Premarket buzz: Are fund managers selling IT stocks?

Wall Street stages a modest recovery to post decent gains led by strength in materials & industrials. Despite successful bond auctions, European markets closed lower on disappointing US economic data.

On US economic data front, Weekly claims for unemployment benefits gained more than expected, climbing by 24,000 to a seasonally adjusted 399,000, the highest in six weeks. Retail sales rose a disappointing 0.1 percent in December, the weakest pace in seven months. Business inventories gained 0.3 percent in November.

Asian markets rise in opening trade as concerns over euro zone's funding problems ease. The SGX Nifty points to a modest start for the Indian markets

In the currency space, the euro hits a one-week high versus the dollar after European Central Bank President Mario Draghi said policy makers have averted a credit shortage and Spain sold almost twice its maximum target at a note auction. The euro was steady at 1.28 to the dollar.

In other asset classes oil drops after uncertainty over EU negotiations on Iran sanctions. Nymex Crude slips below 100 dollar mark. Gold inches higher to above USD 1645 levels.

Shares of Infosys and TCS marked their highest delivery based selling after poor guidance by the former IT bellwether. Stocks worth more than Rs 800 cr were sold by Infosys shareholders. This was the highest delivery recorded in last 3 quarters on the day of Infosys earnings. Around 51 lakh delivery based selling happened in TCS shares yesterday. Rupee has also appreciated close to 5% in this week perhaps indicating fund managers are getting out of IT stocks.

LIC has set aside a corpus of nearly Rs 10,000 crore to buy a part of the shares owned by SUUTI. The government has informally sounded out LIC about the impending dilution of SUUTI that owns more than 11% in ITC, around 8% in L&T and over 23% in Axis Bank.

News reports suggest steel makers have hiked prices once again, the third hike since the start of January and this time the price increase is 500 rupees per tonne.

A leading newspaper reported Apollo Tyres has paid 5.7 million dollars as fine to the Competition Commission of South Africa after found guilty in a tyre cartel.

Leela has put its upcoming Chennai resort on the block. Sources say Leela is looking to raise almost Rs 930 crore from the sale of this beach resort. Buyer can be NRI Ravi Pillai, who had bought Leela's Kovalam Property last year for Rs 500 crore.

Sources also indicate that Unitech and Telenor continue to disagree on rights issue.

Results Today: CMC, Goa Carbon, Sintex, Triveni

Riken Mehta

Your Trade @ 9: Infosys Q3 + IIP Nov = Market rally?

Good Morning everyone! Today is an important day for the markets. KV Kamath's Infosys and Keki Mistry's HDFC will hit the headlines with their quarterly results. Earnings forecast from these two giants will prove to be a trend decider for the market. First, let's take a quick look at the global cues and newspaper headlines this morning.

US stocks held firm near recent five-month highs on Wednesday as investors awaited key bond market tests for Europe in the next two days that could determine the direction of the euro zone crisis.

The Dow Jones industrial average lost 13.02 points, or 0.10 percent, to 12,449.45. The S&P's 500 Index closed flat at 1,292.48.

Watch out for weekly jobless claims and retail sales data later in the day.

Europe closed lower as Fitch says the ECB must do more to prevent euro collapse.

Germany sold 3.153 billion euros of new five-year notes, drawing more demand than in a previous auction in December. Spain is all set to sell 3-4 billion euros in 3-year bonds while Italy will sell 8.5 billion euros worth 12-month treasury bills and 3.5 billion euros worth flexible treasury bills.

It was muted across Asia as investors await China's inflation numbers today. The SGX Nifty suggests Indian markets will dip close to 0.5% in the opening bell.

Meanwhile, Euro hits a 16-month low against the dollar on Europe concerns, currently stable in Asia trade, back above 1.27.

Back home, a CNBC-TV18 Poll sees November industrial output stabilising at 1.6 percent after seeing a 5 percent contraction last month as November core sector rises to 6.8%. All eyes will be on capital goods and consumer goods data.

In stock specific news, Country's second largest software services exporter Infosys is expected to report a profit after tax of Rs 2,322 crore in the third quarter of FY12, a growth of 21.8% as compared to Rs 1,906 crore in the previous quarter, according to CNBC-TV18 estimates.

Revenues are seen going up 13.9% to Rs 9,223 crore from Rs 8,099 crore during the same period while the company expects a growth of 9-11.3% in revenues at around Rs 8,826-9,012 crore in the quarter ended December 2011.

Thomas Cook puts Indian arm on the block reports the Economic Times. The newspaper further reports of companies from steel, cement and power sectors oppose Coal India's new pricing policy.

Reliance Communications, which has a USD 925 million convertible bond maturing in March and has failed so far in efforts to sell its tower unit, is in talks with China Development Bank for a loan to redeem the bond.

Results Today: Infosys, HDFC, TTK Prestige, DCB, Geojit BNP Paribas, Gruh Finance, Sanghi Industries.

Riken Mehta

Good Morning! Here are the top headlines...

