03 February 2012

Hexaware rallies on stellar Q4 numbers Ø CSEC Research

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Hexaware rallies on stellar Q4 numbers 

Ø   The S&P CNX Nifty posted its gains for the third straight day and managed to close above 5250 mark. Volumes were also on the higher side.

Ø   The Supreme Court cancelled licenses given to the telecom firms involved in 2G spectrum allocation scam. A total of 122 licenses had been issued since January 2008. Bharti remained firm and posted 7 percent gains on hopes that the company might get more spectrum post court verdict.

Ø   Cement stocks rallied on the back of its strong January production and dispatches numbers. ACC, Ambuja and India cements posted modest gains.

Ø    In the midcap space, Hexaware Technologies surged 10 percent on the back of better than expected numbers in Q4CY11.

Ø   BHEL and ONGC were in action ahead of EGOM meet to take a call on divestment stake in these firms. However, the EGOM committee decided not to divest its stake in this current scenario.
Outlook

Ø  U.S. indices were flat ahead of January employment report as the next indicator of the economic recovery.The economy created 121,000 jobs last month and the unemployment rate likely held steady at 8.5%.

Ø  In today’s trade Asian peers are trading mixed and SGX Nifty is trading flat, indicating our market to open on a flattish note.

 
Regards,
CSEC Research

Buy Bharti Airtel ; Target : Rs 450::ICICI Securities

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F u n d a m e n t a l   s t r e n g t h   t o   p a y   o f f …
Bharti Airtel is the market leader in telecom with ~30.9% revenue market
share and strongest fundamentals in the industry. Falling capex intensity,
repayment of debt and reduced interest expense thereon, margin
expansion in African business and high quality subscribers (first takers of
3G) led uptake in 3G services would drive EPS CAGR of 17.3% over FY11-
14E. Spectrum pricing and other regulatory overhang may remain in the
near  term  but  it  seems  to  be  already priced in. We reiterate our BUY
rating on Bharti Airtel with a target price of | 450 per share.
3G revenue to drive growth
Bharti Airtel has the highest number of 3G subscribers in the industry. The
company has disproportionately higher revenue market share indicating
cream of the subscribers, who would be the first ones to migrate to 3G
and consume data services. We expect Bharti’s 3G subscriber base to
increase to 6% of total subscribers by FY14E and 10% by FY16E.
Debt repayment resulting in higher EPS growth
Bharti Airtel is expected to generate free cash flow of ~ | 34986 crore
over the next three years, which would be utilised to repay debt. On
account of reduction in debt of about | 24,000 from current levels, we
expect interest expenses to decline by 42.8% by FY14E. This coupled
with margin expansion would aid higher profitability growth. We expect
EBITDA and PAT CAGR of 17.1% and 17.3%, respectively, over FY11-14E.
Margin expansion in Africa
Airtel’s foray into the African market with relatively less penetration give it
further room for growth. Initiatives like BPO, IT and network management
outsourcing and passive infrastructure sharing would help expand the
margins in the long run. Going forward, we expect African revenues and
EBITDA to grow to | 29,372.7 crore and | 9,063.1 by FY14 at a CAGR of
30.9% and 40.4%, respectively, over FY11-14E.
Valuations
Assuming revenue CAGR of 10.8% over FY11-FY20E and terminal growth
of 3% thereon, we have arrived at a target price of | 450/ share for Bharti
Airtel. Our target price discounts FY12E and FY13E EPS of | 13.4 and |
21.3 by 33.6x and 21.2x, respectively. The stock is currently trading at |
356. Our target price implies an upside potential of 27%. We reiterate
BUY rating on Bharti Airtel.

