The market witnessed a gap-up opening supported by good global cues. Demand for realty and consumer durables stocks boosted the market, while IT and healthcare counters saw some selling pressure. The benchmarks touched the day’s highs in early trade and were in a narrow range after that.
The indices pared most of the morning’s gains and were poised near the neutral line at noon. Another bout of selling landed the indices in the red in post-noon trade. The development resulted in 11 of the 13 sectoral indices being pushed into the negative zone. The market touched the day’s low in late trade, but retreated and closed off that mark albeit still in the red.
The Sensex retained its psychological level and shut at 20,015.80, down 44.52 points (0.22%). The index touched a high of 20,151.25 and a low of 19,931.31, intraday. The Nifty stood at 5,984.40, a loss of 16.25 points (0.27%) over its previous close. The index scaled a peak of 6,023.80 and dipped to a trough of 5,958 during trade.
The market breadth showed divergent trends today. The Sensex closed with 15 gainers, 14 losers and one stock ended unchanged. The Nifty had 21 advancing stocks against 29 declining stocks. The broader markets outperformed the key barometers today. The BSE Mid-cap index added 10%, while the BSE Small-cap index rose 0.30%.
The top Sensex gainers were Bharti Airtel (up 3.12%), Hindalco Industries (up 1.91%), Jindal Steel (up 1.55%), Tata Motors (up 1.19%) and Sterlite Industries (up 1.16%). The laggards on the index were Maruti Suzuki (down 2.11%), Reliance Infrastructure (down 1.74%), HDFC Bank (down 1.51%), Wipro (down 1.42%) and Reliance Industries (down 1.34%).
In the sectoral space, BSE Metal (up 0.67%), BSE Public Sector Undertaking (up 0.27%) and BSE Fast Moving Consumer Goods (up 0.26%) were the top gainers. BSE Oil & Gas (down 0.71%), BSE Capital Goods (down 0.61%) and BSE Bankex (down 0.55%) ended at the bottom of the list.
With onion prices skyrocketing to as much as Rs85 per kg in some retail markets, the government today said it has brought down customs duty on imports of the commodity to zero from 5%.
Prices of onions have shot up to Rs70-Rs85 per kg from just Rs35-Rs40 a few days ago on account of the damage to crops due to unseasonal rain in the key-producing states of Maharashtra, Gujarat and a few southern states. This has been compounded by hoarding by some traders.
Asian markets ended mixed on Wednesday in low-volume trade on concerns over further policy-tightening measures in China. Signs of a recovery in the global economy boosted exporters in the region. However, worries about the lingering debt crisis in Europe also kept investors on the sidelines.
The Hang Seng gained 0.22%, the KLSE Composite surged 0.66%, the Straits Times rose 0.14%, the Seoul Composite added 0.05% and the Taiwan Weighted was up 0.37%. On the other hand, the Shanghai Composite tumbled 0.90%, the Jakarta Composite declined 0.46% and the Nikkei 225 lost 0.23% at the end of trade.
Indicating that more policy-tightening measures will have to be undertaken, Reserve Bank of India deputy governor Subir Gokarn today said headline inflation is not easing as fast as the apex bank would like it to and that upside risks still remain high. Mr Gokarn pointed out that the rising commodity prices in the global markets also point to the rising risk of headline inflation.
The US markets ended in the green overnight with the Dow and the S&P 500 closing at their two-year highs, on growth optimism for 2011 and earnings forecasts. Adobe Systems Inc surged 6% to $30.93 after it gave a positive earnings forecast for the fourth quarter. Banking stocks rallied on news that Canada-based Toronto-Dominion Bank agreed to acquire Chrysler Financial, the auto lender owned by Cerberus Capital Management, for $6.3 billion.
The Dow gained 55.03 points (0.48%) to 11,533.16. The S&P 500 added 7.52 points (0.60%) to 1,254.60. The Nasdaq rose 18.05 points (0.68%) to 2,667.61.
