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GVK Power: raising stake in Bial is a well-timed move

Sun, 22 Nov 2009 16:16:00 GMT

The intent behind GVK Power and Infrastructure Ltd’s (GVKPIL) plan to buy out Larsen and Toubro Ltd’s (L&T) 17% stake in the Bengaluru International Airport Ltd (Bial) is to gain a controlling stake in the airport management.

GVKPIL is just completing the formalities on the 12% stake in Bial that it recently bought from Zurich Airport at Rs485 crore. For this, it paid a premium of Rs95 per share. This is not without reason. Bial holds great potential for future growth, given that it already handles more cargo and passengers than its southern counterpart in Hyderabad. According to Isaac George, chief financial officer, GVKPIL, “the quality of passengers is good, with a high average spend per passenger, due to the IT/BPO (information technology/ business process outsourcing) crowd.” This would only improve as the economic recovery gains momentum.

Also, stakeholders in Bial have a revenue sharing agreement of only 4% with the government (Airports Authority of India), unlike Mumbai where it is around 39%. The buzz in industry circles is that GVKPIL is also interested in increasing its stake from the present 37% in Mumbai International Airport Ltd, or Mial. South African company Bidvest Group Ltd holds 27% of Mial.

Flying high: A file photo of the Bengaluru International Airport. The airport holds great potential for growth and it already handles more cargo and passengers than its southern counterpart in Hyderabad. Hemant Mishra / Mint

GVKPIL’s intent to increase stakes in both Mumbai and Bangalore is well timed as air traffic in the second quarter of fiscal 2010 rose 3% over the year-ago period, with passenger traffic rising by 10%. In fact, this was after a contraction during the last four quarters.

Another positive in the airport business is the monetization of real estate in the airport entity. For example, Bial has 515 acres of land out of the total 4,000 acres available for commercial development, which can generate a strong revenue stream. Ditto for Mumbai. Monetization involves setting up of support services such as restaurants, hotels, duty free services and so on which can create a strong revenue stream.

Even before this monetization, fiscal 2010 will see stronger revenue growth and profit before tax as airports ride the economic recovery and benefit from higher tourist traffic. Bial’s revenue for fiscal 2009 was around Rs300 crore. In fiscal 2010, it is expected to earn around Rs400 crore. Similarly, revenue is expected to touch Rs1,000 crore at Mial compared with Rs800 crore in the previous year.

For GVKPIL, profit that accrues from these two airports is added to the pre-tax profit of the company, in which revenue streams mainly comprise of power and roads. Vehicular traffic and revenue on the Jaipur-Kishangarh Expressway project and higher operating rates and higher generation in power projects will improve earnings in the next two-three years.

A leading institutional broker has projected an 80-90% expansion in earnings with earnings per share of around Rs2 by fiscal 2011. At the current market price of the share of Rs52, the future earnings are discounted nearly 26 times, which denotes high investor confidence. That’s probably because the company is at the inflexion point, where the payback on its capital expenditure is just unfolding.

Write to us at marktomarket@livemint.com

Spate of bad news expected to continue in the telecom sector

Sun, 22 Nov 2009 16:15:00 GMT

The decision by Bharti Airtel Ltd to cut roaming charges by around 60% got significant press and its shares weakened further. But analysts tracking the company had already factored in a drop in roaming tariffs. After all, Reliance Communications Ltd’s “Simply Reliance” plan offered roaming at the rate of 50 paise per minute. Even after the sharp cut in its roaming rates, Airtel’s tariff is still higher at 60 paise per minute.

So it was more a question of when rather than if various tariffs will be cut. Thus far, much of the price cuts have centred on call rates for prepaid customers. Prices in non-voice segments such as SMS are also expected to be lowered. Besides, price cuts are happening gradually even for the postpaid segment, with per-second billing plans extended to this segment as well.

Postpaid users form the cream of the subscriber base for telecom companies, and generate much higher Arpu (average revenue per user) compared with prepaid users. Lower tariffs for this segment will lead to a further drop in revenue and profit.

Graphics: Naveen Kumar Saini / Mint

What will speed up this process is the government’s decision to introduce number portability by the end of this year. With competition set to get even more intense with the entry of new players such as Emirates Telecommunications Corp., or Etisalat, and Telenor SA, telecom companies will aggressively go after customers of rival networks. The fact that customers would be able to retain their phone numbers will only encourage this.

Coming back to the drop in Bharti’s roaming rates, it must be noted that national roaming accounts for 5% of the company’s mobile revenues, according to an analyst. In other words, in itself it won’t cause a huge drop in profit. But the development has led to negative sentiment among investors, since the trend of falling tariffs has been confirmed.

Bharti’s share price of Rs289 is close to its yearly lows, but isn’t likely to find many takers considering that the spate of bad news is expected to continue. As and when new operators start services, there may be a fresh bout of tariff cuts, and there could be a similar result when number portability gets operational. In the interim, markets may provide decent opportunities to pick up good telecom stocks such as Bharti at attractive valuations as long-term investments.

Write to us at marktomarket@livemint.com

Back to the bubble territory

Sun, 22 Nov 2009 16:14:00 GMT

The market capitalization to gross domestic product (GDP) ratio of a country can be interpreted as an indicator of how frothy markets have become. The accompanying chart shows this ratio for Bombay Stock Exchange (BSE) stocks over the past 12 years. Market capitalization at the end of March every year has been taken and computed as a percentage of nominal GDP at market prices. Notice the sharp rise in market capitalization from 2005 to 2008. Also, while the ratio dropped sharply in March 2009 because of the global crisis, it was still well above the level for March 2005. During the tech bust in 2001-02, the ratio had fallen to much lower levels.

