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4 Mahindra 2 Wheelers announced its debut in motorcycles with the launch Net inflows (Rs cr)
of the 110cc Stallio and the 300cc Mojo. The two variants of the Stallio, 28 Sep 10 % Chg MTD YTD
which will be part of the volumes-driven commuter segment, will cost Rs
41,199 and Rs 44,699 apiece (ex-showroom, Pune), while the Mojo will FII 895 (31.5) 24,440 83,528
sport a price tag of Rs 175,000. Since the time it acquired the two- Mutual Fund (568) (7.1) (5,607) (21,126)
wheeler business of the Kinetic group two years ago, M&M has launched
three scooters. The bikes will now be critical growth drivers simply FII open interest (Rs cr)
because of the numbers generated in the country. (BL) 28 Sep 10 % Chg
4 Kingfisher Airlines (KFA), owned by the liquor to airlines UB Group, FII Index Futures 16,750 (24.0)
has decided to revamp its capital structure by converting 30% of total FII Index Options 52,536 (41.6)
debt into equity to reduce the loan burden. The debt was Rs75bn at end- FII Stock Futures 37,521 (12.3)
March, a leverage of 17 times. “We have decided to convert Rs7.35bn of FII Stock Options 301 (81.3)
loan given to the company from UBHL (parent company United breweries
Advances / Declines (BSE)
Holdings Ltd) to equity. Also, the process of restructuring is going on now
29 Sep 10 A B S Total % total
with various banks (for the rest of the conversion) and is likely to be
closed in the next one month,” said Vijay Mallya, chairman, on the Advances 72 817 181 1,070 41
sidelines of the annual general meeting. The dilution of promoters’ stake Declines 130 1064 227 1,421 55
due to such capital restructuring is yet to be ascertained (BS) Unchanged 3 81 13 97 4
Sensex
20,200
18,925
17,650
16,375
15,100
Source: ET = Economic Times, BS = Business Standard, FE = Financial Express, Sep-09 Dec-09 Mar-10 Jun-10 Sep-10
BL = Business Line, ToI: Times of India, BSE = Bombay Stock Exchange
MORNING INSIGHT October 1, 2010
Valuation
DPIL is currently trading at 9.6x and 7.9x FY11 and FY12 earnings respectively. On a
forward EV/EBITDA basis, the stock is trading at 7.0x. Our DCF based target works
out to Rs.318
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MORNING INSIGHT October 1, 2010
Risks
n EPC projects are largely fix priced and there are liquidated damages for time
overruns. Thus the company may have to incur higher costs due to material price
escalation and penalties on delay in project completion.
n The company does not have any operating history either in transmission towers
or EHV cables. There may be a risk involving quality and market acceptance of
the product.
We Initiate coverage with BUY n The company's EPC business is concentrated on rural power distribution projects
recommendation on DPIL with a initiated under Rajiv Gandhi Gramin Vidyutikaran Yojna ('RGGVY'). As of March
price target of Rs.318 31, 2010 DPIL is undertaking projects under RGGY in the state of Gujarat and
Assam. Under such contracts, the payments are received after completion of
work. Failure to execute the project in a timely manner, or an unanticipated in-
crease in cost of raw material may adversely affect revenues and cash flows.
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MORNING INSIGHT October 1, 2010
PSU
BSE midcap
BSE small cap
Tech
Metal
Oil & Gas
Banking
Healthcare
Capital goods
Auto
Sensex
8500 2600
Jan'08
Jan'09
Jan'10
Jul
Mar
Mar
Mar
May
May
May
Sep
Nov
Sep
Nov
Sep
July
July
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MORNING INSIGHT October 1, 2010
160 30,000
FII MF
125 20,000
90 10,000
55 -
20 (10,000)
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
(20,000)
Oct
Oct
Jan_08
Jul
Jan_09
Jul
Jan'10
Jul
Feb
Mar
Feb
Mar
Feb
Mar
Jun
Jun
Jun
May
May
May
Nov
Dec
Sep
Nov
Dec
Sep
Aug
Aug
Aug
Apr
Apr
Apr
Sep
Source: Bloomberg
Source: Bloomberg
However, foreign funds have largely chased the large caps and consequently, the
mid and small cap indices underperformed heavily. It is believed that much of the FII
funds have come from Exchange Traded Funds (ETFs), which are mainly large-cap
and short term oriented.
Sector-wise, banking stocks stood out following strong credit growth, improvement
in NIM and upgradation in asset quality. The sector has not been affected by the
ongoing monetary tightening by the RBI. Global banking sector regulators agreed on
new capital norms which were less stringent than feared. With a view to prevent a
repeat of the credit crisis in 2008, the Basel Committee on Banking Supervision
more than doubled its capital requirements for banks, giving lenders as long as eight
years to comply in full. Banks will be required to have a tier 1 capital ratio of 6%, up
from the current 4% level. The key element of tier 1 capital is common shareholder
funds and disclosed reserves or retained earnings, according to the Basel Commit-
tee.
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MORNING INSIGHT October 1, 2010
High beta metal and mining stocks rose on strong economic data from China, which
is the world's largest consumer of copper and aluminum. IT stocks rose as strong
economic data in US and Asia helped soothe worries over the global economic re-
covery.