Back home, on Tuesday foreign institutional investors were net sellers to the tune of Rs34.79 crore in the equities segment. Domestic institutional investors, on the other hand, were net buyers of stocks worth Rs373.67 crore.
BS TransComm (down 0.26%), engaged in the business of manufacturing and supply of towers to the telecommunications and the power sector, has secured a contract (as part of a consortium) worth Rs300 crore from the state-run Rural Electrification Corporation.
The order is for the establishment of 765 KV transmission system for the Krishnapattanam Ultra Mega Power Plant. The work consists of construction of the synchronous interconnection between the southern region and western region, spanning 210km from Raichur to Sholapur, and operation and maintenance for a period of 35 years. The project is scheduled to be completed by March 2014.
Coal India (up 0.56%) has signed a memorandum of understanding (MoU) with Shipping Corporation of India for the purpose of forming a 50:50 joint venture (JV) for importing 25 million tonnes of coal a year to meet the growing demand of imported coal in India.
The size of the JV and other financial aspects are still being worked out. The proposed JV would work towards chartering ships, developing required transportation logistics to supply imported coal directly at the doorsteps of users, setting up bulk cargo-handling terminals and arrangement for mid-sea trans-shipment.
Tata Chemicals (up 3.58%) has forayed into branded pulses under its ‘i-Shakti’ brand, which will be available at around Rs95-Rs100 per kg in retail shops.
The company has introduced four variants—toor, moong, chana and urad—which will initially be available in Maharashtra, Tamil Nadu and Gujarat at around Rs95-Rs100 per kg at modern retail shops, traditional stores, Tata Kisan Sansar outlets as well as through its existing distribution network across the country.
Some prominent firms say that the acquisition is expensive and that reviving the small-capacity steel maker will put a heavy financial burden on JSW
JSW Steel is to acquire 39% of Ispat for Rs21.4 billion and make an offer to buy another 20% from the public by March 2011. JSW is also to refinance Ispat's debt by September 2011. Ispat runs a 3.3 million tonnes per annum plant (mtpa) near Alibaug (on the coast) which is incurring losses due to lack of raw material integration and high power costs. Brokers assume the enterprise value of the deal between $750 and $950 per tonne, which is lower than its replacement value of $1,000 per tonne. JSW will get management control, but with a 26% stake the Mittals still hold veto rights.
CLSA believe the best part about the deal is that JSW has valued Ispat at an EV per tonne of $756 against a replacement value of $1,000 per tonne. However, it is concerned that the deal values Ispat at nine times FY10 EV/EBITDA and that's expensive. The rationale for the deal, CLSA says, is the long delays in setting up steel plants in India, so buying one makes a lot of sense.
But JSW will have huge challenges ahead: It has to improve Ispat's EBITDA per tonne to $100 by Q4 from the negative levels in Q2 and refinance Ispat's debt at lower costs by mid-FY12. "Longer-term, JSW is targeting to improve margins to $175 post-completion of multiple projects and hopes to improve raw material integration in 2-3 years, but we believe that it is too early to factor in either. Overall, we don't see the acquisition either adding to or taking away much from JSW's earnings and valuations in the near-term."
"Why Ispat was not able to procure inputs at cheaper rates on its own remains a mystery," CLSA says, but it feels that the company will see a rise in profits in the coming quarters.
At the core of JSW's game-plan is cost reduction. "JSW plans to cut Ispat's costs by about $50 per tone, by sourcing lower-cost power from JSW Energy, lower-cost coke from Jindal Stainless and surplus pellets from its own Vijaynagar plant, boosting EBITDA per tonne to $100 by Q4FY10 from negative levels in Q2," says CLSA. The brokerage also likes the fact that JSW is buying fresh shares, as this will mean that the "cash will stay within the consolidated entity and go towards reducing debt."