Graphics: Yogesh Kumar / Mint

Now consider the current market cap to GDP ratio. If we compare the market cap of BSE stocks on 20 November with the nominal GDP at market prices for 2008-09, we get 109%. The objection to that would be that it would be wrong to compare the current market cap with last fiscal year’s GDP. We need to compare it with the GDP for 2009-10. The Prime Minister’s economic advisory council has given an estimate for GDP growth for this fiscal last year and they had said that GDP at market and current prices for the current year will be at Rs58.3 trillion. At current market cap, that gives a market cap to GDP ratio of 99%. Notice that the only year in which that ratio was higher was 2007-08. But if the ratio is already as high as it was during the final year of the last boom, that doesn’t look too good for returns from the stock markets in future. It is yet another indication that market valuations have become very stretched.

Incidentally, Barry Ritholz of the Big Picture blog has drawn attention to the fact that the market cap to GDP ratio of the New York Stock Exchange together with Nasdaq has crossed 100%. This had happened twice before: during the dotcom boom and during the housing bubble. What it indicates is that the US market is back to bubble territory.

It’s true that the very lax liquidity conditions could propel the market cap to GDP ratios to new heights. But as Citigroup Inc. ex-CEO Chuck Prince learnt to his cost, you cannot bank on a bubble.

Write to us at marktomarket@livemint.com

Shree Renuka’s unique strategy puts it in a sweet spot

Sun, 22 Nov 2009 16:14:00 GMT

The government’s decision to amend the fair and remunerative price (FRP) mechanism for sugar cane procurement means that state governments can now fix a higher price and not have to pay the difference between it and FRP to the farmers. In the current season, the issue is more political than driven by the market situation. Sugar cane is anyway being procured at around Rs200 a quintal, compared with FRP of Rs129, due to lower output and higher demand. Buyers are scrambling to buy cane, as sugar prices are ruling high, up by nearly 90% from a year ago.

It is in this backdrop that Shree Renuka Sugars Ltd announced its results for fiscal 2009 (year ended September). Its results reflect the combined effect of higher sugar production and higher realizations. The company’s strategy is unique, focusing on a higher share of refining capacity, compared with integrated sugar production. This reduces its investment, insulates it from seasonality as it can process raw sugar at any time, and reduces dependence on cane production.

In fiscal 2009, Shree Renuka’s sugar produced from cane declined by 28% to 377,750 tonnes but sugar processed from raw sugar jumped nine fold to 637,089 tonnes. Sugar output doubled as a result, and sugar sales rose by 50% during the year and by 48% during the September quarter. Realizations were higher by 66% and 84%, respectively.

Graphics: Yogesh Kumar / Mint

During fiscal 2009, sugar sales rose by 144% from the previous year to Rs1,861 crore. The company has a sugar inventory of 390,344 tonnes, including raw sugar. This inventory will get offloaded in the coming months. Higher revenue from by-products such as ethanol and from power generation were offset by a decline in trading income. Overall revenues thus rose by a relatively modest 27% to Rs2,499 crore. But its expenditure rose by only 17% and operating profit margins as a result improved over 4 percentage points to 16.3%.

Shree Renuka’s stand-alone net profit doubled to Rs143.5 crore and its consolidated net profit increased by 91% to Rs225 crore. At Rs230, its share is trading close to its 52-week high, due to the favourable operating environment and its recent acquisition of a Brazilian sugar producer. It trades at about 12 times its projected fiscal 2010 earnings, which is reasonable given the positive factors.

A rising debt burden is a concern, as it is expanding capacity, and the Brazilian acquisition itself may add to consolidated debt. Any uncertainty caused by policy changes and the sugar shortfall turning into a surplus will be the key triggers to watch out for.

Write to us at marktomarket@livemint.com

Taking Stock for 22 November 2009

Sun, 22 Nov 2009 13:30:00 GMT

Monday, November 16 2009

The Sensex started the week on a high note on Monday, November 16, climbing over 1%. Maruti Suzuki and Tata Steel led the gains after steel secretary Atul Chaturvedi said the country’s demand for steel grew 7% from April to October. Other auto and infrastructure related stocks also rose for the day. Rising demand for cars, refrigerators and air conditioners as well as increasing demand from rural areas are boosting steel sales in India.

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Tuesday, November 17 2009

India’s benchmark index increased on Tuesday for a third day. IT service providers led the way on news that the US, which is their biggest export market saw higher retail sales. ONGC fell after reporting a drop in domestic crude oil production.

Wednesday, November 18 2009

The Sensitive index broke its 3-day winning streak on Wednesday, led by banks, on concerns that the new rules requiring lenders to increase their investment in government bonds may decrease credit in the global economy.

Meanwhile, the rupee continued to strengthen and the number of Indian stocks owned by funds abroad has risen 36% since March.

Thursday, November 19 2009

The gauge fell again on Thursday, the most in over two weeks, led by IT service providers on concerns that higher foreign capital inflows would cause the rupee to appreciate and hurt their competitiveness. The rupee has risen 6.7% against the dollar in the last year. Real estate related companies also took a dive, on concerns that interest rates may rise in the near future.

Friday, November 20 2009

The Sensex was up on Friday helped by strong cues in European markets, eliminating earlier losses. Top gainers were ACC, Hindalco, Jaiprakash Associates, Tata Steel, and HDFC. Top losers included Bharti Airtel, Reliance Infrastructure, M aruti Suzuki, and Bhel. Barring the Consumer Durables index, all other sector indices ended the day in the green.

Five of top firms lose Rs24k cr; RIL maintains top slot

PTI — Sun, 22 Nov 2009 06:40:00 GMT

Mumbai: As many as five companies among the elite club of top-10 Sensex firms have witnessed an erosion of over Rs24,000 crore from their market capitalisation previous week, while RIL maintained the top position with a valuation of Rs3.49 lakh crore.

