Stocks
Nifty, Sensex may attempt to rally by early next week: Friday Closing Report

As suggested yesterday, the Nifty almost hit 5,850 today (actual low was 5,854). If today’s low holds, the index will try to make a move towards 5,950. If not, the Nifty may hit 5,825

 
The market settled in the red for the second day on weak corporate earnings and unsupportive global cues. As suggested yesterday, the Nifty almost hit 5,850 today (actual low was 5,854). If today’s low holds, the index will try to make a move towards 5,950. If not, the Nifty may hit 5,825. The National Stock Exchange (NSE) reported a volume of 64.78 crore shares and advance-decline ratio of 611:897.
 
The domestic market opened lower on unimpressive third quarter results from corporates and weak global cues. Dismal results from Tata Motors, Suzlon, State Bank of India, among others and Asian markets trading lower in morning trade hurt investor sentiment as the market opened.
 
The Nifty started off 27 points lower at 5,870 and the Sensex resumed trade 47 points down at 19,450. The benchmarks drifted lower in subsequent trade on all-round selling pressure. Except the BSE FMCG index, all other sectoral indices wee in the negative.
 
The Supreme Court’s order asking telecom firms whose licences were cancelled and did not participate in fresh auction for 2G spectrum to cease to operate immediately, dented the market.
 
The benchmarks continued their descent in the second half of the trading session even as the European markets opened with mild gains. The sustained selling led the market to its low at around 2.00pm with the Nifty falling to 5,854 and the Sensex dropping to 19,382.
 
However, bargain buying in auto and fast moving consumer goods sectors helped the benchmarks in making a recovery from their lows. The gains led the indices to their highs. The Nifty touched 5,900 and the Sensex rose to 19,513 at their respective highs.
 
Seizing the opportunity, sellers once again pressurised the market, resulting a negative close for the second day. The Nifty shed 10 points (0.16%) to 5,887 and the Sensex fell 29  points (0.15%) to settle at 19,468.
 
Markets in Asia settled mixed ahead of the outcome of the G-20 meeting in Moscow on dealing with the sliding yen. Japan is in focus after the yen dived about 12% in the past three months on speculation that new prime minister Shinzo Abe will continue with a more aggressive monetary policy.
 
The Hang Seng rose 0.13%; the Jakarta Composite gained 0.46% and the Seoul Composite added 0.08%. Among the losers, the KLSE Composite fell 0.18%; the Nikkei 225 tanked 1.18% and the Straits Times declined 0.22%.
 
At the time of writing, the key European indices were mixed with a negative bias and the US stock futures were trading lower.
 
Back home, foreign institutional investors were net buyers of shares totalling Rs321.26 crore on Thursday while domestic institutional investors were net sellers of equities amounting to Rs248.99 crore.

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Nomura pegs Power Grid Corporation a BUY at Rs140

Power Grid Corporation’s muted earnings and certain risk factors continue to remain. Despite somewhat negative news, Nomura remains upbeat on the power utility. The management of the company remains tight-lipped about divestment rumours

 
Nomura takeaways from the Power Grid Corporation (PGC) analyst meet noted that despite disappointing earnings and risk of “equity overhang”, it expects company to do well going forward. Nomura said in its report: “We remain upbeat on PGC but note that the risk of an equity overhang (secondary and/or primary issuance) seems to have resurfaced.” Nomura is referring to the divestment agenda, possibly in FY14, which could dilute shareholders’ returns vis-à-vis higher number of shares in the market. However, the management is tight-lipped about the same.
 
The results of PGC were average at best. The company recorded sales of Rs32,617 million as against a consensus of Rs31,698 million, which is 2.9% higher. Its EBITDA was at 28,231 million which is 4.5% higher than the EBITDA. However, reported PAT was 10% higher than consensus at Rs11,291 million. 
 
One of the main concerns about Power Grid Corporation despite its dominance in the Indian power utilities market is the gap between capex committed and asset commissioned i.e. the gestation period of the an investment. Being a capital intensive business, in a sector besotted and riddled with problems, red tape and corruption, it is a plausible concern. The management, however, has downplayed concerns. The report cited, ”management reiterated focus on minimizing the gap between capex and commissioning, but alluded that ramp-up in commissioning to match the step-up in capex of Rs200 billion per year in the 12th Plan would take time”. Normally, it would take around two to three years to get a project from start to finish. 
 
