identified 30-35 oil and gas blocks for auction.
"In the previous round of NELP, there was not much demand. I expect some action, but I do not think it will not be robust. This is not only the case with India but wherever there is auction all around the world," said Jagannadham Thunuguntla, head of research of SMC Global Securities Ltd.
"There can be some action with regards to Reliance Industries ramping up its gas production from its crown jewel-KG D6 basin," he said.
Analysts also point to the need for changes in tax structure for success of NELP IX.
"The previous NELP round failed because the government was not able to present a coherent policy on taxation and gas pricing. It has not been able to convince the international investors. I do not expect it will be any different this year," said an analyst who did not wish to be named.
Since 1997, when government launched NELP, it has awarded 239 blocks.
Of these, 68 discoveries of oil and gas have been made in 19 blocks, establishing reserves of 500 million tonne of oil and oil-equivalent gas.
An investment of over $10 billion has been committed in the first eight NELP rounds.

OPEN ACREAGE EXPLORATION
NELP IX will be the last of the oil block auctioning as government will shift to an "open acreage" system of awarding oil and gas blocks in future.
In 2011, government may firm up the rules for open acreage auction system, which has been the trend globally.
DGH is currently preparing database for such blocks and detailed guidelines can be expected by year end.

SHALE GAS
While government awaits success of NELP IX and upcoming open acreage system, it has set an Aug 2011 deadline for auction of shale gas blocks.
DGH is working on a regulatory framework for India's first shale gas auctions.
While little information is available on potential shale gas reserves in India, several areas are under consideration including Assam's Arakan in northeast, Cambay in west, Krishna-Godavari region in east and Vindhyas in central India.
India and US recently signed a memorandum of understanding on sharing of shale gas technology.

EXPANSION, M&A
Even as government pushes for fuel price reform companies like Indian Oil Corp, Bharat Petroleum Corp, and Hindustan Petroleum Corp will expand their capacities in India in 2011.
"India's surplus in refining capacity will continue with the commissioning of new facilities in 2011 and beyond. However, public sector refiners are partially protected by price controls," said Goel of Fitch.
"Private sector companies such as Reliance Industries Ltd will focus on the export markets, benefitting from more complex refineries than most international competitors," he said.
SMC's Thunuguntla said there can be some action with regards to Reliance Industries ramping up its gas production from its crown jewel KG D6 basin.
"That will push the stock which has been laggard for a while," he said.
India's upstream oil companies like Reliance, ONGC, and Oil India are looking at oil and gas assets abroad.
State-run Oil & Natural Gas Corp recently signed an agreement with Russia's Sistema for exploration of oil blocks and possible joint venture deals.
ONGC will lead a consortium of Indian oil sector PSUs to consider acquiring the stake offered by Sistema under the agreement.
Under the India-Russia energy agreement signed recently, the two companies agreed to consider opportunities for a potential transaction involving Sistema's majority stake in JSC Bashneft and 49% stake in RussNeft, each of which owns and operates numerous fields and refining assets in Russia.
The pact also covers possible stake sale by ONGC Videsh Ltd in Imperial Energy Corp, which owns and operates fields in Russia.

DISINVESTMENT PLANS
The new year will witness two major disinvestments, first ONGC and then IOC.
ONGC will appoint six merchant bankers to manage its proposed follow-on public offer for sale of shares, Chairman and Managing Director R.S. Sharma said Wednesday.
The state-run company earlier today advertised calling bids from merchant bankers for its estimated Rs 130 billion FPO.
Government, which owns 74.14% stake in ONGC, plans to divest 5% in the forthcoming public issue by March.
The ONGC share sale is likely to be the last in the series of government's Rs 400 billion disinvestment programme for 2010-11 (Apr-Mar).
The IOC follow-on public offer may fetch Rs 200 billion as the company divests 5% and the company sells fresh equity of another 5%. (End)

Inox up by 17 pc, Fame tumbles over 5 pc on BSE

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Fri, 07 Jan 2011 05:53:00 +0000

MUMBAI: Shares of Inox Leisure today climbed 17 per cent in the early trade on Bombay Stock Exchange amid reports that Reliance MediaWorks has bought about 32 per cent stake in the multiplex operator Fame India.

Both Reliance MediaWorks and Inox Leisure had announced their open offers last month to wrest control of the multiplex operator.

Inox shares skyrocketed by 17.01 per cent to touch the monthly-high of Rs 79.10 on BSE.

"With Reliance MediaWorks hiking the stake in Fame, chances of Inox losing the takeover battle has increased which means the company's liquidity will be intact, as it will not have to raise any funds for acquiring the additional stake," said SMC Capitals equity head Jagannadham Thunuguntla.

Reliance MediaWorks also gained by 1.64 per cent to Rs 231.65 a share.

On the other hand, profit booking was seen at the Fame's counter, which tanked by 5.55 per cent to Rs 86.70 on BSE.

Fame India scrip yesterday hit its upper circuit of 20 per cent on speculations that Reliance MediaWorks, which held 12 per cent stake in the multiplex firm, had increased its shareholding to about 44 per cent.

Inox had offered Fame India shareholders an offer of Rs 51 a share, putting its offer size at nearly Rs 42 crore. However, the Anil Ambani group company made a higher offer of Rs 83.40 per share. Both offers closed on January 4 after commencing on December 16.

Meanwhile, the BSE 30-share barometer Sensex was trading at 20,167.20, down 133.9 points at 12:45 hrs

M&A new hot exit route for PE players as IPOs lose steam

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Mon, 03 Jan 2011 06:23:00 +0000

The end of 2010 witnessed one among the largest exits in the Indian private equity sector, wherein PE majors Actis and Sequoia together made a cool $500-million profit through the sale of portfolio firm Paras Pharma. The beginning of 2011 is set to witness another big-ticket M&A deal, in which General Atlantic is to exit Patni Computers. The deal size could be around
$1 billion. These two mega deals remain strong examples of M&A being today’s preferred after exit route for PE firms in India than the conventional IPO route.

Siddharth Shah, head of corporate & securities practice at Nishith Desai Associates, said, “One needs to bear in mind that besides the high notional valuation that an IPO may create in some circumstances, the certainty of being able to exit on account of liquidity, price realisation and regulatory constraints may make a trade sale or a strategic sale or an M&A exit a more real and profitable exit. Time value of money is also paramount for PE investors, as most of them invest with a certain time-specific horizon.”