Hold Idea Cellular; Target : Rs 99 ::ICICI Securities

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F a s t e s t   g r o w i n g   d o m e s t i c   p l a y e r …
Idea is the fastest growing player and has gained maximum revenue
share, which has increased from 9.3% in Q2FY08 to 14.1% in Q2FY12.
With 74.6% of its subscribers and 82.7% of its revenue coming form 3G
circles, Idea is best positioned to leverage its strong and superior
subscriber base in these circles to generate higher yields from 3G
spectrum. With pricing stability, 3G uptake and reduction in network
rollout intensity we expect EBITDA margins to expand to 27.7% by FY14.
Idea would post revenue and PAT CAGR of 18.5% and 26.5% over FY11-
14E. However, Trai recommendations  related to spectrum pricing, if
implemented, would have a greater impact on Idea Cellular. We maintain
Hold on Idea with a target price of | 99.
Growth on fast track
Idea has witnessed the fastest revenue growth in the industry among
listed peers. The company has been gaining revenue market share on the
back of rapid high quality subscriber addition. We expect revenues to
grow at 18.5% CAGR over FY11-14E to | 25714 crore on the back of
17.7% CAGR in the traffic and an improvement of ARPM by ~ 1 paisa to
44 paisa. The subscriber base is expected to increase from 89.5 million in
FY11 to 140 million in FY14 at a CAGR of 16.1%.
3G presence in established circles to drive 3G revenues
Idea has won 3G licenses in circles that contribute 82.7% to its revenue
and 74.6% to its subscriber base. Their strong presence in these 2G
circles is expected to help drive the 3G revenues. We expect the company
to generate ~ | 2780 crore from 3G services by FY14 led by an ARPU of
| 360 and 3G subscriber base of 7.7 million.
High sensitivity to regulatory policy
The sensitivity of the company to regulatory policy remains a concern.
Should Trai’s recommendations be accepted in current form, Idea could
face an impact of ~ | 33 per share.
Valuations
Reducing network rollout intensity  and higher 3G uptake margins are
expected to help the margins expand, though spectrum pricing would
remain near term overhang. Assuming revenue CAGR of 12.6% over
FY11-FY20E and terminal growth of 3% thereon, we have arrived at a
target price of | 80/ share for the core business. We have valued the Indus
contribution at | 19/ share to arrive at a target price of | 99/ share.

Sell Reliance Communication; Target : Rs 84 ::ICICI Securities

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H u g e   d e b t !   S t i l l   a   c o n c e r n …
RCom with the second highest subscriber base has very low VLR
subscribers resulting in huge diversification in subscribers (16.8%) and
revenue (8.2%) market share. The company is in the process of cutting
down free minutes on the network resulting in lower MoU growth than
peers.  Also,  huge  net  debt  levels  of  5.8x  FY11  normalised  EBITDA  are  a
huge concern for RCom. Interest costs would rise, going ahead, as RCom
replaces its FCCB with higher coupon debt. Several attempts to monetise
tower assets have been unsuccessful while the current market scenario
and regulatory overhang would make it all the more difficult to get
desired valuations. The only silver lining is increase in external tenancy on
RCom’s towers backed by RIL’s BWA rollout. We have not factored in any
revenue from external tenancy till a formal announcement is made. We
rate RCom as SELL with a target price of | 84.
Huge debt remains a concern
RCom has a huge debt of about | 33699.5 crore as on September 2011.
The normalised net debt/EBITDA stood at 5.8x in FY11 as compared to
3.0x and 3.1x for Bharti Airtel and Idea Cellular, respectively. Though the
company has refinanced some of its debt through cheaper Chinese debt
with longer maturity, the long term issue still remains. Also, it impacts the
company’s network rollout capex. With capex guidance much lower than
its peers, we believe RCom may lose out on network depth and quality.
Tower deal – A ray oh hope
The company has also been looking at diluting its stake in the tower
business to repay its debt. However, we believe given the market
scenario it would be difficult to get the desired valuations for Reliance
Infratel while the regulatory uncertainty would make equity dilution in the
parent company more difficult. Increase in external tenancy would be a
game changer for RCom. The company has announced it is in talks with
Reliance Industries for renting out towers for the latter’s LTE roll out.