This brings us to focus another important aspect of the company—receivables. Is it having enough current assets to fund day-to-day operations? In an industry characterised by long gestation periods, cash-flow from existing project prove crucial, especially those projects where break even is yet to occur. The Nomura report said, “Overdue receivables remain broadly in check, debtors outstanding for greater than 60 days stood at Rs5.5 billion, of which Rs3 billion relate to dispute in Point of Connection (PoC) charges issued by the regulator. 
 
While the company is in line to achieve its targeted capex and has been awarded several contracts, the issue is when it can complete projects and earn more cash.  Short-term open access (SOTA) seems to be healthy and up for the third quarter (22.5%) ended December 2012. SOTA refers to the market where corporate and state government bid for short-term electricity, mostly on a needs basis. Sometimes, power purchase agreements (PPA) with individual power plant break down and the only way to access power is by buying it from a grid.
 
Despite short-comings, Nomura remain bullish. The report concludes, saying, “PGC remains our top pick in the power utilities space on the back of a robust earnings outlook and a highly execution-focused management."
 
To check other company-related reports, click here.
 

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Volume outlook in domestic MHCV industry remains weak, says Nomura

Volume growth for JLR should remain robust in FY14F led by strong growth in China, says Nomura Equity Research in its report on Tata Motors

Volume outlook in the domestic MHCV (medium and heavy commercial vehicle) industry remains weak at least in the near term. The recent decline in market share in MHCVs partly reflects lower dispatches due to inventory adjustments. Further, as per Tata Motors (TML), competitors have added inventory which has impacted TML’s market share; retail market share is much higher for TML than the share based on wholesale volumes.

 

The company has reduced inventory in the passenger car segment over the last few months. Thus, retail volume run-rates in this segment are higher than wholesales seen over the last few months, according to the company.  In terms of new launches, the company will launch more trucks under its Prima range in the MHCVs and ACE family in the LCV segment over the next one year. Further, there will be entire new range of vehicles which will be launched in FY14F in the LCVs segment called ‘Ultra’ range, according to the management.  In the car segment, there will be new variants and refreshments launched for different models over the next one year. The company maintained its capex target of Rs30 billion annually.  This is Tata Motors’ domestic scenario in a nutshell, according to Nomura Equity Research analysts in its report on the company.

 

Volume growth for JLR should remain robust in FY14F led by strong growth in China. Nomura expects margins to remain in the 15%-15.5% range over the next two years. Global slowdown remains a key risk, while stronger-than-expected success of new models could present upside to medium-term volume growth. 

 

According to Nomura, JLR will look to expand its dealer network to 150 dealers over the next one year (120-130 dealers currently). 4QFY13F should see the full benefit of the launch of the new Range Rover and start of All Wheel Drive (AWD) and smaller engine models in Jag XF, XK models. This should particularly help improve demand growth in the US market, according to the company.  The new XF Sportsbrake will be launched in this quarter, while F-TYPE model will be launched in 1QFY14. 

 

Adverse currency movements (quarter-on-quarter) impacted margins by around 50 basis points in 3QFY13. Further, margins were also impacted by an inferior product mix, higher variable marketing expenses and launch expenses of the new Range Rover.  The Castle Bromwich plant (manufactures Jag models) is now working on a two-shift basis (compared to one-shift earlier) due to the new model launches. The other two plants at Solihull and Halewood continue production on a three-shift basis.

 

JLR’s margins should improve driven by product and geographic mix, while the domestic business will likely continue to face headwinds. Given the bullish stance of its China Autos team on the luxury segment, Nomura has revised up its volume estimates for JLR, but reduced its estimates for the India business. Overall, its consolidated EPS estimates are down by 5% for FY14F and up by 2% in FY15F.

 

Nomura analysts note that Bloomberg consensus FY15F EV/EBITDA multiples of other luxury car companies average around 2.5x, compared to 3x for JLR; thus already factoring in a stronger performance.

 

TML’s 3QFY13 adjusted net profit of Rs18.1 billion was below Nomura’s estimate of Rs25.3 billion. JLR’s net profit at GBP296 million was in line, but a domestic net loss at Rs4.5 billion was significantly below Nomura’s estimate (loss of Rs1.4 billion). Margins for JLR at 14% were in line, while those for the stand-alone business at 1.4% were a negative surprise, according to Nomura analysts.

 

Nomura remains ‘Neutral’ on whether to buy or sell the Tata Motors share in the stock exchange.

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