Market Views “We believe in India’s growth story. Valuations are here to stay over a longer period. Short term valuations have a tendency to correct for consolidation” Current Market Scenario Macro indicators like growth in IIP for the period Apr-Sep 2007 stands at 9.2 % over corresponding period; WPI contained at 3.01%. However, a sharp surge in global crude oil prices ~ $95/bbl poses inflation risk. The rupee has been in the range of $39.50-$39.75 withstanding capital inflow pressures with the help of sterilization by RBI.
Fed lowered its benchmark rates by 25bps to 4.50% and there is a possibility that the Fed cuts the rates further in response to the credit market crisis which will have ramifications of inflows into the emerging markets including India. RBI raised banks’ CRR by 50bps to 7.50% to drain excess liquidity. Risks Investors in America start factoring a US recession. Indian equities traded over world equities at a premium ~ 80 % Our view Seasonal Patterns are strong as the period between December and February has churned out an average annualized return of 40% for the last 25 years. The market sentiment is very strong despite constraint of foreign inflows in the form of P-Note restrictions.
MF Net Purchase 70000
(Rs.crore)
60000 50000 40000 30000 20000 10000 0
1
2
3
4
5
6
7
8
9
Series1 1999
2000
2001
2002
2003
2004
2005
2006
2007
Series2 6578
6370
13294
3627
29953 38688 45825 31281 64562
MF Buying/Selling 2007 140,000
(Rs.crores)
120,000 100,000 80,000
Purchase Sale
60,000 40,000 20,000 0
Feb
Mar
Apr
May
Jun
Jul
Aug
Purchase 47,507
51,569
50,553
44,702
51,575
54,749
80,216
58,223
70,695 124,882 81,871
47,412
45,504
49,149
39,270
47,000
46,809
62,083
65,750
51,746 109,305 87,948
Sale
Jan
Sep
Oct
Nov
FII Net Purchase 70000
(Rs.crores)
60000 50000 40000 30000 20000 10000 0 Series1
1
2
3
4
5
6
7
8
9
10
0
1999
2000
2001
2002
2003
2004
2005
2006
2007
6578.1
Series2
6370.5 13294.7 3627.23 29953.2 38688.4 45825.6 31281.1 65540.6
FII Purchase/Sale 2007 140000
(Rs.crores)
120000 100000 80000
Gross Purchse
60000
Gross Sales
40000 20000 0
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Gross Purchse 47506 51568 50552 44701 51574 54748 80216 58223 70694 124882 76559 Gross Sales
47412 45503 49149 39269 47000 46808 62083 65750 51746 109304 81659
COMPANY REPORTS Reliance Industries Ltd. Reliance Industries Limited (RIL) is a Fortune Global 500 conglomerate with operations including the entire hydrocarbon value chain, retail shopping and textiles. RIL is currently buoyed by high gross refining margins, high refinery utilization rates and increased demand for petrochemical products. The company’s strategy to integrate upstream in the oil and gas industry and foray into the retail industry will provide significant opportunities for growth. BSE: 500325 NSE: RELIANCE BSE SENSEX: 18602.62 NSE NIFTY: Company Data CMP (Rs.): 2,852 Market Cap (Rs): Rs.397,254 cr Market Cap (USD): $100,571 mn 52 week H/L (Rs): 3235/ 1011 Avg daily vol (60): 3,086,761 Face value (Rs): 10.00 Share holding pattern, % Promoter: 51% Public & Others: 21% FIIs: 20%
Given RIL’s reputation for prompt execution, we expect rapid expansion of its retail stores. The company’s active participation in acquisition of hydrocarbon assets and track record of finding productive oil wells increases the probability of finding large new reserves. Indian economy is growing at an impressive rate of over 8% and is likely to continue growing at this rate in the coming years. The growth has also accelerated the energy demand of the country, which has created new opportunities for the company in the ‘Refining and Marketing’ and ‘Exploration and Production’ segments. Further, with the Indian Retail industry expected to grow at a CAGR of 40%, RIL’s foray into retail is likely to provide huge addition to sales volume. Currently, the company derives close to 98% of its sales revenue from refining and petrochemical segment, but E&P and Retail segments share is expected to increase at a tremendous pace. Reliance’s efficient business model, strong market share across all operating segments, strong execution capabilities, presence in high growth business areas, and strong fundamentals, all indicate towards potential gains in investor net worth.