In the week ended 20 November, the five firms - ONGC, MMTC, NMDC, Bhel and Bharti Airtel - together lost a sum of Rs24,665.37 crore from their market valuation.

However, the other five firms -- RIL, NTPC, SBI, Infosys Technologies and TCS -- added Rs12,365.47 crore to their market capitalisation (m-cap).

The country’s most-valued firm, Reliance Industries Ltd (RIL), added Rs1,388 crore to its market cap, taking its total valuation to Rs3,49,188 crore previous week, while mining giant NMDC was the biggest loser as it shed Rs8,445 crore from its valuation.

The numero-uno RIL had a market cap of Rs3,47,799 crore in the week ended 13 November.

State-run oil firm ONGC was at the second position, even though it saw a decline of Rs3,069 crore from its market cap, with its total valuation at Rs2,50,066 crore.

Power producer NTPC inched up to third slot from fourth after adding Rs124 crore, while trading behemoth MMTC slipped to fourth place after losing Rs7,883 crore from its m-cap.

The total market valuation of NTPC surged to Rs1,77,360 crore, while the m-cap of MMTC declined to Rs1,72,259 crore.

NMDC stood at the fifth place followed by SBI and Infosys Technologies. The market capitalisation of NMDC stood at Rs1,64,356.64 crore.

The market valuation of public sector lender SBI stood at Rs1,48,292 crore, while Infosys Technologies’ market cap surged to Rs1,39,173 crore.

IT firm Tata Consultancy Services added Rs4,521 crore, with its m-cap at Rs1,35,692.68 crore.

Power equipment maker Bhel climbed to ninth position from tenth even after losing Rs465 crore from its m-cap. Telecom services provider Bharti Airtel lost Rs4,803 crore, with its market valuation at Rs1,09,633.76 crore.

Meanwhile, the 30-share Sensex gained 1.02% to close at 17,021.85 points at the end of Friday’s trade on the Bombay Stock Exchange.

ICICI bank raises $ 750 mn from 5-yr bonds

PTI — Sat, 21 Nov 2009 06:21:00 GMT

Mumbai: ICICI bank said on Saturday it has raised $750-million (around Rs3,465 crore) by issuing five-year bonds at its Bahrain branch.

The issue, which had an order book of over $3-billion, was participated by over 250 investors, the country’s second largest lender said in a press release here.

“The 5.33-year fixed rate notes carry a coupon of 5.5%, which translates to 292.6 basis points spread over equivalent Libor,” the bank said.

Last month, the country’s largest lender State Bank of India raised $750-million through the issue of five-year bonds abroad.

Markets | Tata Steel completes convertible debt swap

Fri, 20 Nov 2009 17:00:00 GMT

Mumbai:Tata Steel Ltd, aiming to cut funding costs, received 56% acceptance for a bond exchange on debt raised to fund its purchase of Corus Group Ltd.

India’s biggest steel producer sold $546.9 million (around Rs2,550 crore) of new 2014 convertible bonds to repay investors who agreed to take $493 million of the $875 million of 1% convertible alternative reference securities due 2012, according to a statement to the Singapore stock exchange on Friday. Around $382 million of bonds remain outstanding, the Mumbai-based company said.

— Bloomberg

Emaar India unit to sell shares in coming weeks

Dubai:Emaar Properties PJSC, the developer building the world’s tallest skyscraper in Dubai, plans an initial share offering in India in a few weeks, chairman Mohammed Alabbar said.

“India has done extremely well for us, and that’s why we are going public in India, probably in a few weeks,” he said in an interview at the World Economic Forum in Dubai. “The banking system is solid and India is still a conservative environment that suits us well.”

New Delhi-based Emaar MGF Land Ltd plans to raise Rs3,850 crore in the offering.

— Bloomberg

Galleon sells its entire stake in Edelweiss

Mumbai:Galleon Group Llc, the US hedge fund whose founder Raj Rajaratnam has been charged with insider trading, sold its stake in Edelweiss Capital Ltd, fetching Rs260 crore. New York-based Galleon sold 5.27 million Edelweiss shares at Rs485, according to the Bombay Stock Exchange.

— Bloomberg

If foreign portfolio inflows become excessive, some curbs are inevitable

Ravi Krishnan — Fri, 20 Nov 2009 16:20:00 GMT

Mumbai: With international investors buying $15.4 billion (Rs71,764 crore) of Indian stocks this year, 2009 may perhaps see the highest portfolio inflows into the country. Brazil is taxing capital inflows, Indonesia is considering it, and India may auction external commercial borrowings (ECBs). Mint spoke to Ajit Ranade, chief economist, Aditya Birla Group, about the impact of rising capital inflows. Edited excerpts:

This year we may see an all-time high of annual capital inflows into India. What will be its impact?

Long-term risk capital is always welcome. As a rule, volatile portfolio flows are less welcome than long-term stable FDI (foreign direct investment) inflow. However, even these have to be ultimately related to the absorptive capacity of the economy. If the capital flows are concentrated in sectors like real estate, there is always the danger of a bubble. The impact of high capital inflows cannot be benign. Latin America in 1980s, East Asia in mid-1990s, and Eastern Europe, including Iceland now, all received phenomenal capital inflows, and all ended up suffering the consequences. How much is enough is a matter of policy assessment.

Will the move to auction ECBs help curb inflows?

On ECBs, an aggregate limit of debt is necessary since it relates to the repayment capacity, not just of corporations but also the country. While India’s forex (foreign exchange) reserves are more than adequate, the same cannot be said about repayment capacity of all individual borrowers. Once an aggregate limit is fixed, we have to decide on an allocation rule. An auction is not always appropriate, since different borrowers don’t have simultaneous needs. Moreover, an auction will unnecessarily raise the cost of borrowing, the very reason to opt for ECB. Then again a first-come-first-served system is also not totally fair for rationing ECBs. What may be workable is a rolling 12 month limit, which is not tied just to the fiscal year. Also the allocations could be pro-rated so as to allow maximum number of applicants to benefit.

