Category: Economy, Markets and Macro Views

Asian Paints reported 49% increase in 2QFY08 profit (pre exceptionals), domestic growth (13% YoY) seems to be slowing down. On the positive side, margins expanded 258bps.Management has indicated that there is a slowdown in domestic construction activity which has impacted paint sales.
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Stocks that ShareKhan likes at current level of market (Nifty 5233 # Sensex 17,640) purely from delivery and investment point of view (more volatility is possible over next few days so one should keep 50% – 70% amount aside to buy at lower levels and actually accumulate when these stocks fall ) are :

J P Associates (cmp 1055) our Target is Rs. 1350
Bharti Airtel (cmp 970) our Target is Rs. 1100
SBI (cmp 1665) our Target is Rs. 2282
Shivvani (cmp 365) our Target is Rs. 480
BHEL (cmp 2075) our Target is Rs. 2450
Ranbaxy (cmp 420) our Target is Rs. 500
Aban Lloyds (cmp 3900) our Target is Rs. 4400
Maruti (cmp 1092) we shall put a new Target shortly.

Here is a brief round-up on Indian Market valuation on various factors as told by ABN Amro.

• China and India are the most expensive markets in the world on the basis of current PE – 25.9 and 23.6 respectively
• India ranks on the top for lowest dividend yield – 0.9%
• On the EY-BY, [-4.1%] India looks badly overvalued. The Earnings Yield (EY) less the Bond Yield (BY) compares the price of equities to interest rates. The EY is the inverse of the PE ratio and basically provides a dividend yield but using the earnings per share rather than dividends per share.
• India is the second most expensive in PEGY at 2.5 [A PEGY ratio compares the PE ratio to the dividend yield and earnings growth. It is calculated by dividing the PE by the sum of the dividend yield and earnings growth rate.]

Think twice before you commit your hard earned money at current levels. However, you can work with your professional fund managers and decide.

Anil Ambani who is in a hurry to takeover as the richest Indian from his brother, Mukesh has landed in trouble for violating SEBI guidelines in the Reliance Power IPO draft prospectus.

Reliance Power is promoted 50:50 by Reliance Energy and Anil Ambani and investment companies owned by him. Reliance Power has proposed to come out with an IPO of 130 crore shares of face value of Rs 2 at a premium to be fixed later. This includes 16 crore shares to the promoters at the offer price. The net offer to the public will be 10.5 per cent of the company’s expanded equity capital raising Rs 12,500 crore.

The Violation by Anil Ambani and AAA Company:
As per clause 4.1.1, the promoters shall contribute at least 20 per cent of the post issue capital in a public issue by an unlisted company. As per clause 4.6.2, the promoters have to contribute this 20 per cent at least at the IPO price if they have contributed this 20 per cent during one year preceding the public issue.

However, according to page 29 of the draft prospectus, it has been pointed out that Anil Ambani through AAA project ventures and REL got themselves allotted 105 crore shares each on September 30 reportedly through a bogus merger. Each of them plan to subscribe 8 crore shares each at the IPO price.

Clause 4.6.1 has been provided to check the abuse by promoters by allotting shares to themselves, for consideration other than cash by merger schemes; allotment of bonus shares out of revaluation reserves (ie out of reserves not earned in cash) and or in any other manner other than for cash (for example contributing an asset to the business at higher unfair value), within three years prior to public issue.

The only exception is when a merger scheme is sanctioned by a High Court. This clause has been provided to take care of genuine mergers and acquisitions which may have taken place before the public issues.

Reliance Public utility – Anil Ambani’s Shell Company Scam:
The group had an existing shell company called Reliance Public Utility Private Limited (RPUPL) which at that time had a paid up capital of Rs 1 lakh. The authorized capital of RPUPL was increased to Rs 1000 crores by a resolution dated July 30, 2007.

Anil Ambani’s personal investment company and Reliance Energy Ltd (controlled by Anil Ambani) invested Rs 500 crore each in the equity share capital of RPUPL on August 3, 2007. RPUPL is still a shell company with just Rs 1,000 crore of share capital and Rs 1,000 crore investment.

RPUPL and Reliance Power Limited passed necessary Board orders for merger of RPUPL into Reliance Power Limited. Rationale of the merger, as stated in the Scheme of Amalgamation is that,

RPUPL has put in considerable efforts in acquiring necessary technical and manpower skills which are ancillary to the business of Reliance Power Limited which can take benefits of this specialized skill sets and technology available with RPUPL to undertake mega power projects and implement them more efficiently and successfully.

From where the shell company having only one lakh paid up capital till July 31 this year acquired skill sets to implement mega power projects.

Anil Ambani is afraid to risk his own money and thus is passing on the risk of Ultra Mega Power projects to the Indian investor. Is there any agency in India to probe this scam ?

Source – Entire Reliance IPO Scam can be read here.

The architect of Modern Stock Trading and CEO of National Stock Exhcnage of India, R H Patil has said that Foreign Institutional Investors have Manipulated the Indian markets and in recommendations to the Finance Minsitry had ask to plug the holes. Mr. Patil said,

The market is being manipulated right now and a bubble was growing rapidly. Although the SEBI proposals are late, they would help avoid a greater disaster. It is very important to know the identity of foreign investors, who have been manipulating this market.

The Indian Markets have crashed this morning and trading has been halted for an hour. The BSE SENSEX was down 1,700 points.

What triggered the market crash ?
SEBI, in a draft guideline, said that foreign institutional investors and their sub-accounts cannot issue or renew participatory notes with underlying as derivatives with immediate effect. They have to unwind their current position within 18 months.

Participatory Notes – PNs are financial instruments used by investors or hedge funds that are not registered with Sebi, to invest in Indian shares. FIIs and their sub-accounts buy Indian securities and then issue PNs to foreign investors with these securities as the underlying.

Once the Sebi proposals are operationalised, only FIIs whose outstanding notes do not exceed 40% of their total asset holding in India will be allowed to issue fresh ones. For instruments already issued by FII sub-accounts, Sebi has given a window of 18 months to wind up existing positions.

As per reports, the notional value of investments through PN’s route grew almost ten times to Rs 3.53 lakh crore at the end of August 2007 from just Rs 31, 875 crore three years ago.

The Ministry of Finance should act immediately by using the Income Tax and Central Intelligence agencies to investigate and bring to book all those involved in the market manipulation.

Update from FM:
FM does a U-Turn and puts SEBI in a tight spot now. He said, We have not banned P Notes. SEBI to issue release to on P-Notes renewals. Move intended to moderate inflow of capital.

Tata Steel’s margin expands on rising raw material prices due to its fully-integrated nature compensating for Corus, while later takes care during falling raw material prices.

Refinancing of bridge loans utilised for acquiring Corus is now firmly put in place. Rights issue and convertible preference shares offer open up later this month, while a big part of the debt US$2.5bn has been sourced locally from State Bank of India to avoid turmoil in the international market following sub prime issue. Tata Steel’s 1.8mtpa expansion is on schedule for completion in early 2008. The green field project in Orissa has reached an advanced stage and will commence construction shortly.

EPS estimates for FY3/09 and FY3/10 by -4% and -1% to Rs99.9 and Rs117.7 respectively. Increased target price from Rs800 to Rs1,000 (ex rights and converts).

Also read our coverage on Gujarat NRE Coke and JSW Steel.