The PE/VC industry witnessed 37 exits through M&A worth $1.67 billion in 2010, including the $726-million Paras Pharma deal. According to VCCedge data, there were about 153 exits worth more than $5.9 billion till November 2010. The only exit that took place in December was the Paras Pharma sell-out to Reckitt Benckiser.

Shah adds, “More recently, while the markets have reached their highs, it appears that still there may not be enough appetite for fresh IPOs, considering how many IPOs could materialise in the last six months as against the number of DRHP filings. Some factors contributing to this could be underperformance by many of the companies post-IPO, sector biases amongst investors and the fear of an impending correction, etc. In such uncertainty, PE players may turn to more certain exits like trade sale or M&A exits, which may not always give the same valuation as an IPO but at least give a certainty in exits.”

The share price of SKS Microfinance, the only listed microfinance firm, eroded to a 52-week low of Rs 559 in the last month due to concerns over new MFI regulations brought by the Andhra government. The shares were traded at Rs 1490 at the end of September 2010.
About 15 exits took place through IPOs worth $1.64 billion in 2010. The largest IPO, backed by PE firms, was that of SKS Microfinance.

Jagannadham Thunuguntla, strategist and head of research at SMC Global Securities Ltd, shares a different view. “As the markets are strong, PE players are taking it as an opportune time to exit some of their investments of 2006-2007,” he says.

In one of the largest buyouts by a Japanese firm in the Indian IT space, NTT Data Corporation acquired IT offshoring firm Intelligroup in a deal worth $199 million, in June 2010.

Shah concludes, “It appears with M&A gathering steam in 2010, trade sells or sell-offs would continue to be the flavour for PE exits in 2011. The Indian corporate sector will look at inorganic growth as its expansion strategy and also many family-controlled businesses supported by PE/VCs will look to sell out.”

BSE Market Cap soars ten-fold in a decade

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Mon, 03 Jan 2011 06:10:00 +0000

The market capitalization of the Bombay Stock Exchange (BSE) has increased more than tenfold in the last one decade. The total market capitalisation (m-cap) of the companies listed on the exchange touched Rs 72,96,725 crore ($1,622 billion) on December 31, 2010, from around Rs 7,00,000 crore ($150 billion) at the end of year 2000.

Indian companies added m-cap of Rs 65,96,725 crore ($1472 billion) during last ten years, with the newly listed companies contributing almost 40% or Rs 25,52,692 crore. The benchmark Sensex jumped over five times or 416% from the 3,972 levels at the beginning of the decade to 20,509 as on December 31, 2010.

The benchmark indices rose for a second consecutive year, making the benchmark index the best performer among the world’s 10 biggest equity markets as economic growth lured record foreign funds. The BSE benchmark index Sensex rallied 17% in last year, extended previous year’s biggest rally in 18 years.

Global funds bought a net of $90.17 billion (Rs 4,05,092 crore) since 2001, taking net flows into equities to $101.97 billion (Rs 4,47,104 crore), according to data on the Securities and Exchange Board of India website. The strong net inflows by the foreign institutional investors (FIIs) and healthy economic growth helped the country to post robust growth during the decade.

“The sovereign upgrade for India (and downgrade for western economies) will generate great appetite for Indian capital market assets. India is considered as one of the best safe-haven economies,” said Moses Harding, Executive Vice President & Head – Global Markets Group, IndusInd Bank.

India currently ranks at number eight in world market capitalisation ranking and has notched up nine positions in the last seven years, the Bloomberg data shows. After ranking at eighteen positions in 2003, we have overtaken Germany, Australia, Switzerland, Italy, South Korea, Taiwan, Spain, Sweden and Netherlands during the journey.

Half of the listed stocks appreciated over 500% during the decade. Out of 1,755 actively traded stocks in the last one decade, as many as 503 stocks appreciated more than 1000% and 312 stocks rose in the range of 500-1000%.

Among the frontline A group stocks, Unitech, United Phosphorus, Jindal Steel and Power, Lupin, Sesa Goa, Jai Corp, Aban Offshore, Crompton Greaves and Shriram Transport Finance have zoomed more than 10,000% or 100 times.

However, most technology and entertainment stocks, including Ketan Parikh’s favorite companies such as PVP Ventures (formerly SSI), Pentamedia Graphics, Himachal Futuristic, Silverline Technologies, Software Technology and Mascon Global shed over 95% from their 2000 levels.

Power and metal jumped over 50 times, while IT and pharma were up less than 6 times. Going by sectoral classification, the market wealth of banks, financial, power, steel, engineering, non-ferrous metal, electrical equipment, constructions, automobiles and oil exploration rose more than 15 times, while refineries, information technology, pharmaceuticals, telecommunication and fast moving consumer goods saw less-than-tenfold jump in market capitalization in the last one decade.

Among the business houses, Tata, Adani, Anil Agarwal promoted Vedanta, O P Jindal group, UB group, Anil Dhirbhai Ambani group and Munjal group have seen over tenfold jump, while the Mukesh Ambani-promoted Reliance group, A V Birla, Mahindra and Mahindra and Shiv Nadar group reported a mere single-digit growth in group market capitalizations in last one decade.

“Indian capital markets had eventful and exciting times during the past decade. Considering the growing stature of India on the global front, one can expect that the coming decade will also be equally fruitful for India,” said Jagannadham Thunuguntla, Strategist and Head of Research, SMC Global Securities.

2011 to see a deluge of public issues, returns remain a concern

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Mon, 03 Jan 2011 06:01:00 +0000

India Inc is set to mobilise over Rs 1,40,000 crore through public issues in the new year. The collections were Rs 1,05,647 crore in calendar year 2010.
Based on the 100-odd applications filed with the Securities and Exchange Board of India, the private sector is expected to raise Rs 65,000 crore, indicate a research report by SMC Global Securities. Of this, 35 have already got the regulator’s approval.