The task is not as easy as it appears on paper. Ispat has reported losses in four of the last five years and in FY10 EBITDA per tonne was just $109. The biggest problem, CLSA points out, is that the whole margin improvement project will take at least a couple of years, until which time Ispat (and by association JSW) remain vulnerable. "There is a risk that JSW might have to support Ispat's capex plans and debt-servicing requirements if steel prices dip and stay lower for longer. The deal also increases JSW's FY11 consolidated net debt-to-equity to 1.21x from 1.01x, reversing the trend of declining gearing of the last two years."
CLSA is not very convinced about JSW's track record in acquisitions either. However, the fact that EPS dilution will be just 3-5% even if one were to assume a lower EBITDA per tonne of $110 over FY12-13 (instead of it improving to $125-130 per tonne to make the acquisiton EPS neutral) is slightly comforting.
In the medium term, Ispat needs a capex of around Rs32 billion-this includes Rs5 billion for a 110MW power plant, Rs6 billion for a 3mtpa pellet plant, Rs5 billion for a 1mtpa coke oven plant, and the big daddy, capacity expansion from 3.3mtpa to 4mtpa for which it needs Rs14 billion.
Credit Suisse mentions an issue that not many other brokers are talking about. "Turning around Ispat is likely to be tricky with existing promoters still holding veto power." It has a divergent view about EV per tonne being below replacement costs too. "EV per tonne is $940, but with further (about) $430 million needed to raise profit to normal levels EV per tonne reaches (about) $1,080."
Credit Suisse believes that with Rs23 billion of cash from the JFE deal still on JSW's balance sheet, funding should not be a problem, but leverage will once again become an issue, since cash contribution from Ispat is a while away.
To get 6x EV per EBITDA, EBITDA per tonne must reach $155, which is targeted after 2-3 years, Credit Suisse points out. "This includes coking coal and iron ore supplies from its own mines (coal from Colombia and ore from Maharashtra)."
Here are Credit Suisse's key takeaways from the analyst meet yesterday.
HSBC Securities and Capital Markets does not think much of the deal either. "Our analysis suggests all synergies, if realised, would help Ispat save Rs1,700 per tonne on costs on an annualised basis. Assuming JSW manages to increase EBITDA per tonne to $170 eventually (2005-10 average being $100 per tonne) the upside to JSW's market cap would be just 6%."
HSBC believes that JSW can help save power costs for Ispat through power purchases from JSW Energy. However, since JSW Energy is a listed company, the transaction will have to happen on an arm's length basis. Even so, it can be far better than the Rs5 per unit electricity cost that Ispat is working with right now. A saving of just Rs0.50 per unit can result in savings of Rs1.2 billion or Rs300 per tonne for Ispat on an annual basis, the brokerage points out.
JSW plans to supply 350 kilo-tonnes per annum (ktpa) of coke to Ispat and rent out Jindal Stainless' excess capacity-Ispat needs 700ktpa of coke at $377 per tonne. HSBC calculates that savings of $50 per tonne on coke costs can result in a savings of Rs1.6 billion (or Rs400 per tonne) for Ispat on an annual basis. According to its other calculations, savings of $25 per tonne on pellets can result in a savings of Rs1.6 billion (or Rs400 per tonne) on an annual basis. "Ispat can also avail Rs1,300 per tonne VAT benefit selling in Maharashtra and Rs1 billion on freight costs."
(This article is based on secondary research. The report is for information only. None of the stock information, data and company information presented herein constitutes a recommendation or solicitation of any offer to buy or sell any securities. Investors must do their own research and due diligence before acting on any security. Some of the opinions expressed in this article are the author's own and may not necessarily represent those of Moneylife.)
Patel Engineering Ltd in consortium with BS TransComm and Simplex Infrastructure has won a transmission project worth Rs300 crore from REC Transmission Project Company.
The transmission project associated with the Krishnapattanam Ultra Mega Power Plant includes establishing a 210 km, 765 kV transmission system from Raichur to Solapur and operating it for 35-years after completion. The project is expected to be complete by March 2014.
On Wednesday, Patel Engineering increased 3.74% to Rs318.65 on the Bombay Stock Exchange, while the benchmark Sensex closed 0.22% down at 20,015.80 points.