The beginning of this week as well as that of next week is likely to be volatile as the bulls try to stem the rot and the bears try to consolidate their position further
S&P Nifty close: 4,891
Short Term: Down Medium Term: Down Long Term: Down
The Nifty opened flat, and after a pause, continued its decline as it sliced through the S1 level of the week (4,848) and almost went and hit the S2 level pegged at 4,768 points, as was envisaged in the last week's piece. From very close to this level the Nifty recovered smartly, on the last trading day of the week, on some bottom-fishing as well as short-covering to close with a marginal loss of 37 points (-0.76%). Volumes were, however, significantly lower as the Nifty ended marginally below the trendline (lavender) depicted on the weekly chart.
The sectoral indices which outperformed were CNX FMCG (+1.41%), CNX Pharma (+1.03%), CNX PSU Bank (+0.91%) and CNX IT (+0.59%) while the gross underperformers were CNX Auto (-5.33%), CNX PSE (-1.54%) and CNX Media (-1.18%). The weekly histogram MACD continued to move further below the median line indicating that the bears are now having a stranglehold on the markets.
Here are some key levels to watch out for this week
1. The Nifty is facing stiff resistance in the 5,135-5,185 area which has to be taken out in close for the bulls to be shaken.
2. Weekly averages turned negative implying that the bears have increased their grip on the market and immediate bottlenecks are pegged at 4,969, 5,047 and 5,110 (optimistic scenario) this week.
3. For a very short term reversal, the previous week's high (4,957 points) has to be crossed in close, otherwise the bears continue to rule the roost.
The bear domination continued and the recovery on Friday saw the Nifty make a 'hammer' (on the weeklies, though not a classical one), raising hopes of some respite from the bear onslaught. We also saw the Nifty almost touch the 78.6% retracement (4,768) of the rise from 4,531-5,629 points and the weekly indicators just venturing into oversold territory. All these point towards the likelihood of a small corrective rise taking place (though it will move up in fits and bursts and sailing would not at all be smooth). One should therefore cut shorts in any dips and wait for rallies close to the above mentioned resistance level before taking a fresh view of initiating shorts. For the purists the trend is firmly down (selling near retracement levels is the best option) and is not going to change in a hurry even though a small corrective bounce is likely. The beginning of this week as well as that of next week is likely to be volatile as the bulls try to stem the rot and the bears try to consolidate their position further.
(Vidur Pendharkar works as a consultant technical analyst & chief strategist at www.trend4casting.com)
With poor market conditions to raise equities, infrastructure players may find it difficult to stay afloat. A brief primer shows how debt can be dangerous
Public-Private Partnerships (PPP), an innovative method of roping in the private sector to engage in judicious government and infrastructural projects is currently seen as risky and dangerous, as more and more companies endanger themselves by borrowing recklessly to keep projects afloat. While potential returns can prove to be huge, there’s one catch. If private infrastructure players fail to finish the project on time, they will be penalised, usually at high rates, and this damages their prospects for bidding in future projects. Given the current market situation, infrastructure players are frantically trying to keep projects alive, albeit in a very unhealthy way—by loading up their balance sheets with debt.
According to a recent ICRA report, it is learnt that private infrastructural companies could be gearing up as much 20 times to keep their projects afloat. In other words, the holding/infrastructure company, if it is listed, will see a project decimated if its share price goes down by just 5%.
With so much gearing and little likelihood of generating cash flows, these companies will find it difficult to service their debt obligations in future and will soon go belly-up, which will lead to disastrous consequences across the economy, especially banks that are increasingly writing off loans, much the same way as Lehman Brothers went kaput.
The current challenging market conditions make it difficult to raise equity. Further, government policy inaction and vague tax laws have made private equities leery of investing in government projects, even attractive ones. This leaves infrastructure companies with no choice but to raise debt.
Typically, an infrastructure company, or holding company, will have several smaller subsidiaries or “special purpose vehicles” (SPVs), which are project entities unto themselves, merely owned by the holding company. The idea is assign a governmental project to each SPV, so as to keep management efficient. Each SPV has its own balance sheet. When you add all the SPV balance sheets, you will get the main holding company’s balance sheet. It is a neat thing to do. But the problem comes when there’s debt involved. Let us see how.
Sometimes, government projects require huge amounts of money to be raised by the parent company to fund the project. The private infrastructure players can raise money through bank loans, initial public offers (IPOs), from private equity firms and sometimes from its own coffers (either using parent company’s cash, or cross-subsidising from profitable SPVs and such).
The ICRA report explains, in detail, how infrastructure companies saddle SPVs with debt, which translates into a much higher debt for the holding company. In the report, it explains how companies can raise debt in three different ways and how they can affect its balance sheet. Since parts of the report are very technical, we will not be going through them in detail, instead give a brief overview of the methods of madness in raising debt.
a) Funding of equity in projects SPVs by raising debt at holding company level resulting in high overall leverage
This is the most basic form of funding an SPV. Basically the holding company or the infrastructure company raises initial debt. By creating a SPV, it invests part of this initial debt in form of part-equity ownership in the SPV. Within the SPV, it uses the equity ownership to raise further debt, to finance the remainder of the project cost. Thus the leverage found here is seven times. So, if the holding company is listed and its market price moves down 14%, it will see the equity in a particular SPV wiped out.
b) Part funding of equity contribution through EPC profits; availability of mobilisation advances further reduces the initial fund requirement for equity infusion
This is slightly more complicated. In the previous example, we had one part equity and one part debt. In this case, the equity part of the SPV is funded through cash flows from the project. Thus, there is less debt involved, but also less equity as well. Thus, at SPV level, the gearing for the holding company is now much greater, due to less equity. Here, the gearing is found to be roughly 12 times. It takes only 8% downside in market movement to put a project at a risk.
c) Loan re-financing/securitisation as a means to upfront profits
This is the most complex of the three. Basically, it involves in ‘securitising’ of cash flows to secure even more debt. In other words, debt is being raised in the lieu of cash flows, which flows into the holding company as debt and not equity. Here, the gearing is found to be 20 times. In the most difficult of market conditions, securitising is usually followed, as it involves raising debt in small dosages, which over time becomes too big to handle. All it takes is just a 5% market downside to wipe off an SPV.
The ICRA report does not mention what is the status of infrastructure companies and hence it is not known to what extent these companies have raised debt or how bad the situation is. We do know that PPP isn’t all that safe we thought out to be, especially in challenging market conditions.
Despite a marginal increase in total revenues, the seventh largest steel producer in the world, reported 90% fall in fourth quarter net profit
Mumbai: Tata Steel on Friday posted a nearly 90% fall in its consolidated net profit at Rs433 crore for the fourth quarter ended March 31, 2012, despite a marginal increase in total income, reports PTI.
The company, which is currently the seventh largest steel producer in the world, had clocked Rs4,176 crore net profit in the corresponding quarter previous fiscal, it said in a statement.
Total income of the company during the January-March quarter, however, rose to Rs33,999 crore against Rs33,824 crore in the year-ago period.
On standalone basis, Tata Steel's net profit in Q4 FY12 stood at Rs 1,560 crore compared to Rs 1,708 crore.
Shares of the company closed Friday at Rs399.85 apiece at the BSE, down 1.5% over the previous close.