The government will also raise Rs 50,000 crore in the first three months of the new year. This includes Rs 19,000 crore from the follow-on public offer of Indian Oil Corporation, and the remaining from SAIL, ONGC and Hindustan Copper. The final figure for the full calendar year will be much more as the government is expected to announce a new target in next year’s Budget. Add to this the Rs 25,000 crore expected from the rights issues of State Bank of India and others.

In 2010, the public issue market saw a huge appetite from foreign investors and high net worth individuals for fairly priced issues. Retail investors joined in later, but mainly for public sector issues led by Coal India. The private sector was not as lucky.

The returns, however, from investment in these public offers failed to keep pace with the subscription enthusiasm. Average returns at the end of the year was a paltry 9 per cent. Though the follow-on public offers (FPO) worth Rs 31,577 crore, mostly from the public sector companies, were well received in the capital market, the year to date average returns has been a miniscule 5 per cent.

As many as 151 companies entered the capital market in 2010 to mobilise over Rs 100,000 crore, of which only 14 made investors happy with an appreciation of over 100 per cent each. Among others, 24 are trading 25-99 per cent above their offer price, while 22 are currently quoted at 10-25 per cent above offer prices. Of the 81 companies that are quoting below their issues prices, the stock price of as many as 30 issues have declined 25 per cent each.

Analysts believe that in most of the cases where investors have gained, the pricing of the IPOs has been reasonable along with good fundamentals and a strong business case. Also, most of these IPOs were oversubscribed by a good margin, leading to investors’ interest in these companies post their listing. Companies like Gravita India were oversubscribed 42 times and Talwalkar Fitness 28.2 times. Both the companies, post their listing, have more than doubled from their issue price.

Among the star performers were the Coal India IPO and Jubilant Foods (up 330 per cent over issue price). The mood turned for the better only after the strong listing of Manganese Ore India Limited.

Coal India was a game-changer for public issues: SMC Global Securities

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Wed, 29 Dec 2010 07:33:00 +0000

Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities discusses his latest report on company public issues in a chat with ET Now.

Are you a bit surprised that the HNI interest for Shipping Corporation of India and Power Grid even though they were FPOs and they were priced to perfection was quite extraordinarily high?

Jagannadham Thunuguntla : I think it is Coal India that was a game changer in the public issue market of India I believe. It has all the features of making a fairytale be it quality of the company, be it pricing, be it the listing everything went well and everybody made money and in capital markets there is something called spill over effect. If something goes well and 2-3 issues after that tend to do well I think that rub off effect came on to the Power Grid and Shipping Corporation and these 3 issues got about more than a 10 lakh applications bidding and it is a very very strong response.

I believe that momentum can be expected going forward and amidst of all this even lot of excitement in the NBFC space as well because they are getting to give huge IPO funding to these HNIs who are eagerly going an investing for example in an issue where 150 times HNI subscription happened that means if you have to get 1 crore allotment you have to put in an application of 150 crore application so it is a huge business for NBFCs. I think on the basis of the interest revenue that they are earning I think 2010 3-4 major issues they made about 400-500 crore of interest amount alone.

What is the call on the realty IPO pipeline you have got Emaar MGF, Raheja, Lodha as well do you think any of them would sort of postpone their fundraising plans and will they revise their price in given the kind of falling valuations of the listed peers?

Jagannadham Thunuguntla : The real estate public issue market has been still raising some question marks. In the 2010 we have seen 2-3 issues from the real estate space Godrej Properties and 2-3 players were able to do it but excitement is not that high and I also I would like to draw one more point here is that there is a huge attraction for PSU issues because the quality evaluation everything is looking well and in that context private sector issues are already unable to catch up to the excitement of the PSU issues.

Even out of that private sector real estate private sector is facing much more problem so technically I think till the time this divestment activity goes on private sector issues have to be very very reasonable in terms of that pricing effect all they have to find in the market.

That was the easy part. Now is the difficult part ONGC FPO, IOC FPO, SAIL FPO a) these are companies which are regulated, b) these are companies where the FPO size is going to be in billions of dollars?

Jagannadham Thunuguntla : Yes, before comment that all the 3 are extremely quality companies and huge asset basis and so that is one factor that should work in their favour and as far as the fundamentals are concerned and second point is the FPO is one of the most difficult instrument to sell because it is like a hitting a moving target whereas in case of IPO at least there is a stationary target in case of FPO there is a moving target. There is always inherent competition between the issue price and the market price that is going on that is why it is relatively difficult instrument to sell.

We have seen in the last year with NTPC, NMDC how those issues unable to get the excitement in the market and in case of ONGC and IOC as you rightly said that deregulation pricing element is also there in to that let see how it goes but as of now the government is seems to be under control to reach that 40000 crore of divestment target for the financial year.

Already they met about 23000 crore remaining 17000 crore I think they can pull it through be it let say ONGC FPO or SAIL FPO I believe this fiscal year it seems things are falling in place and it needs to be say how it goes but people are making money and rub off effect is showing robustness and positive mood is still there in the market.

Finally, you have got a new listing this week which is Punjab & Sind Bank the issue if you look at the grey market premium it is trading at premium of about Rs.35 to Rs.36 what are your expectations there?

Jagannadham Thunuguntla : I believe it was fantastically priced issue in the sense of one to price to book is a very extremely reasonably priced issue and understably so the issue got about 50 times over subscription. Again for HNIs and the retails it’s a major challenge is to get the allotment in this kind of over subscription scenarios.

But having said that the listing should be fairly good and already this December there are not much activity happening in the secondary markets that is why many traders and investors have got into the Punjab & Sind Bank trade. I believe they should be making money if at all any body culprit is there for not making big money in the Punjab & Sind Bank it will be because of over subscription not necessarily because of the company.

FIIs purchase stocks, bonds worth nearly Rs 10 lakh cr in 2010

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Wed, 29 Dec 2010 07:23:00 +0000

The 'hot money' poured in by foreign investors for purchase of stocks and bonds in 2010 has neared Rs 10 lakh crore, a record high for a year and nearly one-fifth of their overall investment so far.

Foreign institutional investors (FIIs), whose investments have often been called 'hot money' because they can be pulled out anytime, have purchased stocks and debt securities worth Rs 9,60,000 crore so far in 2010, according to the latest available data.