Financials:(in Rs.crores)
Sales Turnover Other Income Total Income Operating Profit Gross Profit Net Profit Earnings Per Share Equity
Sep '06 28,474.00 22.00 28,496.00 4,565.00 4,587.00 2,709.00 19.43 1,394.00
Dec '06 26,472.00 42.00 26,514.00 4,709.00 4,751.00 2,799.00 20.08 1,394.00
Mar '07 25,895.00 85.00 25,980.00 4,699.00 4,784.00 2,853.00 20.47 1,394.00
Jun '07 28,056.00 105.00 28,161.00 5,177.00 5,282.00 3,264.00 23.41 1,394.00
Sep '07 32,043.00 168.00 32,211.00 5,781.00 5,949.00 3,837.00 27.53 1,394.00
Investment Rationale:Refining & Marketing RIL has the world’s third largest grassroot petroleum refinery with an installed capacity of 33 mn tonnes p.a. For FY07, the refinery processed 31.7 mn tonnes of crude at an average utilization rate of 96% which is much higher than the global average. The company has reported a Gross Refining Margin (GRM) of USD 13/bbl for the quarter ended Mar 07 which reflects a premium of USD 6.2/bbl over benchmark Singapore Crack Margins. RIL has consistently out-performed the regional and global benchmarks over the period. This highlights the benefit of operating high complexity refinery. Petrochemicals The strong demand for petrochemicals globally is fuelled by the booming economies of India and China. The polymer consumption is expected to grow by 27% globally over the next 5 years, but Indian consumption is expected to grow at a much faster rate. The consumption in India is expected to grow from 5 MMTA in 2006 to 12 MMTA by 2011, an increase of 140%. The increase in demand for polymers in the Indian market is driven primarily by three industries- packaging, infrastructure and agriculture.
YES Bank Yes Bank is the new generation private sector bank. The bank has demonstrated excellent performance in FY07 with y-o-y deposits and advances growth of 182% and 161% respectively. The bank has rapidly expanded its branch network in the last two months of FY07 by adding 11 branches, hence reaching a total of 40 branches. In order to achieve faster credit growth, branch expansion and to enhance its Capital Adequacy Ratio, the bank has raised Rs. 2 bn Tier II capital in March-April 2007. Yes bank may raise additional equity capital of Rs. 3 to 4 bn in the next 2-3 months to enhance Tier I capital.
SENSEX: 532648 NIFTY: YESBANK BSE SENSEX: 18602.62 NSE NIFTY: Company Data CMP (Rs.): 230 Market Cap (Rs): 6,465.20cr. Market Cap (USD): $1,637 mn 52 week H/L (Rs): 254/84 Avg daily vol : 1,119,653 Face value (Rs):10.00 Share holding pattern, % Promoter: 36% Public: 14% FIIs: 25% Institutions: 26% P/E: 47.12 EPS: 4.90
Yes Bank is a new age private sector bank and the only Greenfield license awarded by the RBI in the last 12 years. Yes Bank has adopted international best practices and offers comprehensive banking and financial solutions. Yes Bank differentiates based on a “knowledge driven approach” to banking. The bank has developed expertise in sectors like Food & Agribusiness, Life Sciences, Telecommunications, Media & Technology, Infrastructure, Retailing & Textiles and Select Engineering to provide high value accretive end to end product solutions. Yes Bank is present across all major cities in India and offers a comprehensive range of banking products and financial services which include corporate and institutional banking, financial markets, investment banking, business and transactional banking, retail and private banking. Corporate and SME banking lending and fee based income are expected to be the key revenue contributor to the bank in the initial years of expansion until it achieves the critical mass in retail branches across India.