Since India is dependent on capital inflows, are such curbs desirable?

I am not sure India is very dependent on foreign capital flows. After all our domestic savings rate at 35% is among the highest in the world. If only all of it can be channelled into productive investment, we would need very little FDI. Of course, FDI brings technical and managerial know-how as well, and that’s why it is welcome.

India unfortunately cannot get FDI in its own currency, and that’s the main problem. If foreign portfolio inflows become excessive, some curbs are inevitable. Not just small countries like Iceland and Chile but even large countries like Brazil have used some curbs.

Markets rise 1.4%; up for 3rd week in row

Reuters — Fri, 20 Nov 2009 11:22:00 GMT

Mumbai: Indian shares climbed 1.4% on Friday and helped stretch weekly run of gains to three in a row, after higher European markets lifted investor confidence from an early slide.

Banks led the gainers with sentiment also boosted by an assurance the government was not planning to tax foreign capital inflows.

Montek Singh Ahluwalia, deputy chairman of the Planning Commission and a close confidant of the prime minister, told Reuters the government wants an increase in foreign investment and there was no proposal to tax overseas funds.

Curbs on foreign inflows imposed by Brazil and Indonesia have raised worries other countries may tighten rules to stem their strengthening currencies as investors move money into faster growing economies.

The 30-share BSE index closed up 1.41%, or 236.20 points, at 17,021.85, taking gains for the week to 1%. Twenty-six components closed in the green.

The benchmark is up more than 76% this year, supported by foreign portfolio investment of $15.4 billion. In 2008, the index had fallen more than a half as foreigners pulled out over $13 billion.

“If the rally gains momentum and crosses 18,000-18,500, we will move from a stretched valuation scene to a bubble zone,” said A.V. Srikanth, executive director of private wealth management at Anand Rathi Financial Services.

State Bank of India and ICICI Bank, the country’s top two lenders, gained 2.4% and 1.3% respectively.

“Banking sector is looking good, as with the economy growing the sector has good potential,” said R. Ganesh, director of Systematix Shares.

Energy giant Reliance Industries rebounded 2.1% to Rs2,125.15, after falling more than 3% over three days on the absence no major announcement at its annual general meeting earlier this week.

Outsourcers climbed on improving outlook in their main markets in the United States and Europe. Infosys Technologies jumped to a record high of Rs2,447, before settling at 2,427.50, up 0.75%.

Sector leader Tata Consultancy gained 2% and smaller rival Wipro firmed 0.7%.

Top vehicle maker Tata Motors closed 1% higher at Rs642.20, after CLSA upgraded the stock to ‘outperfomer´ from ‘sell´ on Thursday.

“We now recognise that JLR’s demand environment is better than we expected and, combined with cost-cutting measures, should support a strong profit rebound over FY11-12,” CLSA said in a note, referring to Tata Motors’ Jaguar Land Rover brands.

Bharti Airtel dropped 1.4% to Rs288.75, after the leading mobile operator said it had launched a new bill plan that would slash mobile roaming rates by nearly 60%.

In the broader market, gainers outpaced losers in the ratio of 1.2:1 on moderate volume of 411 million shares.

Markets fall 0.4%, banks drop

Reuters — Fri, 20 Nov 2009 04:25:00 GMT

Mumbai: Indian shares fell 0.4% early on Friday, led by losses in banks, in line with the weakness in global equities.

At 9:55am, the 30-share BSE index was down 0.44% at 16,711.49 points, with 25 components declining.

State Bank of India and ICICI Bank were down 1% each.

The 50-share NSE index was down 0.4% at 4,968.95.

Asian shares dip in shift to safety

Reuters — Fri, 20 Nov 2009 03:58:00 GMT

Hong Kong: Asian shares fell on Friday and the dollar firmed as investors took profits on riskier assets after US data raised fears that a global economic recovery could lose momentum.

The dollar edged up 0.2% against a basket of major currencies as some investors shifted back to safer assets despite extremely low yields.

Investors were unnerved by a report showing that a record one in seven US mortgages were in foreclosure or at least one payment past due in the third quarter, signaling a recovery in the US housing market will be tepid at best.

“Investors have turned more cautious, and they are awaiting more US data coming out next week,” said Hwang Keum-dan, an analyst at Samsung Securities in Seoul, where shares were down 0.2% but outperforming most other Asian markets.

Tech shares suffered some of the heaviest losses in Asia after a US brokerage downgrade on the semiconductor industry. The subsequent rout in US tech stocks overnight helped push the S&P 500 index down 1.3 %, its worst one-day %age fall in three weeks.

The tech sector has been one of the leaders in a strong global equities rally that has extended into its ninth month.

Japan’s Nikkei index fell 1.3 % and looked set for a fourth week of losses, with electronics giant Sony Corp sliding to a near four-month low on doubts the company’s new business strategy could deliver strong profit growth.

The MSCI index of Asia Pacific stocks traded outside Japan and the Thomson Reuters index of regional shares were both down around 1 %.

In Taiwan, the world’s biggest contract chipmaker TSMC, which sells the bulk of its chips to North America, fell 2.4 %.

“Unless Christmas sales (of technology products) are very good, we don’t think the market can rebound significantly,” said Alex Huang, director of Mega International Securities in Taipei.

However, analysts said the retreat from equities may be temporary as excess global liquidity will continue to encourage fund inflows into Asia. The region’s economies are showing signs of rebounding from the global financial crisis far faster than the United States, the UK and Europe, where consumer sentiment remains fragile.

