Nifty may try to bounce back but a short-term rally is possible only on a close above 5,625 tomorrow
After three days of positive opening, the domestic indices opened lower today. The Sensex opened at 19,127 and the Nifty opened at 5,665. With almost at the opening of the session the indices hit their respective high. The NSE recorded a volume of 69.04 crore shares.
The indices were pulled down with the rupee hitting its record low. The Sensex reached 18,667, which is the lowest since 26 June 2013, while the Nifty hit the 5,522, the lowest since 15 April 2013.
Both the Sensex and the Nifty saw the highest absolute fall since 20 June 2013. The Sensex closed at 18,733 (fell 449 points, 2.34%) while the Nifty closed at 5,542 (fell 143 points, 2.52%).
In the meanwhile, the finance ministry is expected to announce five-six measures to curb CAD. According to Finance Ministry sources, the government may tell Public Sector Units (PSUs) like IRFC, PFC, IIFCL to float quasi-sovereign bonds. The government will look to raise around $507 billion through the bonds. Another measure that is being looked at is import tariff hikes for non-essential imports. Among the indices, the top loser was Realty (4.61%); Finance (4.12%); Media (3.95%); Bank Nifty (3.88%) and Commodities (3.29%). After market hours, news came in of the appointment of Raghuram Govind Rajan, the country's chief economic advisor to the finance ministry, as the 23rd governor of RBI.
Of the 50 stocks on the Nifty, four ended in the green: Ambuja Cements (1.13%); Tata Motors (0.79%); Power Grid(0.48%) and TCS (0.20%). The main losers were Tata Power (14.35%); Asian Paints (7.34%); IndusInd Bank (7.14%); BHEL (7.08%) and BPCL (6.69%).
US stocks fell on Monday, 5 August 2013 after a report indicating better-than-expected growth in the service sector and a Federal Reserve official's remarks that the central bank is closer to curbing its asset purchases. Federal Bank of Dallas President Richard Fisher, one of the more ardent critics of quantitative easing, told an audience in Portland, Oregon, that investors should not count on the Fed to continue its $85 billion in monthly bond purchases indefinitely.
The Institute for Supply Management's non-manufacturing index for the US rose to 56 in July, beating the median estimate and June's 52.2 reading.
Economic output in emerging economies contracted in July to its slowest pace since April 2009, marking a fresh low since the global financial crisis, according to HSBC Holdings PLC. The HSBC Emerging Markets Index, which tracks purchasing managers' index reports from 16 emerging economies, declined to 49.4 in July from 50.6 the previous month, HSBC said in a report. A reading above 50 indicates an expansion in activity.
Australia's central bank cut its benchmark interest rate to a record low and damped expectations of further reductions. Governor Glenn Stevens and his board reduced the overnight cash-rate target by a quarter percentage point to 2.5%, the Reserve Bank of Australia said in a statement in Sydney today.
Most of the Asian indices closed in the red. Hang Seng, fell the most, fell 1.34% while Nikkei 225, top gainer, rose 1%. Most of the European indices were trading in the red. The US Futures were also trading in the negative.
GAIL India plans to sell part of its 4.6% stake in Hong Kong-listed city gas distribution firm China Gas Holdings. GAIL had made a strategic investment of Rs137 crore by acquiring 210 million shares of China Gas in 2005. The company plans to keep a small strategic interest in the company that will help it retain its board position in China Gas. GAIL picked up equity in the company as China was keen to replicate Delhi's success in using natural gas as a vehicular and domestic fuel in its cities, primarily Beijing, before the 2008 Olympics. Now that the city gas distribution business is being pursued by GAIL's wholly owned subsidiary, GAIL Gas, the company feels continuation of the investment in China Gas does not appear to meet the original objectives. GAIL fell 1% to close at Rs302 on the NSE.