No. of shares held by mutual funds: July 2007 1802669
Financials:-
August 2007 7440303
September 2007 7070132
October 2007 8813348
(in Rs.crores)
Sales Turnover Other Income Total Income Operating Profit Gross Profit Net Profit Earnings Per Share Equity
Investment Rationale:-
Sep '06 Dec '06 Mar '07 Jun '07 Sep '07 127.88 160.77 202.35 272.53 303.45 38.13 44.92 78.73 75.96 75.93 166.01 205.69 281.08 348.49 379.38 81.56 104.34 124.40 198.88 213.19 119.69 149.26 203.13 274.84 289.12 21.49 25.10 30.90 36.00 45.28 0.80 0.90 1.10 1.29 1.62 Neyveli Lignite Corporation (NLC), a 93.6% government 270.00 280.00 280.00 280.00 280.00
owned Company is the largest lignite based power
generating companies in India. The Company has massive capacity addition programmes for the 11th and
12th five year plans. Given, the timely execution of these Knowledge Banking Yes Bank is positioned on plans, the “Knowledge and isexpertise” This the Company expected platform. to increase in scale differentiator enables the bank to provide end to end solution, lower entry barriers, scope. GOI’s mission of ‘power for all’ by 2012 create customer stickiness, achieveand superior structuring, and better risk mitigation. The bank is able to introduce new and innovative products for industry verticals implies that installed generation capacity be like at least 2 Integrated Agribusiness, Infrastructure, Life sciences & Pharmaceuticals, Media & lakh as compared to the current 1.32 lakh MW. Entertainment, Tourism and Education andMW cross sell its various products, customizing them to meet industry specific requirements. As India has considerable lignite reserves, NLC is well positioned to benefit from this development. However, Advances growth Given a small asset base and any overall strong credit growth, Bank advances unexpected delay in the Yes execution of power sector have grown at frantic 161% y-o-y in FY07. In the initial years of expansion the reforms could the future growth Corporate and SME banking is expected to be thehinder key revenue drivers for prospects the bank of the and 513683 retail advances may form 5%-10% of total advances as the branch network BSE: Company. expands to 250 branches by 2010. NSE: NEYVELILIG Fee based income BSE SENSEX: 18602.62 Leveraging NSE NIFTY: its Industry Knowledge and high end treasury, investment banking & wealth management products, the banks other income has grown at an impressive 95.1% y-o-y Company Data to Rs. 1,946 mn in FY07. High percentage contribution of other income (53% of 186 total income for FY07) has supported net earnings in initial years of CMP (Rs.): expansion. Market Cap (Rs): Rs.39,518.45 cr Market Cap (USD): $10,005 mn 52 week H/L (Rs): 241/48 Avg daily vol: 12,837,299 Face value (Rs): 10.00
Neyveli Lignite
Share holding pattern, % Promoter: 93.6% Public: 1.7 FIIs: 0.2% Institutions: 4.6%: P/E: 57.03 EPS: 4.13
Financials:(in Rs.crores)
Sept’06
Dec’06
Mar,07
June,07
Sept’07
SR.NO.
SCRIPS
Sales Turnover 1 L&T Other Income 2 NTPC Total Income 3 Neyveli Lignite Operating Profit 4 Power Fin Corp Gross Profit 5 Profit Petronet LNG Net 6 Axis Dividend (%)Bank 7 YES Bank Earnings Per Share 8 HDFC Equity 9
RIL
Investment 10 Reliance Rationale:Energy
OPEN
CLOSE
HIGH
607.92 510.24 1348 4368 4670 125.98 132.58 138 265 283 733.90 642.82 63 186 227 214.30 189.40 108 297 340.28262 321.98 52 163.88108 117 152.66 501 1019 --946 -118 255 0.98230 0.91 1644 2628 1,677.71 2899 1,677.71
LOW
350.23 1319 217.23 129 567.46 49 55.96 101 273.19 41 26.40 299 -84 0.16 1400 1,677.71
HIGH %
NORMAL %
LOW %
777.58 246.44 148.35 105.07 925.93 260.32 385.49 175.00 533.84 125.00 281.37 103.39 -116.10 1.68 76.34 1,677.71
727.77 224.04 -2.15 154.31 92.03 -6.52 882.08 195.24 -22.22 260.99 142.59 415.30 -6.48 107.69 233.21-21.15 88.82 ---40.32 94.92 1.39-28.81 59.85 1,677.71-14.84
1274
2843
2989
1176
134.62
123.16
-7.69
533
1757
2149
445
303.19
229.64
-16.51
338.81
195.52
-13.43
996.66
6876.88
11
RPL
67
198
294
58
1
L&T
183.28
63.16
40.76
-185.43