In Hong Kong -- which has attracted record fund inflows of more than $70 billion since October last year -- central bank chief Norman Chan warned that rapid inflows, which are raising the risk of asset bubbles, posed a dilemma for policymakers across Asia.

Even if economies in the region raised interest rates, that could make dollar carry trades even more active and aggravate fund inflows, Chan said.

Carry trades involve borrowing money in a low-yielding currency and using the funds to invest in other assets which potentially offer far higher returns.

Asian currencies also suffered on Friday as investors retreated from riskier assets, sending the Korean won to a three-week low at 1,164.2 to the dollar.

The yen like the dollar, benefited from demand for safer assets, adding pressure on shares of Japanese exporters.

Japanese government bond futures hit a fresh seven-week high as the stock market sagged and were also buoyed by stronger US Treasuries.

Crude oil futures gained 22 cents to $77.68 a barrel after losing 3 % in New York on fears that lacklustre economic growth would limit energy demand.

Gold was slightly weaker at $1,140.30 an ounce as the dollar gained ground, retreating after hitting another record at $1,152.75 an ounce earlier this week.

Vice-chair sells all shares, CEO half as Cognizant soars

Lison Joseph — Thu, 19 Nov 2009 19:45:00 GMT

Mumbai: Senior executives of the New Jersey, US, headquartered firm Cognizant Technology Solutions Corp. have sold shares worth $13 million (Rs60.3 crore) in two weeks starting 6 November, after the stock hit an all-time high on the Nasdaq stock exchange. In one case, an executive sold all his shares; in another, more than half.

Great timing: Lakshmi Narayanan, vice-chairman of Cognizant. Hemant Mishra / Mint

The executives who sold shares in the last two weeks include its president and chief executive Francisco D’Souza, chief operating and financial officer Gordon Coburn, chairman of the company’s board John E. Klein and vice-chairman Lakshmi Narayanan.

CEO D’Souza, who sold the maximum number of shares on a single day, earned around $8 million by selling 175,440 shares on 16 November.

Interestingly, this sale has more than halved the number of shares he owns in the company; he now owns 168,681 shares in the company.

Vice-chairman Narayanan made $3.5 million by selling 76,500 shares, in separate transactions on 16 November and 17 November. He no longer holds any shares in the company.

Cognizant board chairman Klein, who sold 40,000 shares on 6 November to earn $1.7 million, now holds 428,700 shares in the company.

A Cognizant spokesperson said that the company does not comment on sale of shares individually owned by members of the management.

Institutional investors hold as much as 91% of the outstanding shares of the company which had a market capital of $13.43 billion as on 18 November.

Shares of the company, which currently employs at least 67,000 staff, have seen a rally since June and have touched all-time high levels of $45 in November. Since the end of the June quarter, Cognizant’s shares have gained 71%, from $26.7 on 1 July to $45.6 on 18 November.

Also See All-Time High Price (Graphics)

“With the stock trading at all-time high levels, (it is a good time) for the members of the management to book gains at this time, especially as they would have gotten it through Esops (employee stock options),” said an analyst with a Mumbai-based investment advisory firm. He requested not to be identified as he is not authorized to speak to the media.

Cognizant, which clocked $2.8 billion in revenue in 2008, competes with leading Indian information technology (IT) firms such as Tata Consultancy Services Ltd, Infosys Technologies Ltd and Wipro Ltd.

In terms of sequential growth, or adding incremental revenue over the previous quarter, Cognizant has outperformed Indian IT firms for the last two quarters. The company, based in the US, does almost all its development work out of India.

In the quarter to June, in dollar terms, Cognizant’s revenue grew by 4.1% over the quarter to March; and in the September quarter, the company’s revenue grew by 9.9% to touch $853 million.

Cognizant makes nearly 78% of its revenue from the US and around 19% from Europe. Revenue from financial services clients makes up around 43% of Cognizant’s revenue, while clients in the healthcare sector contribute 26%.

After the September quarter, in absolute numbers, Cognizant’s revenue from financial services clients trails that of Infosys by only around $23 million. While Infosys earned $387 million from this segment, Cognizant was close behind at $364 million.

With its acquisition of the India back-office of Swiss financial services firm UBS AG in October for $75 million, Cognizant’s revenue from the banking, finance and insurance sectors is expected to outstrip that of Infosys by the December quarter. Along with the acquisition, Cognizant got a five-year IT services contract worth $440 million.

Cognizant, started in 1994, was originally an in-house unit of Dun and Bradstreet Corp. (D&B) in India. The firm split from D&B in 1996, completed its initial public offering and was listed on Nasdaq in 1998.

Graphics by Ahmed Raza Khan / Mint

Sensex lifeline: high beeps and pratfalls

CNBC-TV18 — Thu, 19 Nov 2009 19:45:00 GMT

Bharat Hindustan (7.4% down)

Shares of Bajaj Hindustan declined 7.4%. Other sugar stocks also fell after farmers protested low state-controlled sugarcane prices and forced an adjournment of the first day of Parliament’s winter session. Some 5,000 farmers from Uttar Pradesh took out a rally in New Delhi to demand higher state-set prices for sugarcane.

BPL (9.7% up)

Shares of BPL rose 9.7% after the firm said it is likely to dispose of its 600-acre land bank to retire debts. Vijay Simha, chief operating officer of the health management solutions group at BPL, told CNBC-TV18 the firm will move into joint development of products with Welch Allyn in the healthcare sector.

Andrew Yule (5.6% up)

Shares of Andrew Yule gained 5.6% after the firm said the Calcutta high court has approved the stake sale of Dishergarh Power Supply Co. Ltd (DPSC). The stake sale will happen through an auction on Friday. Andrew Yule holds 15%, while other financial institutions hold 42% stake in DPSC.

