FUNDAMENTAL STOCK PICK:
ELECTROSTEEL CASTINGS LTD.
CMP 45, TARGET 100.
The Company is India’s largest and world’s one of the few manufacturers of ductile iron pipes.
Company’s products are used in water supply and fire fighting systems.
The Company is fully integrated backward with,
(1) Pig iron plant(steel mining rights)
(2) Sinter plant
(3) Captive power plant(coal mining rights)
The Company has exclusive rights of iron ore and coal mines which will reduce raw material prices and will help to increase profits in coming years.
In India 25% of rural population and 9% of urban population don’t have water supply.
To supply water across India government has lined up investments of 1,76,306 crores for water supply and irrigation in the 10th five year plan under various programs like,
(1) accelerated rural water supply programs
(2) pradhan mantri gramodaya youjna
So the company has very good business opportunity in water supply pipes with backward integration of raw materials such as; steel which is main part of the manufacturing and un –interrupted power supply through captive power plants with coal mining rights.
Backward integration will help company to stand in competitions and will help to increase profitability in coming years.
Financials:
Book value stands at Rs. 45 and the P/E multiple is 10 which is quite reasonable, with such an growing economic scenario and business model of the company as well as last five year averages of key ratios.
Sometimes what happen stock trade at cheap valuation because of no great business, lower profits margin, lack of corporate governances, and inability of management to handle the company.
Is it so with Electrostel castings Ltd.? Let’s see below,
Below are the last 5 year averages of some key ratios,
Last 5 years sales growth is 27%.
Last 5 years profit growth is 17%.
Last 5 year’s dividend payout ratio is 33%.
Apart the company has good growth in sales and profit and management has translated it in to dividend and last year with bonus so company has good cash flow in real accounting.
Management has taken good step of backward integration by taking exclusive rights of steel and coal mines which it self gives confidence on management side.
Looking at the opportunity we believe stock is trading at cheap valuation and it deserves much higher valuation.
We recommend a buy call on this company and our projected target is Rs. 100.
MUTUAL FUND PICK
UTI CONTRA FUND
Recommendation:
Avoid.
Rational:
This fund fails to deliver impressive returns and constantly underperforming its benchmark index.
WEEKLY MARKET OUTLOOK
SUPPORT AT-4750
RESISTANCE AT-5060-5150-5200
(1) TECHNICAL ANALYSIS ARGUMENTS:
Now all is well from budget!
As we were telling 15300 should be hold after budget now that’s come true.
Now to continue this rally we need to fill the gap of 17025 very fast in terms of time frame, if we fail to fill the gap then we may see some pressure at higher levels and has to consolidate between 16000 to 17000 and has to wait more time may be till quarter 4 results.
If we manage (hope fully will manage) to fill the gap in short time then as per wave structure there will be “a-b-c common flat” pattern and first target will be 19300/19600 and their after 22000 in 20 week time frame.
As per wave theory, wave 1st made by initial traders and investors with contrarian call on market.
When the corrective wave 2nd end and wave 3rd start with breaching wave 1st, this rally again catches attention of initial traders /investors who were holding long position from wave 1st and not exit on down wave 2nd at this time they become more confident about the market rise and the same time price and volume both rise at faster pace, because those who have left opportunity to enter in wave 2nd and those who have buy in wave 1st both will start entering in to market.
Once we complete 19300/19600 levels we may see some sort of profit booking from the initial traders and investor who have entered in wave 1 at that time the fall will be limited to the 17900 or 17500 in maximum case, once this sell off get over we will have 5th wave and again explosive wave and price projection will be 22000 with time projection of 20 week.
So one thing is clear on technical front that we have secured down side with 5 different theories (full report given before 2 week ago) support of 15300.
(2) FUNDAMENTAL ANALYSIS ARGUMENTS
Now this is confirm that government is focusing on micro economy and has taken good steps in budget for growth of the economy as well as in the direction of fiscal prudence.