At the same time, FIIs sold shares and bonds worth Rs 7,80,000 crore during the year, still leaving behind a record net investment of over Rs 1.75 lakh crore for the year.

Experts said that it was a strong FII inflow that provided the much-needed warmth to the Indian capital markets in 2010 when the global economy continued to reel under pressure.

This has taken the overall gross purchases by FIIs so far in the country to close to Rs 47 lakh crore. After taking into account total sales worth Rs 42 lakh crore by FIIs so far in the country, overseas investors have made a net investment of over Rs 5 lakh crore since markets were opened up for them in 1992.

This includes about Rs 4.5 lakh crore in stocks and the rest in debt securities. During 2010 alone, FIIs made a net investment of Rs 1.30 lakh crore in equities and about Rs 46,000 crore in debt. The huge inflows came despite only about 50 new FIIs entering the country during the year, on top of the about 1,700 FIIs already present at the end of 2009.

This is the first time in history that net FII inflows for a year have crossed the Rs 1 lakh crore mark and analysts expect overseas investment to continue to rise in the next year. In 2009, FIIs had infused Rs 83,423 crore in the stock market.

According to analysts, FIIs have been pumping funds into emerging markets like India because of their strong growth potential. Besides, rising concerns over the European countries' debt issue are also driving foreign funds into the Indian market.

Marketmen further said that FII inflows into the country will continue to rise in the next year as well, if the liquidity conditions remain strong. "FIIs are bullish on Indian market and foreign funds are aware that India and China together have the potential to attract around 10 per cent of total inflows in a couple of years," CNI Research Head Kishore Ostwal said.

He further said, "FII inflows were not disturbed by the 2G scam, financial bribery scandal and the Indian stock market will continue to witness huge inflows in the 2011 as well."

"Apart from the country's robust economic growth, weakness in overseas markets due to European crisis, Federal Reserve's second quantitative easing plan and Indian government's disinvestment added to the huge inflows and 2010 has broken all the records of investment by FIIs," SMC Capital's Jagannathan Thunuguntla said.

Minority investors need to be wary in Patni

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Wed, 29 Dec 2010 07:20:00 +0000

Even as the deal price of Patni Computer Systems is expected to be in the range of Rs 525-550 per share at the face value of Rs 2, the stock on Tuesday closed Rs 53.25 or 10.14 per cent below the range. Patni stock closed at Rs 471.75 on the Bombay Stock Exchange (BSE).

Market experts attributed this fear among investors on the possible non-compete agreement in the deal, which will mostly benefit the promoters at the cost of minority shareholders. Vedanta-Cairn deal is being cited as an example for the same. Citing the case of Vedanta-Cairn Energy deal, Jagannadham Thunuguntla, strategist and head of research of SMC Global Securities said, "The minority shareholders may need to be extra careful before venturing into investing in Patni in the anticipation of the deal. There is always a risk of 'non-compete fees' element in the structuring."

In the case of Vedanta-Cairn deal, where Rs 405 per share is offered to the promoters of Cairn India, there was Rs 50 per share of non-compete fees given exclusively to the promoters. "Hence, this resulted into Rs 355 per share for minority shareholders. After such structuring, the share price of Cairn has significantly corrected," he added.

As per the newly proposed takeover guidelines by the Securities and Exchange Board of India (Sebi), there is no scope for any 'non-compete fees' in the deal structuring. "However, these new guidelines have not yet been approved. Hence, on the basis of the current Sebi takeover guidelines, there is always a possibility of 'noncompete fees' in the deal structuring," Thunuguntla said.

Hence, till the new Sebi takeover guidelines come into effect, the minority investors have to tread carefully before venturing to trade for 'open-offer' arbitrage.

Promoters of Patni Computer and private equity (PE) investor General Atlantic, which has a stake in it, have put their stakes on sale. While the proposed sale was being anticipated by the market circles for two to three years now, there is a talk that the deal is entering the final lap.

I-Gate, promoted by ex-Infosys' US marketing head Phaneesh Murthy, along with its partner and private equity firm, Apax Partners, are said to be the front-runner at present. Others in the race include PE firm Carlyle and Advent and Fujitsu.

Another good year in the offing for stock markets

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Wed, 29 Dec 2010 07:16:00 +0000

It promises to be a good year ahead for investors. Leading brokerages are cautiously optimistic on the equity market outlook for 2011, predicting an average upside of 18.33 per cent and an average downside of 8.33 per cent from the current level of the National Stock Exchange's (NSE) benchmark index, Nifty. This result is based on the expectations of nine leading brokerages.

The bellwether Bombay Stock Exchange's (BSE) Sensex closed at 20,028.93 points on Monday, while NSE's Nifty closed at 5,998.10. However, these were rounded off to 20,000 and 6,000 points for Sensex and Nifty respectively for Mail Today's survey of brokerages on 'Market Outlook-2011'.

Independent research firm CNI Research, has given the most optimistic picture for the market in 2011 by giving a ranges of 18,980-26,000 (5.1 per cent downside to 30 per cent upside) for Sensex and 5,700-7,700 (-five per cent to 28.33 per cent) for Nifty - lowest downside and highest upside.

Kishor Ostwal, chairman and managing director of CNI Research cited global recovery, higher liquidity (availability of funds seeking good investment opportunities), continued domestic growth fuelling higher corporate earnings growth as influential factors for the market in 2011.

On the other hand, SMC Global Securities fixed the downside at 15,000 for the Sensex, or about 25 per cent downside from the current level. However, it also sees the possibility of the Sensex touching 25,000-point mark on the upside. For Nifty it has given a range of 5,000-7,000 points (16.66 per cent downside and upside) for the next calendar year.

On the factors that would influence the course of market in the next 12 months, Jagannadham Thunuguntla, strategist and head of research of SMC Global said, "We have to keep a watch on international factors like falling Chinese real estate prices, Korean war, and sovereign debt crisis in Europe in the new year.

On domestic front, it needs to be seen how the corporate earnings would pan out in the wake of high inflation, leading to higher interest rates." Comparatively, the actual return on these indices have given in 2010, so far, seems rosier. Sensex has given a 14.48 per cent return, while Nifty has given a slightly higher return of 15.33 per cent till December 27 close.