Mukand (2.9% up)

Shares of specialty steel company Mukand gained 2.9% after the firm said it’s looking to sell off its land bank for Rs600-700 crore over the next couple of years. Funds from the land sale will be used to retire debt, its chairman Rajesh Shah told CNBC-TV18. The firm, he said, is not looking to sell land in Karnataka.

Suzlon (2.5% up)

Shares of Suzlon gained 2.5% after the firm reported its subsidiary plans to sell about 35% equity interest in Hansen Transmissions for around €305 million. The firm will use the money to repay loan taken for acquisitions.

Mint CEO Briefing | Raise capital while liquidity abounds

Shraddha Nair — Thu, 19 Nov 2009 19:08:00 GMT

Mumbai: The Indian financial system is flooded with cheap money at this point of time, but the liquidity overhang may not last for long and interest rates are bound to go up soon. So, companies, big and small, should raise money now and use it when needed.

This was the key takeaway from Mint CEO Briefing, the first of a series in partnership with Bain and Co., held in Mumbai on Thursday over breakfast, in front of a select audience of senior executives.

Money talk: (from left) Romesh Sobti of IndusInd Bank Ltd, Motilal Oswal of Motilal Oswal Financial Services Ltd, R. Sukumar of Mint, Sri Rajan of Bain &amp; Co., Madhabi Puri-Buch of ICICI Securities Ltd and Hetal Gandhi of Tano India Advisors Pvt. Ltd at the discussion in Mumbai on Thursday. The event, with the theme, ‘Financing options in the upturn’, was the first of a series in partnership with Bain & Co. Abhijit Bhatlekar / Mint

The panellists were Madhabi Puri-Buch, managing director (MD) and chief executive officer (CEO) of ICICI Securities Ltd (I-Sec); Motilal Oswal, chairman and MD of Motilal Oswal Financial Services Ltd; Romesh Sobti, MD and CEO of IndusInd Bank Ltd; Hetal Gandhi, MD of Tano India Advisors Pvt. Ltd; and Sri Rajan, head of private equity and M&A, Bain and Co.

The discussion—“Financing options in the upturn”—was moderated by R. Sukumar, editor of Mint.

Rajan set the context of the discussion by posing key questions to the panel and the audience: Is there an upturn? Is money available to all, especially small and medium enterprises (SMEs)? Are companies using the right funding mechanisms for global acquisitions, and is there money available for these?

According to Sobti, funding options in an economic upturn are slightly different from those in a downturn, but the basis on which the chief financial officer of a company takes a decision remains the same—should the company go long or short while raising loans; should it opt for fixed or floating rates of interest; and finally, should the money be raised offshore or onshore.

Also Read What They Feel

There are always two stances, a view-based stance and a hedge-based stance, he said.

“Today there is excess liquidity in the domestic market and everybody is going short, but I would suggest you take a contrarian view and go long when there is excess liquidity. This is particularly true about the small and medium enterprises,” Sobti said.

According to him, Indian firms are raising 90-day money at 4.5% from mutual funds, but this avenue won’t be open for long as interest rates will go up soon.

Puri-Buch of I-Sec, too, said it was “hard to tell” how long the liquidity would last. Her advice to companies was to “move swiftly even if you don’t need growth capital right now”. “Take it. Keep it and use it through the period when you will actually need it.”

She had yet another recommendation for India promoters who hate to sell their stakes for fear of losing control. “The way to go about would be perhaps through a holding company structure,” she said.

Many successful companies have spawned subsidiaries or divisions that started new lines of business. According to Puri-Buch, the operational entities need to be demerged into operating companies in their specific line of business while the promoters can continue to retain a strong control over the holding company. “They are free to do as much financing as required at the subsidiary level, based on the opportunities that the market presents without diluting control at the holding company level,” she said.

Oswal, who heads a listed brokerage, did not see any problem in terms of liquidity, today or tomorrow. His logic: the Indian economy is now worth $1 trillion-plus (nearly Rs46 trillion) and it will continue to grow at least 6-6.5%. Considering the fact that the savings rate in India is around 37% of its gross domestic product, there will always be plenty of money for corporations. Oswal said he did not believe in any “plug and play solutions” for funding.

Gandhi of Tano India, however, had a different take. According to him, the issue of choice of financing options has never been more important than perhaps in the last two years because today it is not just about the availability of finance, but dealing with larger structural and macroeconomic variables, such as currency volatility of the kind not seen thus far.

In Gandhi’s opinion, SMEs are the worst hit in the downturn and for them, the private equity (PE) route is the best form of funding as PE funds are well equipped to provide them not only with money, but also guidance on business strategies.

Rajan of Bain said smaller companies have not been able to access bank funds. However, he added that at a larger level, the environment was changing and that the level of uncertainty that existed six to 12 months ago was no more there.

Gandhi didn’t quite see things that way and said, “There is a false sense of security that things are coming back to normalcy.” According to him, bankers have money, but they are not lending. The same is the case with PE funds. “People are still not convinced that the risks associated with business is lower. … There is a complete misplaced sense of bravado with people coming out and saying the worst is over. Personally I feel there is no upturn. I sit on boards of several companies and I see that they are still struggling to do business.”

Puri-Buch said the PE route has not been utilized fully by SMEs as there is always a belief that they are giving away too much to somebody who is a financial partner. Sobti of IndusInd Bank offered a solution to this problem. The PE model needs to be tweaked for SMEs, he said. “Who knows the SME best other than the banker who has been funding the SMEs. The PEs should go through and target the SMEs through the banker. Put in your money, but don’t come on the board. Instead, work closely with the banks who know everything about the SME as they have given them debt. What they don’t like is people sitting on their board and breathing down their neck and saying three years down the line you need to do an IPO (initial public offering),” he said.