There is lots of money are on side line to invest after budget and budget has not given any big bed surprise and now we expect vary good money flow from retail, mutual funds, FIIs, insurance companies etc.
Improved indicators like industrial production, export data, quarterly results indicating recovery of Indian economy.
Life Insurance Corporation of India has planned to invest Rs 10000 crores by March end.
If we analyze the last quarter data of insurance company, they all together have collected nearly Rs 30000 crores, if assume all premiums will be paid by all policy holders the again this quarter Rs 30000 crores of money flow come to capital market.
So there is no problem of liquidity from domestic front and largely not from international front.
In India we will have good growth under insurance sector (particular ULIP) which will pump long term money in to Indian market.
Along with insurance sector online mutual fund will also help to tap the rural and urban money vary fast in long run.
We believe that there are ample opportunities available which can yield higher returns.
These have to UN covered through research and meticulous stock selection.
In such scenario active portfolio management is likely to outperform passive strategies.
Biggest Mistake Done By Common Investor Is…
…that they Don’t Buy When Stock Market Come Down At Value Buying Levels.
…that they Don’t Buy When Stock Market Come Down At Value Buying Levels.
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CONCLUSION:
So over all on both side we says this was just a bull market correction and we have hold the last bottom despite the rally on dollar index(rise in dollar index translate in to correction in emerging markets and commodities) and negative news flow across the world this is good sign of economy and stock market.
This will give more confidence to long term investor and traders towards our economy, government steps towards economy and in long term we believe this will be good.
But at the same time, a stock picking attitude has to be adopted by the investors because it is going to be stock pickers market who want better return out of the bull markets than just riding on the index constituents or heavy weights and so on.
INDIA BUDGET 2010:
Friends, a budget is all about numbers. It can be said to be an annual financial statement with projections for next year. Let’s take a look at some of the important announcements in this budget in brief manner.
Government expected to mop up Rs.40000 crores from disinvestment and Rs.49000 from the telecom license fee.
Increase in plan expenditure by 15% and non planned expenditure by 6%.
The clear statement that oil and fertilizer subsidy will be give in cash and not through bonds issue is good for the oil and fertilizer companies and also the capital markets. The fear that the bond market will be crowded out by the government has receded.
As per most experts the budget expects/assumes reasonable and realistic nominal GDP growth estimate of about 13% and net tax revenue growth of 15%.
MAT (minimum alternate tax) increased from earlier 15% to 18%. This tax was started with a rate of 7.5% then increased to 10%, then to 15%, then to 18% now. The education cess and surcharge added further, effective it sums to 19.93%.The corporate are already paying 16.6 percent of DDT Dividend Distribution tax, and the MAT+ DDT effectively sums to 33.6 per cent.
Reduction in surcharge on tax by 25% to 7.5% from earlier 10%. Although many business people argued that this corporate surcharge should be completely abolished. While experts say this will sum to relief of only around 0.7 percent. Even many tax experts have sought complete abolition of MAT.
Cenvate rate has already been risen by 2 percent.
Private players to be granted license for banking and nbfc activities subject to RBI guidelines.
Amending definitions and provisions so that cold storages companies can raise fund through ECB route.
A coal regulator authority proposed for,
-benchmarking of standard of performance
-introduce competitive bidding process for allocation of coal blocks
-pricing issues
Plan outlay of Ministry of New and Renewable Energy increased from 620 crores in 2009-10 to Rs.1000. Moreover the government targets 20,000 MW of solar energy by 2022 and leading the world in this segment.
The FM proposed reducing central excise duty on LED lights from 8% to 4%.
Allocation for defence hiked to Rs.147344 crores including Rs.60000 crores for capital expenditure.
Some announcements related to housing construction is positive for builders and developers.
Also for starting hotels above 2star, the FM has provided to allow them to write off their investment such as land, financial instruments against profit.