Investors are worried that rising power availability could impact sale of back-up power genset. In this context, the drop in power deficit especially in South India does lead to some slowdown concerns for Cummins India’s power gen segment, says Nomura
Cummins India displayed a strong hold on margins during times of revenue decline (similar to the downturn in 2009) in its quarterly performance for first quarter of FY14 and this will be seen as a key positive. On the negative side, the investors would start getting increasingly worried on the top-line decline. Even recent management commentary of Kirloskar Oil Engines on power genset sales for FY14 has not been encouraging, says Nomura Financial Advisory and Securities (India) Pvt Ltd in a report.
“In fact, sales (for Cummins India) declined 17%, which was the worst in the last 12 quarters. However, year-on-year decline in employee expense as well as other expenses provided support to the margins. As a result, miss on EBITDA by 17% was largely led by miss on the topline. Other income +74% y-y boosted net profitability and made up for the weak operating performance,” Nomura said. The first quarter performance of Cummins India is given in the table below:
According to Nomura, investors are worried that rising power availability could affect sale of its back-up power genset. In this context, the drop in power deficit especially in South India does lead to some slowdown concerns for Cummins India’s power gen segment. However, an analysis of CEA data reveals that the sharp drop in power deficit in June 2013 was not on account of higher power availability but because of a sharp drop in demand for power. In Nomura’s view, the demand was impacted by seasonality (above average rainfall) as well as low demand for power on the back of a weak economic environment. In fact, availability of power on an All India basis as well as in South India has remained flat compared with same period last year.
The increase in diesel prices will increase the operating cost of gensets and could impact the demand in small HP segment in the shorter terms, as demand is more price elastic, points out Nomura. However, gensets in MHP and HHP segments are used in industrial where we believe the demand is relatively inelastic as these gensets are used for critical applications.
Nomura sees Cummins India as a fundamentally strong company with its long-term competitive advantages in the business. But given the worsening of the macro environment with tightening of credit availability in the market by RBI, sharp depreciation of the rupee, no clear timelines for implementation of CPCB norms, we believe the confidence on near-term earnings has reduced. As a result, we have lowered our valuation multiple from 18x to 16x (mid cycle multiple). With the cut in the multiple along with downward revision in the earnings (2% over FY14-FY15F) Nomura’s target price has been cut to Rs434/share from Rs496/share previously. Nomura maintains its Neutral rating on the stock.
Nomura’s valuation is based on the following estimates:
In the long run, Nomura believes that India’s industrial sector offers the unfolding of a substantial opportunity including opportunities in niche segments.
Why propose a 15% FPO (follow-on equity offering)? – Power Grid does not require equity infusion and yet announced an FPO citing margin of safety, growing investment avenues as prime considerations
Power Grid Corporation of India (PWGR) still does not require equity issuance to execute its base-case business plans and yet has announced a follow-on public offering (FPO). The company management attributed the 15% FPO to growing investment opportunities and margin of safety that it needed. The management expects to conclude the FPO within CY13, subject to the government’s views on the quantum of issuance and its decision to simultaneously divest part of its holding in the company, says Nomura Financial Advisory and Securities (India) Pvt Ltd in a note.
In the past few weeks PWGR has won a bid-based project (taking the tally to three), has inked a MoU with the Railways for a nationwide transmission/ traction project, and has garnered visibility on a chunk of the ‘Green Transmission Corridor’ project coming its way (Figure below).
Potentially in FY14, there is a risk of assets capitalized having equity contribution below the 30% threshold. Hence, the company management stated that the margin of safety is low, which is not a preferred situation. Even though the lenders have not asked for equity infusion, the company has proposed an FPO of 15%.
According to Nomura, this would provide reasonable financial flexibility. “Should the equity raised be lower (vs. its base case), the company management stated it would still have enough financial comfort as the capex-capitalization gap narrows going ahead,” Nomura said.
Nomura said it expects that funds raised (through the FPO) would generate returns above its cost of equity (12%-13%). The impact of proposed equity offering in FY14 on Nomura’s forecast EPS/BVPS is given in the table below:
Nomura has given a ‘Buy’ recommendation with a target price of Rs142.