Rajan concluded the discussion by pointing out that it would be interesting to find out the reason for the “access” gap wherein bankers say they are willing to lend money, but companies, especially small ones, aren’t able to borrow money from them. He added that it would be interesting to look at the option of subsidiary or operation-company level financing as suggested by Puri-Buch.

shraddha.n@livemint.com

Debt funds gain momentum in October

Thu, 19 Nov 2009 19:00:00 GMT

Concerns about interest rates, bond auctions and an increase in industrial output weighed on investor sentiment in October, pushing bond yields higher. The yield on the 10-year 6.9% government bond maturing in 2019 increased to 7.29% from 7.19% in September. Earlier in the month, the bond market had expected the Reserve Bank of India (RBI) to end its easy money policy stance and raise interest rates in its second quarter monetary policy review on 27 October.

Higher-than-expected growth in industrial output, which rose 10.4% in August, further raised market expectations of an increase in interest rates. But RBI kept all its key rates unchanged, only raising the statutory liquidity ratio, or the proportion of deposits banks need to invest in government securities, by 1 percentage point. The bond market took comfort from data on inflation, which rose to 1.51% for the week ended 17 October against market expectations of a 1.55% rise. During the month, the mutual fund industry witnessed a 24% rise in its assets to Rs774,796 crore, with income funds receiving higher inflows after the September redemptions. Institutional investors returned to ultra short-term bond funds, pushing the income funds’ category assets by Rs151,271 crore. Liquid funds saw outflows (Rs7,344 crore) for the third month in a row as returns from this asset class have been affected by the Securities and Exchange Board of India’s new mandate of investing in papers of up to 91 days’ maturity.

METHODOLOGY

The Morningstar star rating methodology is based on a fund’s risk-adjusted return denoted as Morningstar risk-adjusted return (MRAR) within a given Morningstar category. Morningstar categorizes funds based on their average holdings statistics for the past three years. Morningstar uses expected utility theory as the basis for MRAR. The expected utility theory determines how much return an investor is willing to give up to reduce risk. Therefore, MRAR gives more importance to a fund’s downside deviation. To calculate MRAR, a fund’s monthly total return is calculated. The total return is then adjusted for risk-free rate to arrive at the Morningstar return. The Morningstar return is then adjusted for risk to calculate MRAR. Morningstar uses parameter gamma to describe investors’ sensitivity to risk. Morningstar fund analysts have concluded that gamma equal to two results in fund rankings that are consistent with the risk tolerances of typical retail investors.

Morningstar risk is calculated as the difference between Morningstar return and MRAR. Morningstar rating is calculated every month for 3-, 5- and 10-year periods. The fund’s overall rating is calculated based on a weighted average of the available time period ratings. Within each rating period, the top 10% funds receive a five-star rating, the next 22.50% earn a four-star rating, the next 35% get three stars, the next 22.50% receive two stars, and the last 10% get one star. Morningstar rates each share class of a fund separately, because each share class has different loads, fees and total return time periods available. The distribution of funds among the star ratings depend on the number of portfolios evaluated within the category, rather than the number of share classes available.

Also See Gaining Momentum (Graphics)

Graphics by Ahmed Raza Khan / Mint

Markets | Patni Computer family sell Rs40cr of shares

Lison Joseph — Thu, 19 Nov 2009 18:06:00 GMT

Mumbai: Promoters Gajendra Kumar Patni and Ashok Kumar Patni have between then sold a 0.64% stake worth Rs40 crore in information technology firm Patni Computer Systems Ltd, the company informed the Bombay Stock Exchange on Thursday. The sell-off follows rumors in the past few weeks of a possible stake sale by the promoters.

While Ashok Patni sold 400,000 shares in two transactions on 16 November and 17 November for Rs20 crore, G.K. Patni’s family sold shares held by his sons Arihant Patni, Amit Kumar Patni, grand daughters Ayushi Amitkumar Patni and Aakruti Amitkumar Patni in multiple transactions together worth Rs20 crore.

There was no sale by either of the other two Patni brothers, Narendra Kumar, who is the chairman, or Narendra Patni.

Together the Indian promoters hold about 45% stake in the company.

SAIL’s expansion plan will transform it in the long run

Mark to Market | Mobis Philipose, Ravi Ananthanarayanan and Vatsala Kamat — Thu, 19 Nov 2009 17:56:00 GMT

The expansion and modernization plans of Steel Authority of India Ltd(SAIL) will see it emerge as a much larger and more profitable steel firm by 2012. Investors, unfortunately, tend to focus on the more foreseeable future.

First in their sights is a mega equity issue from SAIL, in which the government will sell 10% from its 85% stake. Also, SAIL itself will sell 10% in new shares to fund capital expenditure. A higher public holding will make it more popular with large investors, due to better liquidity. Another factor will be steel prices, which are causing some concern.

In recent months, Indian steel makers have dropped prices, with SAIL reported to have lowered prices of flat products by about Rs500 a tonne, shortly after it cut prices by around Rs1,200-1,500 a tonne. But this is in line with international trends. Higher steel inventories have led to weaker prices. The strengthening of the dollar also has a lagged effect on domestic steel prices, as landed imports become cheaper. SAIL’s average realizations during the September quarter were down 25% over the year-ago period. But lower input costs and better efficiencies limited the decline in margins to just 1 percentage point.

The long-term outlook for steel is improving. Global steel consumption is expected to grow by 9% in 2010, after a decline of 8.6% in 2009, according to the World Steel Association. India will grow by 12% and China by 5% in 2010. Higher demand is evident, as SAIL’s steel sales rose by 9% in the first half of fiscal 2010, over the year-ago period.