Benefits have been announced for research and development organizations and institutes. Also the scope for R and D widened from not just pharma and scientific research but also to include social and statistical research and more.36
End to services exemption on goods, transported by Indian Railways is a negative news for the steel, fertilizers, coal and oil companies.
Government Net borrowing is pegged at 3,45,000 crores as against general expectations of around Rs.4 lakh crores, and hence the dual fears of rise in interest rates as well as inflation rates controlled to a greater extent.
The income tax breaks and slab cuts are step to put more disposable income in the consumers hand so that the economy and companies/businesses can thrive in 2010, a year when exports markets like the developed countries are themselves contracting and likely consume less due to deleveraging process, credit crunch and so on. The estimated around Rs.26000 crore in income tax breaks that the Rs.3 lakh above income groups are going to get, will be most likely to be spent on consumer durables, house refurnishing, travelling and so on. This money is most unlikely to go into buying essential commodities and optimistically food inflation will remain untouched because of this 26000 crore. If assuming 34% savings rate, we can assume that around Rs.8500 crores shall come into banking system in the form of savings and may be also in the form of investments in stock markets. Indeed this income tax break can be said to be the single largets tax relief in the history of Indian budget.
The provisions for healthcare has been kept at Rs.22300.
A sum of Rs.66000 crore has been allocated for rural development.
Excise duty increase on tobacco products.
Provisions for giving benefit to SEZ units.
Provisions of subsidy to hybrid and electricity automobile companies.
Unique ID project has been allocated a sum of Rs.1900 crores which will go in administration exp, purchase or biometric devices, data collection, security, and to other technology vendors etc.
Provision of Rs.31000 to education sector.
Announcement to make 20km long road every day.
Planned expenditure for power sector doubled to 5200 crore.
Announced Rs.1.47 lakh crore for infrastructure development.
Number of food parks to be increased to 5.
Rs.200 crores to be spent for climate resilience efforts.
Envisages reducing the combined central and state debt to 68 per cent of GDP by 2014-15.
Exemption from central exice duty for solar power plants machinery.
The excise duty on cement hiked 2% from 8% tp 10%.
Excise duty hiked by 2% on specified segment of cars.
Basic custom duty on radium used for polish of jewellery to 2%.
Custom duty on crude oil hiked back from zero to 5%, and 7.5% on petrol ,diesel from earlier 2%.
Rs.19894 allocated for road and highways development.
Reduction in the fiscal deficit sought to 5.5% of GDP for the year from 6.7% in 2009-10, 4.8% in 2011-12 and 4.1% in 2012-13. Everywhere we see is the praises about ‘fiscal consolidation’ move and an act of ‘fiscal prudence’. But this is not a that much big issue. Friends, without fiscal deficit countries like India couldn’t have achieved in terms of growth what it has achieved till date. Yes excessive deficit is something no one would want. But the present hype or whatever you say it created regarding the fiscal defitice figures and percentage and the king of mention and prime importance given to it seems exaggeration and a ‘clone-view’ phenomena where everyone would talk the same talk so as to show that are sophisticated. Friends our economy is atl east 5-10 year behind to worry about the fiscal deficite. If the government is not going to spend the mass of the rural, unemployed, and bottom of the pyramid population is not going to have to enjoy the fruits of economic growth. The profit oriented companies and you and me are not going to go and help these people. The concern for fiscal deficit is really really exaggerated in my opinion.
Please note that the positives and negatives are indicative and not perfect. If the excise duty is hiked for some sector that does not mean that some company in that sector is now negative. Yes the profitability hurts in some quantum. But this quantum has to be calculated company to company and many times it is negligible. Many times company manages to increase its sale and profitability by expanding business, markets, price rises and help of good expert accountants and tax experts. In fact knowing what coming helps is more than anything or more than commenting on what will be the impact of the gone and happened. Like guestimatig and acting on the effects of the forthcoming DTL, GST, new company law, coal regulator, spectrum sale, 3g, oil pricing policy, kirit parikh report etc. will benefit more to investors.
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