Asked to pick three best stocks from each of the three categories - large-, mid- and small-cap segments - that could perform well during the coming calendar year, seven brokerages identified State Bank of India (SBI), Reliance Industries (RIL) and Rural Electrification Corporation (REC) from the biggies.

Three brokerages - Angel Broking , Kotak Securities and IIFL (erstwhile India Infoline) picked SBI as one of their best bets. Two brokerages each have picked up RIL and REC.

Dipen Shah, senior vice-president (PCG Research) of Kotak Securities terms SBI as the proxy to Indian economic growth, besides enjoying high level of cheap funds like CASA (current account and savings account) deposits.

Two brokerages - SMC Global and CNI Research - picked RIL as one of the big bets for 2011. Thunuguntla of SMC Global said that RIL, which under-performed during 2010 is expected to ramp up its KG basin gas capacity, besides continuing its global acquisitions.

On REC's strengths, IIFL said that it is power capex play, with strong traction in sanctions, stable spreads, robust asset quality and impressive return ratios. The other 14 stocks include four auto stocks - Maruti, Hero Honda, Bajaj Auto and Tata Motors DVR (Differential Voting Rights) - and three other banks, including Axis Bank, ICICI Bank and IDBI Bank.

Among the 39 mid- and small-cap stocks picked by various brokerages, only TRIL (Transformers and Rectifiers India Ltd) figured twice, highlighting the divergence of views on these stocks.

TRIL, picked by KR Choksey Shares and Securities and CNI Research, is a power transmission equipment manufacturer, with eight per cent market share in the segment.

The remaining 37 mid-cap and small-cap picks include prominent names like Tech Mahindra, TVS Motors, Crisil, Blue Star, Glenmark, Voltas, Bombay Dying, P&S Bank and Petronet LNG.

Earnings disappointments can lead to a correction

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Wed, 29 Dec 2010 07:11:00 +0000

On market trends

Jagannadham Thunuguntla

Strategist and Head of Research, SMC Global Securities Ltd
Date : 27 Dec 10 | 09:30 AM

Smartinvestor : Hi, this is Puneet Wadhwa and we have with us Jagannadham Thunuguntla, Strategist & Head of Research, SMC Global Securities Limited on the Talk Show today

Smartinvestor : Hi Jagannadham and welcome. The Indian equity markets have been finding it tough to scale past the recent highs. How long do you think such movement will continue?

Jagannadham Thunuguntla : The markets have been subdued due to lack of participation from foreign institutional investors (FIIs) as this is a holiday season for them. Even the local players have not shown much of action.

Jagannadham Thunuguntla : However, the fourth quarter of the current financial year can witness some action as higher amount of fund allocation will be taking place.

Smartinvestor : Do you believe that the markets have factored in the December 2010 quarter performance of India Inc?

Jagannadham Thunuguntla : The current valuations suggest that the markets not only have factored in December 2010 quarter results in the prices, but there isn’t any scope for any unpleasant surprises from the results season starting in January 2011. So, in case the results are not up to the expectations, one can expect a correction from the current levels.

Smartinvestor : Which sectors, according to you, are likely to report a good performance in the December 2010 quarter? Which sectors will be laggards?

Jagannadham Thunuguntla : One can expect good results from sectors like information technology (IT), banking, consumer durables, FMCG, automobiles. The biggest laggard sector shall be the PSU Oil & Gas due to increasing under-recoveries, on account of rising crude prices.

Smartinvestor : What are the upside triggers and downside risks for the markets, going into the New Year?

Jagannadham Thunuguntla : The upside triggers for the market shall be reduction in inflation rate, better economic data coming from both US and the Euro zone.

Jagannadham Thunuguntla : The downside triggers can be the rising crude prices, the expectations of a increase in interest rates by the Reserve Bank of India (RBI) in its upcoming January 2011 policy meet.

Smartinvestor : What is your view on information technology and banking sectors in the near-to-medium term? Any stocks in particular that you recommend in this space?

Jagannadham Thunuguntla : The IT sector has outperformed the broader markets due to the economic revival in US, which has led to increased IT spend by the US clients. Moreover, the rupee-dollar movement has so far been in the favor of IT companies. This has helped them protect and improve their margins while maintaining the strong growth rates.

Jagannadham Thunuguntla : One can expect the bigger IT players to outperform the mid-sized player due to increased attrition rates (which is leading to salary hikes to control them) and the threat of global IT giants increasing their India presence and thus beating Indian players on the cost-advantage turf.

Jagannadham Thunuguntla : Thus, any exposure to the sector should be restricted to the bigger players like TCS, Infosys and Wipro.

Jagannadham Thunuguntla : The banking sector has also outperformed the broader indices as the banks have been able to improve their margins in the year 2010. However, with the rising interest rates in 2011, one can expect the bond portfolio of the banks to take a hit.

Jagannadham Thunuguntla : Moreover, there is a concern that there might be a strain on the asset quality of the banks too. Thus, the Net Interest Margins (NIMs) of the banks are expected to come under pressure. One would do better by avoiding any exposure to the sector in 2011.

Smartinvestor : Would you recommend investing in the mid-cap space in the current market conditions? Any stocks / sectors that you are bullish on?

Jagannadham Thunuguntla : Punjab & Sind bank (decent size of loan book, healthy margins, reasonable valuation), TVS Motors (third largest two-wheeler company, healthy market share, latest product offerings), Indraprastha Gas (sole supplier of CNG in NCR, strong positioning in the retail gas distribution / CNG supplies, customers focusing on fuel efficient CNG vehicles).

Jagannadham Thunuguntla : Banking, automobiles and healthcare are the sectors which are set to perform in 2011.

Smartinvestor : Copper prices hit record highs on the LME recently. What is your outlook on metal space?

Jagannadham Thunuguntla : The price of copper hit record highs due to several factors like Chile's Collahuasi mine halting shipments, falling dollar, growing demand and copper mining companies falling short of demand.

Jagannadham Thunuguntla : There has been lot of nervousness because of volatility in the global price. But from a long term perspective demand for metals from emerging markets will continue to be strong.

Public issues strike a loud gong this year

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Wed, 29 Dec 2010 06:47:00 +0000

Big-ticket Government divestments and good listing gains helped the primary markets here mop up more than Rs 71,000 crore this calendar year.