US stocks climbed to a five-month high on Tuesday, led by materials stocks after an upbeat forecast by aluminum company Alcoa and strong gains in bank shares.

The Dow Jones industrial average gained 69.78 points, or 0.56 percent, to 12,462.47. The Standard & Poor's 500 Index rose 11.38 points, or 0.89 percent, to 1,292.08. The Nasdaq Composite Index climbed 25.94 points, or 0.97 percent, to 2,702.50.

The Dow and S&P 500 hit their highest intraday levels in five months. The S&P 500 close above 1,285.09 is the highest since the end of July and marked a breach of technical resistance, which could spur further gains.

German chancellor Angela Merkel is meeting IMF chief Christine Lagarde later today in Berlin to deal with the eurozone sovereign debt crisis.

Easing some concerns about Europe, Fitch said it does not expect to cut France's AAA credit rating this year, but countries under review such as Italy or Spain could be downgraded by one or two notches. Europe closed sharply higher with over 2 percent gains.

China's reported a drop in import growth triggering speculation that monetary easing is right around the corner adding to the worldwide stock rally.

Asia was firm in opening trade. The SGX Nifty suggests Indian markets will open flat after stellar rally in last trading session.

Shifting focus to commodities, tensions in Iran give a boost to oil prices with Brent above 113 dollar levels. Gold too surged over a percent to 1634 dollar levels.

In the currency space, the euro holds flat at around 1.27 to the dollar ahead of ECB policy meeting tomorrow and crucial debt auctions from Spain and Italy this week. The Indian currency rose to a 5-week high on the back of strong FII flows & the strength in the equity markets.

In stock specific news, 100 percent FDI in single brand retail becomes a reality. Also mandatory sourcing from SMEs will kick in once FDI crosses the 51 percent mark. Retail stocks will remain on buyer's radar in the short term.

The impression of bankers who met RBI officials ahead of credit policy hints RBI is comfortable with current liquidity and hopes of a CRR cut are dim. Rate sensitive stocks will remain in focus today.

A big blow for national carrier Air India as lenders refuse to convert loans into preference shares as they doubt the airline's capability to pay dividend on these shares.

GTL Infra Director Prakash Ranjalkar steps down.

Genus Power will consider restructuring proposal today. 

Riken Mehta

Dalal St Week Ahead: Infy earnings & guidance, Nov IIP nos to stay in spotlight

The opening week of 2012 was won by the bulls with the Nifty closing above the 4700-mark, notching over 2% gains for itself. However, the focus now shifts to the third quarter earnings and guidance from the Indian companies and the November IIP numbers.

The season will be kicked off by IT bellwether Infosys.  All this and much more events are lined up for the next week. Let's analyse them and gear you up for trading.

There is no doubt that Indian markets have failed to decouple itself from global cues. So let’s take a look at list of global and domestic events first.

January 09: Chinese GDP, Chinese CPI

January 10: IndusInd Bank, Amtek India Results

January 11: Europe GDP data

January 12: Germany, ECB Interest rate decision, US Retail sales, US Initial Jobless Claims, ECB President Draghi Speaks, Gruh, HDFC, Infosys, Geojit BNP, TTK Prestige, DCB results. IIP November (Expected 1.90%, Prior -5.10%)

January 13: Canada, US Trade Balance Data, Michigan Consumer Sentiment Index, CMC, Sintex Results.

Chart Check

Back home, Nifty was trading in the range of 4700-4800. Edelweiss Securities is of the view, "In the medium term directional oscillator ADX is still trading very negative and the Nifty continues to form lower top and lower bottom. Thus the medium term trend is still negative. Nifty has support in the range of 4700-4645, and in the coming days if Nifty starts trading below the above mentioned support range then we can witness further downside till 4580/4530. Near term Nifty has resistance at 4800."

Sectors to watch

When money talks, everyone listen. The key trigger for next week is going to be where the rupee heads and of course the corporate earnings forecast. In view of this, the sectors that are likely to see movement are IT and pharma. A couple of private banking stocks will announce the quarterly results which will set the tone for the entire banking sector. Capital goods, however, remains the laggard in the entire pack. The joker in the pack is sugar stocks.

Stock Pick

Edelweiss picks Dr Reddy’s Laboratories with a target price of Rs 1840. Time horizon is for 3 months. “Dr Reddy's revenue guidance of USD 2.7 bn by FY13 offers 23% upsides (USD 300- 400 mn of potential sales) from consensus and our estimates at USD 2.2-2.3 bn. The guidance is based on fair visibility on base case, which implies 27% CAGR in revenue and 45%, 40%, and 15% incremental contribution to growth from US, EM & PSAI and EU, respectively. We believe, with improved operating performance and enhanced visibility of niche launches in US, there are strong possibilities for estimates upgrades across the Street.”

F&O Wrap

Futures data suggests long build up in Index futures were created by the FIIs last week. India VIX was down 6.09%, a positive sign. Nifty Open Interest Put Call Ratio is up at 1.18 compared to 1.06. Long build up was seen in banking, IT and pharma stocks. Short covering was seen in Capital Goods stocks.