Are structured products needed?:: Business Line

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The turmoil in financial market in recent times has made investors question the justification for long-term investing as their burgeoning profits were wiped out in these unexpected market gyrations. Also, many investors discovered to their unfortunate surprise that their portfolios were not nearly as protected from downside risk and their traditional notion of ‘diversification' failed their expectations. So, are we willing to stick to traditional investments only which move in tandem with the general market or should we actively deploy alternative assets such as Structured Products whose uniqueness provides the right mix of return vs risk.
 How do structured products work?
To understand how a Structured Product works, consider an investor investing Rs 100 in a Structured Product (let us assume it has a maturity of three years). Considering a 3-year corporate bond of highest rating gives 10 per cent, approximately Rs 70 would be allocated to a zero coupon bond and remaining Rs 30 can be allocated to equity through options so as to give maximum participation.
A ten per cent interest rate on the debt component of Rs 70 would mature to Rs 100 approximately in three years which ensures that the principal remains intact. On the other hand, let us assume Rs 30 allocated to equity gets doubled in three years, i.e., investors get Rs 160 after a gap of three years, i.e., an approximate simple annualised return of 20 per cent on the portfolio.
Even in the worst case scenario, if the Nifty goes down from the initial value, investors' principal is protected.  This is an example of a plain vanilla Structured Product.
 Pointers for investors
The three most important components of a structured product are the underlying asset, the issuing entity and its maturity. A structured product focuses on capital protection which happens on the sacrifice of certain market upside. Credit quality is an important aspect, but an investor may prefer slightly less attractive headline terms in order to achieve better returns. It is also useful to compare one product against another before making a decision on what product is best suited to the investor.  
Portfolio allocation
Alternative investments can increase diversification and reduce volatility, given low correlations to traditional investments. They can offer the potential for enhanced returns and can hedge certain portfolio exposures, thereby reducing concentration risk.
Even in a sample Markowitz efficient frontier, the inclusion of alternate assets such as structured products can move the efficient frontier up and to the left. So, for a given level of return, risk is lower or for a given level of risk, return is higher. Also, alternate assets may have higher volatility than their traditional investments.
They typically have low correlations to more traditional asset classes and their inclusion in a portfolio tends to result in a lower overall volatility.
Generally allocating 10-20 per cent of a portfolio to alternative investments is the most appropriate way out of which 5-10 per cent can be allocated to structured products.
 In India, structured products are still in nascent phase and are widely constructed on Nifty index including some commodities such as gold and silver futures. These products are, however, slowly making inroads in to investor portfolios.

Letting go of anchoring bias :: Business Line

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Writing down succinct reasons while making an investment is one way out
Information overload is a common problem in equity markets. Analysts, journalists, corporate honchos vie for the investor's attention with a torrent of numbers and news.
The investor often responds by latching to various tidbits of information from these sound bites. It may be a production target, sales projection or comments by analysts on how the share price is at a multi-year low and is attractive.
Economists and psychologists being what they are have given this behaviour a name: anchoring. It's about an investor's tendency to let one piece of information, such as a buy price, target price or sales projection, outweigh other relevant information or developments when it comes to making an investment decision.

DROPPING ANCHOR

Let us say you bought into company X at Rs 200 with the rationale that the valuations look good given the superior margins, great visibility for sales and a wonderful regulatory environment.
The investment rationale holds up nicely until a new piece of regulation is proposed.
This new rule limits the company's ability to price its wares and this affects your rationale to buy into this company. The stock drops off a cliff to Rs 150.
You now think that the stock was a buy at Rs 200, so it must clearly be a buy right now. That may or may not be true, but what is important is that you sit down with someone who understands the regulation and figure out how this new information affects the company. How does it change the way the company operates and makes money? This should be the key determinant of why you decide to buy or sell your shares.
As Investment writer Mr Benjamin Graham put it, Mr Market does not know you or how much you paid for a stock.
So, why do you put so much emphasis on the price when what matters is why you paid that price?
Much like the buy price, analyst projections for earnings per share or a company's target output provide a false sense of security for the price paid.
They are expectations which are often subject to wild revisions based on what happens in the big bad world of volatile currencies, irate governments and unpredictable monsoons.  

RAISE THE ANCHORS

How, then, do you prepare for the unknown?
How do you prevent yourself from acting on a completely misplaced sense of security?
An extreme case in the fight against anchoring is of the famous mutual fund manager, Mr John Templeton, who would research and then commit himself to buying shares at a predetermined price to avoid the pessimism of bear markets from clouding his judgement.
Surgeon-novelist Mr Atul Gawande in his book, Checklist Manifesto, provides an easy solution. When you decide to buy or sell an investment product why not write down 5-10 succinct reasons for doing so?
When the time comes to sell or buy again, you have a list of reasons to weigh your decision against.
While this may not guarantee a great result, it minimises the chances of glossing over what you know with certainty.
Better yet, when something dramatic happens, you get a chance to re-weigh the assumptions backing why your investment made sense in the first place.