There were 70 public issues, out of which were 62 initial pubic offerings worth Rs 39,710 crore, according to data provided by SMC Capital.

A report from the brokerage also added that all primary market issuances of 2010 fetched subscriptions worth Rs 7.06 lakh crore.

“It was a good year for the primary market, as there were companies with well established track records that had approached the market. The issues were also priced right. The best examples are the public sector divestments,” said Mr Nagendra Bhatnagar, Managing Director and Chief Executive Director at IDBI Capital Market Services.

Among the PSU divestments was Coal India's Rs 15,000-crore IPO, India's biggest primary market issuance. The issue was subscribed more than 15 times and received subscriptions worth Rs 2.54 lakh crore. Others were Power Grid's Rs 7,400-crore follow-on offering, which was subscribed 14.84 times; MOIL's Rs 1,200-crore IPO which was subscribed a massive 56 times.

The divestments of this year also included Shipping Corporation, Engineers India, NMDC, NTPC and REC's FPOs.

Broker commissions were raised following the department of disinvestment officials meeting brokers at various cities across the country after the NTPC and NMDC issues saw lack of retail participation. This ensured better retail mop up subsequently.

This year companies from newer sectors made their debut on the bourses. Jubilant Foodworks (operator of national pizza chain, Domino's Pizza), Hathway Cable (cable TV services provider), Talwalkars Better Value Fitness (fitness chain), Eros International (film distributor), VA Tech Wabag (water treatment company) and Career Point (coaching institute) were among the companies that tapped the markets.

Maiden IDR

Standard Chartered Bank came out with the first Indian Depository Receipt to be listed on the bourses. The last two unlisted PSU banks – United Bank of India and Punjab & Sind Bank (issue has closed) – listed themselves. All these companies saw good response.

The year also saw retail investors showing renewed interest in the primary market after staying away for two years. Their enthusiasm showed not just in the PSU divestments but also in the private sectors issuances. According to SMC Capital report, the retail portions of all IPOs were subscribed 6.88 times this year, as compared with just 1.47 times last year.
Coal India, Power Grid and MOIL received more than 10 lakh retail applications for their issuances. Coal India received 16.64 lakh retail applications, Power Grid 14.27 lakh and MOIL 13.01 lakh applications.

“The PSU divestments have renewed retail interest in the primary market. PSU divestments tend to inspire a greater degree of confidence in the markets,” said Mr Bhatnagar.
He also said that new guidelines by SEBI have helped whet retail appetite in the primary market.

It was this year that SEBI allowed companies to keep their issues for retail and high net-worth categories open for one whole day after the closing date for QIBs. “This has allowed the retail investors to see how the QIBs respond to the issue and act accordingly,” explained Mr Bhatnagar.

The regulator asked QIBs to foot the whole amount of subscription to an issue instead of the earlier 10 per cent and this brought the oversubscription down significantly. The regulator also extended the application supported by blocked amount (ASBA) facility to QIBs
SEBI also increased the retail limit in primary market issuances from Rs 1 lakh to Rs 2 lakh.

It clamped down on misleading IPO advertisements and on companies that made forward-looking statements to the media just before listing.

Stricter rules

Investment bankers were asked to file a dossier with the regulator that statements made to the media strictly adhere to the draft red herring prospectus. In addition the duration between issue closing and listing has been brought down by 10 days.

The year 2011 too will be a good year for public issues, said merchant bankers, referring to the bigger and stronger PSU divestment pipeline that includes Indian Oil and ONGC.
Some of the companies that are likely to come out with their public issues include Micromax Informatics, Lavasa Corporation, VRL Logistics, Scotts Garments Lovable Lingerie and Emaar MGF.

पति-पत्नी और पटनी के प्रवर्तक

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Wed, 29 Dec 2010 06:39:00 +0000

एसएमसी ग्लोबल सिक्यूरिटीज के रणनीतिकार और रिसर्च प्रमुख जगन्नाधम तुनगुंटला पटनी कंप्यूटर सिस्टम्स पर कब्जा जमाने की कोशिशों को लेकर बड़ा मजेदार सवाल उठाते हैं कि आखिर इन पत्नी (Patni) का पति कौन होगा? जवाब आ चुका है, हालांकि इसकी पुष्टि होनी बाकी है। खबरों के मुताबिक नास्डैक में लिस्टेड कंपनी आईगेट पटनी को 100 करोड़ डॉलर में खरीदने जा रही है। कितना अजीब संयोग है कि पटनी के एक पूर्व कर्मचारी एन आर नारायण मूर्ति ने वहां से निकलकर इनफोसिस बना डाली और अब इनफोसिस का ही एक पूर्व कर्मचारी फणीश मूर्ति पटनी को खरीदने जा रहे हैं। पटनी, इनफोसिस और मूर्ति का यह कैसा गोल-गोल चक्र है भाई!

यूं तो पटनी कंप्यूटर (बीएसई – 532517, एनएसई – PATNI) फणीश मूर्ति ही नहीं, हमारे-आपके निवेश के लिए भी माफिक है। 50.81 रुपए का टीटीएम ईपीएस, 278.25 रुपए की बुक वैल्यू और शेयर का भाव 471.75 रुपए यानी वह मात्र 9.29 के पी/ई अनुपात पर ट्रेड हो रहा है। सामान्य रूप से ऐसे स्टॉक में निवेश करना किसे नहीं भाएगा। लेकिन पटनी का मामला अब सामान्य नहीं रह गया है। प्रवर्तक अपनी सारी हिस्सेदारी बेचकर कंपनी को गैर के हवाले कर रहे हैं। इसलिए निवेश के फैसले से पहले हमें कुछ खास पहलुओं पर गौर कर लेना चाहिए।