Rupee Corner

Edelweiss Currency report says, "Indian rupee is expected to open slightly weak against the US dollar next week tracking multi months drop in higher beta currencies. However, in immediate short-term, 52.50 act as a major support - long-term trend line as well as 34-day moving average support, breach of it would form a lower top lower bottom amid opening a major move on the downside. On upside, 53.25-53.32 resistance area looks vulnerable on hourly chart targeting further up move to 53.58.

Commodity Outlook

“The rally from the lows has put gold in a much better near-term situation with a close above the 200-day moving average at $1634 signaling further upside potential. Only a weekly close below $1545 would shatter this projection and lead to a deeper correction. Crude Oil is taking resistance at $104, from last few days and is not able to sustain above it. But whenever it does, we will see price rally to $114.

Base metals will, despite a deteriorating outlook for new supply, continue to struggle through the early parts of 2012 on growing concern of a recession in developed markets, combined with emerging markets slowing down. The long-term prospect however remains positive as lower prices should meet restocking demand, especially from countries like China.” says Edelweiss Commodity report.

Strategies

-Buy MCX Gold (Feb) above 27950 SL 27450 TGT 28550.

-Buy MCX Crude Oil (Jan) above 5430 SL 5325 TGT 5560.

-Sell MCX Copper (Feb) around 405-406 SL 412 TGT 395.

(With inputs from Edelweiss Research Reports)

-Riken Mehta

FCCB: A saga of Fancy Companies Crazy Borrowing

The year 2010 saw the Indian currency get its very own symbol and in 2011, the rupee was the symbol of the countries ailing condition. The Indian rupee holds the dubious distinction of being Asia’s worst performing currency, depreciating close to 20% in last five months. Reactive rather than pro-active RBI policies have left people in dilemma with ample rate hikes and little intervention in the forex market.

The current scenario of high interest rate, thanks to RBI, was a repetition of the 2006-2008 situation wherein companies shifted focus to raising money via external commercial borrowings (ECBs). It was a prudent option for the companies since it would lead to equity dilution without much impacting the financials of the company. However, these companies never expected a credit crisis to unfold in US and later in Europe, or the steep depreciation in the rupee.

What are ECBs?

External commercial borrowing is a medium by which Indian companies can access foreign funds for various purposes. These include loans, terms of credit, notes, fixed rate bonds, etc. Probably the most common instrument used is an FCCB.

Foreign currency convertible bonds, or FCCBs, are debt instruments issued by companies in a foreign currency. It is a hybrid security, with both debt and equity features, meaning the FCCB has the option to be converted to the issuing company’s equity at the time of maturity.

The main advantage of an FCCB is that it allows the issuer to raise long term finance at lower interest rates. However, in turbulent times, if the share price of the equity doesn’t reach the conversion price, the company will have to refinance its debt so as to redeem the bonds.

Another method of raising finance from foreign markets is through foreign currency exchangeable bonds. FCEBs are bonds issued by an Indian company to foreign investors, however, they are not exchangeable into shares of the same company. The equity shares offered are of a company that is under the same group of companies.

For example, company X, the issuing company, issues FCEBs, which on conversion will give the bondholder equity shares of company Y, the offering company. Now, both company X and Y are under the same umbrella, which means that X is selling off a portion of its stake in Y so as to raise finance. However, under this method, there is dilution of a promoter’s equity stake in the offering company. 

FCEBs are currently the less popular means of raising foreign funds in India because it is not allowed freely. An approval is required from the RBI or from the foreign investment promotion board (FIPB) prior to issuance of FCEBs. Another drawback of the FCEB-medium is that individuals and other non-corporate entities are not allowed to invest in them.

Impact on companies:

Since FCCBs and FCEBs are funds raised in foreign currency, the company also faces the uncertainty of currency fluctuations on repayment. Sometimes it may be to the benefit of the issuer. However, due to the current strength in the dollar, companies will have to shell out more in terms of rupees.

Let’s take the case of Reliance Communications. The telecom giant issued FCCBs worth USD 1 billion on 12^th March 2007, with the conversion price set at Rs 661 per share for bondholders. However, due to bearish market scenario and negative company newsflow, the current market price of the stock is languishing in double digits. This means that there is no real chance for the outstanding FCCBs worth USD 925 million being converted by maturity date. What will happen next? RCOM will have to repay its outstanding loan to bondholders.

The effect of the rupee in this scenario is with regards to the amount of cash outflow RCOM will face while replaying its outstanding bondholders. With the rupee near its lifetime high against the dollar, RCOM will have to shell out more in rupee terms so as to repay its outstanding FCCBs worth USD 925 million. For a company that is already facing several problems, this is a double whammy.

According to an IIFL report, 2012 is going to see FCCBs totaling USD 5.3 billion due for redemption. However, the actual redemption value is a whopping USD 7.2 billion, the highest ever amount yet. With stock prices of almost 90% of FCCBs significantly below conversion prices, a vast majority of companies are in for a difficult year ahead. 

- Anisha Mappat, Riken Mehta