Higher global demand will eventually translate to higher prices, but its timing and strength is uncertain. While demand in India has improved, higher demand from China and developed economies would be key trigger points.

SAIL is operating at 112% of its capacity, explaining the need for an expansion. Its Rs60,000 crore programme is split between Rs37,000 crore for 10 million tonnes of steel capacity and the rest will be spent on improving its product mix, technology and de-bottlenecking. It would have spent Rs17,400 crore by the end of fiscal 2010.

While this plan will transform SAIL into a larger and better run company, in the near term, an improvement in steel prices and a successful public offering will be key factors influencing its share price.

Write to us at marktomarket@livemint.com

JSW, JFE propose an exciting but tentative combination

Mark to Market | Mobis Philipose, Ravi Ananthanarayanan and Vatsala Kamat — Thu, 19 Nov 2009 17:13:00 GMT

When JSW Steel Ltd announced an alliance with Japan’s JFE Steel Corp. on Thursday, the euphoria was short-lived. Its share price declined a bit, although it was up by 16% from a week ago. Lack of any short-term triggers such as an open offer and the initial stage of talks seem to have curbed investor enthusiasm.

The two companies have agreed on one project, to sell automobile-grade steel. Here too, the structure and financing has not been finalized. Broadly, they will collaborate on technology and material supplies. India’s emergence as a manufacturing hub for cars, especially small cars, is making steel companies seek domestic production facilities. Proximity to the car plants is a big advantage.

JFE has a similar venture, the Guangzhou JFE Steel Sheet Co. Ltd, to supply steel to the Chinese car market. Earlier, ArcelorMittal, too, entered into a similar agreement with Uttam Galva Steels Ltd for selling high-grade steel for use in automobile and consumer durable sectors in India.

Indian companies are very strong in the basic stages of steel production, but need foreign technology to make high-end grades. While some would prefer to acquire technology, tying up with some of the global majors eases the process. And in some cases, these companies come with their existing customers. Indian companies may have to yield a share in their business, but they benefit from a higher proportion of value-added products, leading to better margins, even as investments remain at an optimal level. Customer acceptance too is easier.

The auto-steel venture is only one small step, however, if the broad road map is considered. Of utmost interest to JSW shareholders is whether JFE will pick up a stake in JSW. News reports indicated that it may pick up a 10% stake for about Rs1,600-2,600 crore, but these have not been confirmed.

The road map talks about mutual shareholding, so the announcement, when it comes, will be a two-way stake sale. That will be a big move for JSW as JFE is a very large steel company, with sales of 3.4 trillion yen, or about Rs180,000 crore, in fiscal 2009. In contrast, JSW’s sales were Rs15,935 crore. Even a small stake in JFE may involve a large outlay. What shape could this collaboration take in the future? JFE has said in its near-term business outlook that it continues to look for overseas business development opportunities, especially in integrated steel factories. JSW’s has a proposed steel project in West Bengal with a 10 million tonnes capacity. In addition, the two companies will consider producing steel for other sectors.

But these are all on the drawing board at the moment, with sticking points likely to be the respective capital outflows for both companies, the stake dilution of the promoter groups, respective responsibilities and rights, and the price at which equity will be issued. If they find sufficient common ground, it could lead to a significant transformation in JSW’s profile and position in the global steel market.

Write to us at marktomarket@livemint.com

Smoother road ahead for makers of commercial vehicles

Mark to Market | Mobis Philipose, Ravi Ananthanarayanan and Vatsala Kamat — Thu, 19 Nov 2009 16:54:00 GMT

A 52% growth rate in commercial vehicle sales during October has set the pace for a firm recovery in the sector. Although seasonality could hit truck sales marginally in November and December, the deferment of sales to the new calendar year coupled with new emission norms which come into force from 1 April 2010, can give a fillip to sales in the fourth quarter of the year to March.

That means the two leaders in the segment, Tata Motors Ltd and Ashok Leyland Ltd, which together hold nearly 88% of market share, are poised for a strong volume-led recovery in the current fiscal year.

Graphics: Ahmed Raza Khan / Mint

November and December are dull months as most truck operators defer sales to the next calendar year. For example, during FY09, while sales fell sequentially from 28,019 commercial vehicles (CVs) in October to 20,637 in November and 17,906 in December, the industry registered an uptrend with 23,104 vehicles sold in January. This trend has been maintained even during years of robust growth rates, like FY08 and FY07.

One can hence expect a flat or marginal decline in sales volumes in the third quarter compared with the second quarter of FY10. However, on a year-on-year basis, volumes could be higher by around 60-70% because of a low base in the previous year. While the recovery in light commercial vehicles kicked off in July, medium and heavy duty vehicles’ volumes gained momentum with a lag since September.

Come January, there will be renewed buying interest. This time around truck owners could advance sales to January and February due to several reasons. The Euro-IV emission norms come into effect in 11 cities on 1 April 2010, while the rest of the country moves into Euro-III level. This means all fresh sales should be Euro-IV compliant. Analysts estimate that this along with the increase in input costs (mainly steel) may make a truck 7-8% more expensive. All this could lead to early buying in the fourth quarter of FY10. Any interim price increase by manufacturers or excise duty rollback (duties were cut to boost sales during recession) could dampen sales offtake in CVs.

However, both firms share an order to supply buses under the Union government’s urban renewal scheme and state transport undertakings which will shore up volumes. So far from April until October, figures from industry lobby group Society for Indian Automobile Manufacturers show a 5.2% growth in CV sales over the year-ago period. A pick-up in construction and industrial activity all point towards a better second half. Corroborating this is a report by India Foundation of Transport Research and Training, which states that rentals on major trunk routes are up 4-5% between 8 October and 7 November.

Write to us at marktomarket@livemint.com