खबरों और बाजार की अपेक्षाओं के मुताबिक आईगेट और अपैक्स का कंसोर्टियम पटनी के लिए प्रति शेयर 525 से 550 रुपए देने को तैयार हैं। प्रवर्तक पटनी बंधु अपनी पूरी की पूरी 45.88 फीसदी इक्विटी बेचने जा रहे हैं। साथ ही प्राइवेट इक्विटी फर्म जनरल एटलांटिक भी अपना 2.10 फीसदी निवेश निकाल रही है। प्रवर्तकों के खाते के 6.01 करोड़ शेयरों में से तीनों भाइयों नरेंद्र, गजेंद्र और अशोक पटनी के पास लगभग बराबर-बराबर हिस्सेदारी है। इसलिए उनमें से हर एक को पूरे सौदे से मिलनेवाले 3155 करोड़ से 3300 का एक तिहाई हिस्सा (1100 करोड़ रुपए) मिल जाएगा।

जनरल एटलांटिक के लिए भी यह जबरदस्त मुनाफे का सौदा होगा। उससे साल 2002 में पटनी कंप्यूटर के शेयर 133 रुपए के भाव से खरीदे थे। इसके बाद से उसे प्रति शेयर 79.50 रुपए का लाभांश मिल चुका है। अब उसे अगर हर शेयर का दाम 525 रुपए मिलता है तो सोचिए आठ साल में उसका कुल रिटर्न 355 फीसदी हो जाता है। इसलिए उसकी मौज है। प्रवर्तकों की तो मौज इसलिए भी बढ़ जाती है कि उन्हें कंपनी खरीदने वाले से ‘नॉन-कम्पीट’ फीस अलग से मिलेगी। 525-550 रुपए मूल्य में से इसका कितना हिस्सा होगा, यह तो शेयर खरीद समझौते के बाद ही सामने आने के बाद ही पता चलेगा। लेकिन इतना तय है कि अगले हफ्ते हस्ताक्षर की जानेवाली डील में ऐसा प्रावधान है कि पटनी के प्रवर्तक कम के कम अगले दो सालों तक सॉफ्टवेयर बिजनेस में नहीं उतरेंगे।

हमारे-आप के लिहाज से असली सावधानी यहीं बरतनी है। प्रवर्तकों को तो नॉन कम्पीट फीस मिल जाएगी। लेकिन उसके बाद का ओपन ऑफर उससे कम का रहेगा। आपको याद होगा कि वेदांता-केअर्न की डील में जहां प्रवर्तकों को प्रति शेयर 405 रुपए मिलेंगे, वहीं आम निवेशकों को 355 रुपए क्योंकि इसमें 50 रुपए की नॉन-कम्पीट फीस है। सेबी की नई अधिग्रहण संहिता में प्रस्ताव है कि आम निवेशकों व प्रवर्तकों को एक समान मूल्य मिले। लेकिन यह अभी तक लागू नहीं हुई। फिलहाल मौजूदा नियमों में ऐसी कोई बाध्यता या प्रावधान नहीं है। और, आईगेट जबरदस्ती क्यों ज्यादा खर्च करना चाहेगा?

बाजार को इस बात का अहसास है। यही वजह है कि डील के चर्चा में आने के बाद से यह शेयर या तो स्थिर है या गिर रहा है। सोमवार को यह 486.40 रुपए पर स्थिर रहा और मंगलवार को 3.01 फीसदी गिरकर 471.75 रुपए पर बंद हुआ। जो लोग सोचते हैं कि अभी खरीद कर ओपन ऑफर में बेचकर फायदा कमा लेंगे, उनकी सोच व्यावहारिक नहीं लगती क्योंकि ओपन ऑफर मौजूदा भाव के आसपास ही रहने की उम्मीद है। इसलिए हमारे-आप जैसे आम निवेशकों को पटनी के सौदे की चकाचौंध में नहीं फंसना चाहिए। हां, तमाशा दूर से जरूर देखते रहना चाहिए

Indian cos to raise Rs 90k cr from primary market in 2011: Study

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Wed, 29 Dec 2010 06:33:00 +0000

Capitalising on market revival, 2010 saw Indian companies raising nearly Rs 59,000 crore from IPOs and the total mop-up from initial offerings is expected to touch Rs 90,000 crore in the coming year, says a study.

According to a report by SMC Global Securities Limited , Indian companies, both public and private,have collected about Rs 59,523 crore from the primary market so far this year. In 2009 only 20 companies raised close to Rs 20,000 crore from initial public offers.

The report added that the pipeline is indicating a total public issue volume of about Rs 90,000 crore during 2011. "... Rs 50,000 crore from private sector and Rs 40,000 crore from public sector," SMC Global Securities Strategist & Head of Research Jagannadham Thunuguntla said.

As per the prospectuses filed by private companies with the market regulator SEBI, there are 100 public issues in the pipeline with an indicative IPO size of about Rs 50,000 crore.

Of this, about 35 have already got SEBI's nod and are waiting to open the issue. The indicative size of these 35 issues is about Rs 35,000 crore, he added. Rest 65 issues worth Rs 15,000 crore are waiting for the SEBI clearance, the report added.

Besides, initial public offerings of state-owned companies would hit the market next year as a part of the government's plan to mop-up Rs 40,000 crore in 2010-2011 fiscal through disinvestment in PSUs.

Analysts are of the view that revival of the primary market boosted investor confidence and expect that this momentum will continue in the coming year as well.

This calender year the government diluted stake in nine companies, including largest coal producer Coal India's IPO. With an issue size exceeding Rs 15,000 crore, the CIL IPO made history as the largest public issue of all time in the Indian capital market.

Also, follow-on public offers of NMDC , NTPC and Power Grid Corporation of India Ltd recieved an overwhelming response of investors.

Over 100 public issues to be launched in 2011

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Wed, 29 Dec 2010 06:30:00 +0000

After calendar year 2010, which has seen the highest-ever public issue mobilisation by Indian companies at Rs 59,523 crore, there are at least 100 public issues waiting to hit the market in 2011 to raise Rs 90,000 crore.

According to an estimate by SMC Global, the pipeline indicates total public issue volume of about Rs 90,000 crore during the calendar year 2011. Of this, Rs 50,000 crore can come from the private sector and Rs 40,000 crore from the public sector.
From the private sector alone, there are 100 public issues in the pipeline on the basis of offer documents filed with SEBI. The indicative IPO size from these issues is to the tune of about Rs 50,000 crore.

