Category: Economy, Markets and Macro Views

Breaking News: India’s Largest FII, Citigroup has recommended a SELL on Reliance Energy and has categorized the stock in “Low Risk” category. Stock Price target is Rs 510.

RELE shares have rallied up 118% over the past 5 months on expectations of blue-sky scenarios through capacity additions, EPC order wins and the value of CBM blocks. Even with extreme blue-sky scenario of 1] additional 25,000MW capacity in 7 years, 2] execution of EPC orders of Rs800bn to be executed over 7 years with EBITDA margins of 15%, 3] no fuel supply risks, 4] no execution risks, 5] generous multiples for valuations, 6] and 20% premium to our existing value of RELE (ex-cash) yields only Rs1,183/share. Citi reiterates a Sell on stock.

RELE has re-rated every time a project has been announced. It was expected that RELE would capitalize on the opportunities thrown up by the passing of the Electricity Act 2003 (EA03). Projects were announced from time to time, but 4 years have passed and RELE continues to have only 941MW of generation capacity and distribution licenses in Mumbai and Delhi.

12-month target price for Reliance Energy of Rs510 is based on RELE (ex net cash) value of Rs229 and net cash value of Rs281 (1.1x FY07E Net Cash/FD Share). RELE (ex net cash) would comprise Mumbai business value of Rs117, other power assets value of Rs27, EPC Business value of Rs65 and Delhi distribution value of Rs20. At target price of Rs510, RELE (ex Delhi) would trade at a P/E multiple of 10.1x FY09E.

Dalal Street Recommendation: We have recommended our clients to BUY PUT OPTIONS.

A rising rupee has a negative impact on the margins of Indian IT companies who live on arbitrage with very little scope for innovation. More than 50% of their earnings are in dollar terms because of their dependence on US market.

In the case of IT stocks, the market has been looking only at the rising rupee since April 2007. The IT index has lost nearly 21% to 4310.38 from its all time high of 5,611.33 recorded on 19 February 2007. On the other hand, Indian Rupee extended gains to about 11% this year, making it Asia’s best performing currency. Infosys , Satyam and TCS are the biggest losers in the IT pack.

Today, the rupee strengthened past 40 per dollar for the first time in more than nine years, after lower US interest rates brightened the outlook for high-yielding assets like the Indian currency.

Meanwhile, Indian Trade Minister Kamal Nath, has expressed his concerns on rising rupee and said that the government would look at steps to protect exporters.

Analysts feel that high crude oil prices, hovering around $80 per barrel, and Reserve Bank of India (RBI) intervention continue to be the key risk to a sustained appreciation of the Indian unit.

Our internal analysts are of the view that one can expect a re-rating of IT stocks downwards within the next couple of weeks as they come out with their half yearly results.

Big Bulls on the Street are partying as the Bombay Stock Exchange Index crossed 16,000 mark in early trade and is currently trading at an all time high of 16,167.

Bank and financial shares rose on the reckoning that the Fed move could put pressure on RBI to loosen its monetary policy. BSE Bankex touched an intra-day high of 8606.46 which is a record high for the index.

Major Gainers in the SENSEX are – ONGC, Maruti Suzuki India, HDFC Bank, HDFC and Tata Motors. Reliance Industries all hit an all time high of Rs 2,130 in intra-day trading.

Also read about what our corporate reporter has to say about Infosys Technologies’ bid for Sage in the UK.

Citigroup Research has downgraded Gokaldas Exports Ltd to SELL. Earnings estimates of Gokaldas Exports have also been revised downwards.

Significant slowdown in India’s garment exports, rupee appreciation is the key concern said the report. 10%-19% downward revisions to FY08E-10E earnings to factor in this slowdown and stock’s 25% run-up over last 3 months. Target price reduced to Rs237 based on 10x FY09E PE – implies 6% downside.

Given the stock’s low free float (30%), we expect Blackstone’s 20% open offer at Rs275/share to provide near-term support. Investors can tender their shares in the open offer.

ITC wants to cash in on the big boom that is going to hit the organized retail market in India. After introducing Snacks and Biscuits, it will now venture into Shampoos and Soap market.

The new shampoo brand will be a part of its two year old, super premium range of personal care products, Essenza di Wills. But unlike Essenza that was available at ITC hotels and Wills Lifestyle stores, Fiama di Wills shampoos will be stocked at retail stores across India. The product will be available at Rs 99 for a 200 mili litre (ml) bottle. The shampoo market is crowded with multiple players and variants. The competition is cut-throat, in this segment. Hindustan Unilever is the market leader and also has a dedicated Social networking site, SunsilkGangofGirls, which helps them develop new customer base and continuously improve on their product lines.

We have reliably learnt that Fiama di Wills, the company may also foray in soaps market.

Breaking News:
The management of Tata Motors have indicated that they will unlock the value of its subsidiaries – HV Transmissions Ltd and HV Axles Ltd through an IPO or sale to outside party.

After the London Investors Conference, Citi still maintains a BUY – Low Risk with a target price of Rs 1029 on the stock.

Management guided to a modest revival in truck sales into 2HFY08E, implying that overall sales for the fiscal should be flat, or register modest growth. Truck operators’ profitability remains healthy, despite the rise in interest rates. Freight rates also continue to remain stable.

Rs80bn will be deployed over the next 3 years to launch new platforms in passenger cars and trucks. The small car remains on schedule and will be launched in mid-CY08 (1HFY09E). Management stated that TAMO will start the process of demerging its subsidiaries by end FY08E – with HV Transmissions and HV Axles being the businesses to be initially listed.

12-month target price of Rs1,029 is based on a sum-of-parts valuation methodology. Tata Motors’ core business at Rs 827 / share, which is based on 9.2x FY08E EBITDA. The subsidiaries are valued at Rs201 / share.