Demand Scenario 12 SENSEX 13617 18603 20238 12316 48.62 36.62 -9.55 Low per capita consumption of electricity in India (481KWh/year) and energy shortage of 8% and a peak shortage of 12% and the increasing demand supply gap p(H-k )(H- p(N-k)(Np(L-k)(LSR.NO. % H-k % N-k % L-k% k)% k) % k)% suiting NLC toSCRIPS gain from the p*k demand. 797.84
Expansion 3.94 2 Capacity NTPC 17.19 10.99 -50.15 59.09 72.44 503.06 Capacity expansion from 2,490 MW to 3,240 MW and lignite mining capacity from 3 Neyveli Lignite 74.93 30.14 17.10 -81.45 181.74 175.48 1326.80 24 MTPA to 30.6 MTPA by setting up new projects of lignite mining and power 4 Powerin Fin Corp 95.56 30.48 projects -186.98 1826.17 557.28 6992.61 generation Tamil Nadu 164.76 & Rajasthan. These are expected to be th 5 Petronet LNG 144.24 -23.42 -73.97 4160.99 329.21 1094.23 commissioned during the 11 -9.73 five year plan (2007-12). Thus, continuous expansion plans would drive growth for21.59 the Company. NLC is -57.83 also planning up an668.88 6 Axis Bank 25.77 10.69 132.79 to set 68.54 integrated lignite mining and power project in Gujarat by FY09. The mine would have 7 YES Bank 119.26 55.74 23.33 -125.74 621.41 326.67 3162.15 an initial capacity of 8 mn tonnes per annum and later on, the capacity would go up to HDFC 39.62 project 22.31 -106.54 298.58 2270.09 128 mn tonnes. The first phase85.38 of the power would generate313.88 1,000 MW and the 9 RIL 30.14 -64.41 88.48 second phase 1,500 MW. This is likely21.03 to boost14.46 up Company’s revenues in125.46 the long829.81 run. 10 Reliance Energy 11.99 27.52 3.53 -38.10 151.50 7.46 290.36 11
RPL
65.91
37.49
22.91
-106.23
281.03
315.04
2256.86
Product Mix in favour of thermal based generation 12 SENSEX 74.41 41.69 -103.22 347.69 252.36 2130.89 Presently, coal contributes nearly 54% to20.51 the total power generation. Primary energy sources for India are expected to be dominated by the fossils fuels such as Risk coal and lignite over the next STD15-20 years. COV x, Systematic Unsystematic free β SCRIPS VAR DEVIATION mkt CORR Risk Risk k% L&T
8671.38
93.12
278.3681
0.6815
0.1479
16.6823
76.4379
90.16
634.60
25.19
75.0481
0.1837
0.1474
8.6620
16.5292
33.89
Neyveli Lignite
1684.02
41.04
116.8029
0.2859
0.1408
10.8062
30.2305
67.93
Power Fin Corp
9376.06
96.83
208.1524
0.5096
0.1064
14.4257
82.4044
55.15
Petronet LNG
5584.43
74.73
-159.9853
-0.3917
-0.1059
12.6493
62.0797
31.70
Axis Bank
870.21
29.50
72.9979
0.1787
0.1224
8.5428
20.9564
12.50
YES Bank
4110.22
64.11
159.3667
0.3901
0.1230
12.6225
51.4885
22.15
HDFC
2882.54
53.69
152.3615
0.3730
0.1404
12.3420
41.3474
16.04
RIL
1043.74
32.31
98.7624
0.2418
0.1513
9.9367
22.3703
45.61
449.32
21.20
24.0879
0.0590
0.0562
4.9073
16.2899
85.54
RPL
2852.92
53.41
156.5038
0.3831
0.1450
12.5086
40.9041
69.84
SENSEX
2730.94
52.26
NTPC
Reliance Energy
9.57
PORTFOLIO SCRIPS L&T NTPC
R% 183.28 3.94
Neyveli Lignite
74.93
Power Fin Corp
164.76
W (Allocation) 0.1 0.1 0.1 0.05
R*W % 18.328 0.394 7.493 8.238
Petronet LNG
-9.73
Axis Bank
21.59
YES Bank
119.26
HDFC
85.38
RIL Reliance Energy
30.14
RPL
65.91
11.99
0.1 0.05 0.1 0.05 0.15
-0.973 1.0795 11.926 4.269 4.521
0.1 0.1
1.199 6.591
Portfolio
10%
10%
10%
10%
10% 15% 5% 5% 10%
Portfolio Return = 63.06
10% 5%
L&T NTPC Neyveli Lignite Power Fin Corp Petronet LNG Axis Bank YES Bank HDFC RIL Reliance Energy RPL
%
Methodology The risk & return computation has been used to evaluate the stock risk-return. The returns is based on the past realized returns and is calculated thereof. Also, open price is the price of the stock at the beginning of the period (52week) and close is the last traded price in the period.
The second consideration is the close price which is taken for equating the normal rate of return for the period defined. The computation of β is done by averaging 3 returns of both stock & Sensex. Systematic Risk has been computed by using the formula β^2 x σ^2 while unsystematic risk has been computed by using the formula (1-Systematic risk). The 52 week period considered is from 21st November 2006 to 21st November 2007. The portfolio return has been computed by using Markowitz’s Portfolio theory. References KRChoksey Report Indiabulls Report Moneycontrol.com Rbi.org Debtonnet.com Indiaearnings.com