Of this, about 35 prospectuses have already got the SEBI clearance and are waiting to hit the market. The indicative size of these 35 floats is to the tune of about Rs 35,000 crore.
Says Jagannadham Thunuguntla, strategist & head of research, SMC Global Securities, “A robust public issue calender can be expected in 2011, if market conditions remain strong”.
According to the report, offer documents for which SEBI clearance has been received and the indicative issue sizes are Jindal Power ( Rs 7200 crore), Reliance Infra Tel (Rs 5000 crore), Gujarat State Petroleum Corporation ( Rs 3067 crore), Sterlite Energy ( Rs 3000 crore), Lodha Developers ( Rs 2500 crore), Lavasa Corporation ( Rs 1663 crore), BPTP Limited ( Rs 1500 crore), L&T Finance (Rs 1500 crore), Ambience Limited ( Rs 1293 crore), Avantha Power & Infrastructure (Rs 1250 crore), IND-Barath Power (Rs 1140 crore), Raheja Universal (Rs 864 crore) among others.

In addition, there are about 65 prospectuses waiting for SEBI clearance. The indicative size of these issuances is to the tune of about Rs 15,000 crore. These include Sahara Prime City (Rs 3,450 crore), Embassy Property Developments (Rs 2,400 crore), Emaar MGF ( Rs 1,324 crore), Future Ventures ( Rs 750 crore), Kalpataru Ltd (Rs 710 crore), Micromax Informatics (Rs 426 crore), Reid & Taylor (Rs 393 crore) among others.

Adds Thunuguntla, “If market conditions remain strong, there is every reason to believe that the government will continue to be aggressive even during 2011 and pursue the target of Rs 40,000 crore of disinvestment.”

The public issue market is still relishing the gains of Coal India IPO and the mood is still upbeat, the report says.

Enter for short-term gains

jagannadham.ndg@gmail.com (Jagannadham Thunuguntla) — Wed, 29 Dec 2010 06:24:00 +0000

While analysts expect gains for Patni’s shareholders, they believe the new owner will have to overcome quite a few challenges to create value in the long run.

The plan of the promoters of Patni Computers to sell their entire 46 per cent holding may
have a positive rub-off on its stock in the near term. However, it also brings along some challenges, including retaining clients, curbing employee attrition and boosting growth rates, which the new promoters will have to overcome in order to create value for shareholders.

Along with the promoters, General Atlantic will also be shedding its 17 per cent holding in
Patni, one of the oldest technology firms in the country. While the iGate-Apax Partners consortium and private equity (PE) firm Carlyle are in the race to buy out the promoters, the bids are reported to be in the range of Rs 500-600 a share, valuing Patni at $1.45-1.74 billion. While in the lower band, valuations are in sync with the current market capitalisation of the company, if the deal is struck at Rs 600, it could lead to immediate gains of 20 per cent for the investors.

While the valuations at the current levels are slightly lower than the peers, suggesting there is a good probability of the deal getting done at Rs 500 per share, high cash equivalents of Rs 1,416-crore (Rs 108 a share) provide further support. Analysts, too, believe the sell-out will take place at a premium to the current level of Rs 490. Jagannadham Thunuguntla, strategist and head of research, SMC Global, says, “The promoters have been looking to exit for two-three years and the finalisation of the deal will be a positive for the minority shareholders. A price of Rs 525-550 would be a good exit point for minority shareholders”. Thus, retail investors can hold the stock and benefit from the premium arising from the deal. However, the key risk would be the fallout of the deal, which will lead to a big correction in the stock price.

PEER COMPARISON
In Rs crore	Patni Comp.	Mphasis	Oracle Finance	Polaris Software
Revenues	3,156	4,823	2,814	1,439
% chg y-o-y	-1.8	39.4	-6.4	4.7
Ebitda	831	1,308	990	248
% chg y-o-y	26.9	38.5	-3.4	28.0
EBITDA margin (%)	26.3	27.1	35.2	17.2
Net profit	654	1,052	781	181
% chg y-o-y	48.7	42.3	-4.5	32.5
PE (x)	10.2	14.0	26.7	10.9
For Trailing 12 months Source: Capitaline

MUTED GROWTH
In Rs crore	CY09	CY10E	CY11E
Revenues	3,153	3,184	3,634
Ebitda (%)	603	629	697
Net Profit	482	546	525
E: Estimates Souce: Bloomberg

What Patni offers
With annual revenues of $655.9 million and 16,556 employees, Patni offers a good opportunity for a buyer aiming to enhance presence in the technology outsourcing industry. The company also has a strong customer base of 282 clients, many of whom are from the insurance and financial sectors.

While the company reported a strong jump in performance in CY2009, led by its new CEO Jeya Kumar (joined in December 2008), it has reported muted revenue growth and underperformed its peers in the recent quarters. For the December quarter, it again expects muted revenue growth (0.7-1.2 per cent) and 3.7-5.8 per cent decline in the net profit (excluding forex gain) compared to the September quarter.

In the September quarter, its BPO revenues grew 31 per cent sequentially, primarily due to revenue contribution from the acquisition of CHCS, excluding which the growth was muted. While the insurance business grew 8.5 per cent, its financial services grew just 2.2 per cent, where most of the peers are witnessing strong traction. This is due to fewer banking clients, which are spending more in the current environment benefiting peers. Also, Patni has one of the highest attrition rates in the industry, of around 26 per cent. Thus, apart from boosting overall growth rates, employee retention would also be a key challenge for the new owner.

A big challenge for the new promoter will be to retain its top clients. Analysts say customers typically relook at the arrangement with their vendors when major events like acquisitions take place. While Patni is known to have clients such as GE, analysts say the relationship with Patni for most of the clients is not critical (strategic). In simpler words, it is usually not difficult for clients to move out to another vendor. The threat is apparent, given that Patni derived 48.5 per cent from its top 10 clients in the September quarter, marginally lower than 51.4 per cent in the year ago period.

For now, Patni is planning to increase its focus on the BFSI and telecom sectors in the EU. It is also planning to add more customers in the remote infrastructure management space, which accounts for less than five per cent of revenues currently.

The company recently won a big ticket transaction processing deal from the US-based health insurance company, Universal, which is five year $175 million contracted incremental revenue. This is in addition to another $75 million expected from the third-party agreement totalling $250 million. Going forward, good traction from the healthcare vertical and higher demand in the US market will continue to drive volume growth.