50 12.0
47 8.0
44 4.0
41
-
38
Jul-05
Jul-06
Jul-07
Jul-08
Jul-09
Jul-10
Jan-05
Jan-06
Jan-07
Jan-08
Jan-09
Jan-10
(4.0)
Jul-08
Jul-09
Jul-10
Mar-08
Mar-09
Mar-10
Jan-08
May-08
Jan-09
May-09
Jan-10
May-10
Nov-08
Nov-09
Sep-08
Sep-09
Source: Bloomberg
Source: Bloomberg
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MORNING INSIGHT October 1, 2010
Domestic macros - IIP growth strong but base effect catching up…
July IIP (Index of Industrial Production) rose 13.8% yoy well ahead of market predic-
tions. Mining, Manufacturing and Electricity sectors for the month of July 2010 grew
IIP growth (%)
at rates of 9.7%, 15.0% and 3.7% respectively as compared to July 2009. As per
20.0 use-based classification, Basic goods, Capital Goods and Intermediate goods posted
16.0 growth of 5.1%, 63% and 9.1% yoy respectively. The Consumer durables and Con-
sumer non-durables have recorded growth of 22.1% and 0.5% respectively.
12.0
8.0 While the IIP data has been encouraging, there has been skepticism over the cred-
ibility of the sharp rise in Capital Goods index (42% month-on-month). This is espe-
4.0
cially in the backdrop of a muted growth in core sector in July (accounting for 27%
- weight in IIP) at 4% yoy. One should wait for further evidence of pick-up in non-food
(4.0) credit and core sector growth to conclude that the acceleration in Industrial output is
Jul-06
Feb-06
Mar-08
May-07
Jan-09
Jun-09
Dec-06
Nov-09
Oct-07
Sep-05
Aug-08
Apr-05
Apr-10
credible.
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MORNING INSIGHT October 1, 2010
Recommendation
Quite clearly, the Indian markets have been driven by foreign fund buying even as
the domestic funds have been selling consistently. Data available with us indicates
that in relation to other Asian emerging market peers, India has received dispropor-
tionate share of foreign portfolio funds during the past two months. How long the
foreign funds would continue to buy Indian equities remains a key question for the
markets as well as the economy. However, given that the US economy still remains
vulnerable to slowdown and deflation, the Fed is likely to maintain low interest rates
in the near-term. This means that global liquidity should remain strong, thus creating
favourable conditions for fund flows into emerging markets like India.
Indian investors have been amazed by the strength of the rally and fear whether the
markets are overheated (fearing a repeat of 2008). However, one must note that
current market valuations are much lower than the heady multiples prevailing in late
2007. Hence there may be a minor adjustment to that extent but not a serious
selloff.
At the current market valuation (20x FY11 consensus earnings), we are fairly valued
based on FY11 numbers but there is a moderate upside based on FY12 numbers.
Investors entering at current levels must be prepared for a longer time horizon for
making gains. As earlier, we prefer sectors with a strong domestic consumption
theme. In fact, the consumption driven sectors like Auto and Consumer Durables
have been major outperformers in the ongoing rally. Apart from this, we recom-
mend select stocks in Infrastructure, Capital Goods, Financial Services and large IT
as our preferred picks. The risk to our moderately bullish call comes from any disrup-
tive event in global economy.
Preferred picks
Sector Stocks
Banking ICICI Bank, BoB, Union Bank, Andhra Bank, Axis Bank, J&K
Construction Unity Infraprojects, IVRCL, Jaiprakash Associates,
Sunil Hi Tech
Engineering Blue Star, L&T, Greaves Cotton, Kalpataru Power,
Diamond Power Infrastructure Ltd
Information Technology Infosys, NIIT Tech, TCS
Logistics Mundra Port, Gateway Distriparks, Allcargo, GATI
Media Jagran Prakashan
Metals Sesa Goa
NBFCs India Infoline, IDFC
Other Midcaps JBF, Time Techno, Everest Kanto
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MORNING INSIGHT October 1, 2010
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MORNING INSIGHT October 1, 2010
Source: BSE
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MORNING INSIGHT October 1, 2010
Gainers
HDFC 733 3.7 11.6 6.8
ITC 178 2.7 8.5 16.3
HDFC Bank 2,489 1.9 5.6 1.9
Losers
Reliance Ind 987 (1.2) (6.8) 6.6
ONGC 1,404 (1.2) (2.0) 1.7
Ambuja Cements 141 (4.5) (1.8) 2.4
Source: Bloomberg
Research Team
Dipen Shah Apurva Doshi Sarika Lohra Jayesh Kumar Shrikant Chouhan
IT, Media Logistics, Textiles, Mid Cap NBFCs Economy Technical analyst
dipen.shah@kotak.com doshi.apurva@kotak.com sarika.lohra@kotak.com kumar.jayesh@kotak.com shrikant.chouhan@kotak.com
+91 22 6621 6301 +91 22 6621 6308 +91 22 6621 6301 +91 22 6652 9172 +91 22 6621 6360
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