Additional safety in online transactions:: Business Line

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Another choice to ‘extra protect' your online transactions is to create virtual cards. Banks such as HDFC and Kotak Mahindra currently provide this option.
Frauds not only happen at ATMs and points of sale but also when we use cards to make online payments (Card Not Present transactions).
While beyond the card number, the name, expiry date, and CVV2 or CVC2 numbers was used initially as an additional security measure, a second factor authentication based on information not visible in cards was made compulsory by the RBI from August 2009.
This second factor is like a PIN to protect your card usage on the Internet.

Mutual Fund Talk:: Business Line

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I am a self-employed professional aged 44. I have a daughter in class eight and a son in class three. I plan to retire at 60 and have been investing Rs 40,000 a month through SIPs over the last two years in various equity mutual funds. I also invest in PPF. These are purely for my post-retirement life.  My investments in real estate, including the flat in which I stay, are worth Rs 2.25 crore today. I am hoping it will cover expenses arising from any major health issues or any mishaps on the professional front.
 Now I would like to invest another Rs 20,000 a month purely for my children's education so that I can raise at least Rs 10 lakh (please include inflation). I want it to be in debt instruments with no exposure or at best minimal exposure to equities.
I was planning to invest Rs 10,000 a month in recurring deposits, Rs 5,000 in gold ETFs and another Rs 5,000 in HDFC Children's Gift fund-Investment plan. I read in Business Line that dynamic bond fund and income funds are worth considering for the short term. I would like to know more about them. Please suggest me a plan. 
Ajith C
It is good that you are using a combination of the time-tested public provident fund and equity mutual funds for your retirement. If your equity funds deliver at least 14 per cent per annum then your Rs 40,000 a month savings can help build about Rs 3.8 crore when you turn 60. But move the profits from your portfolio to safer debt instruments a few years before your retirement.
Do not depend on your real estate portfolio for your medical needs. Ensure that you have a medical policy, for you and your family. You can consider a reverse mortgage on your apartment for any shortfall in your retirement portfolio.

CHILDREN'S PORTFOLIO

Moving to the portfolio that you are building for your children, we assume that you want to build Rs 5 lakh a child in today's value. To be on the safer side, let us assume an 8 per cent per annum of inflation. That will mean, in four years, when your daughter finishes high school, a Rs 5-lakh course will cost Rs 6.8 lakh. Similarly, you will need Rs 9.9 lakh for your son's higher education after nine years.
Building an education portfolio in four years, that too with debt instruments, is normally a challenging task. However, this should be possible with a reasonably large SIP of Rs 20,000 together with small exposure to equity.

INCOME FUNDS

Dynamic bond and income funds are all good debt products in a long-term portfolio. These funds typically shuffle their investments in debt instruments based on the interest rate cycle. For instance, they invest in long-term instruments if they anticipate interest rates to decline and try to gain from the rising prices in bonds. Or they may go for short-term instruments if interest rates are moving upward.
You are, therefore, spared the hassle of tracking interest rates and timing your investment in debt.
Schemes such as monthly income plans also seek (not mandatory though) to declare regular dividends.
But given that your daughter's education expense is only four years away, pure debt funds may or may not deliver over 9 per cent returns in this period. Hence, go for funds such as HDFC Children's Gift Savings Plan, which will have a small proportion invested in equities. Invest Rs 8,000 a month in this fund and Rs 4,000 a month in Canara Robeco MIP.
We will not recommend over 10 per cent of your savings or Rs 2,000 a month in gold ETFs. The recent outperformance of gold is more a result of current economic uncertainties. But such a situation may well change. We believe holding quality equity funds can still generate superior returns over the long term.
On your plan to invest in recurring deposits (RD), do keep in mind that RDs are not very tax efficient and you will have to pay tax on interest at your normal tax rate. Debt funds, on the other hand, will attract relatively less tax on the capital gains.
Of the remaining Rs 6,000, go for a four-year bank recurring deposit for Rs 3,000 a month and invest another Rs 3,000 a month in the systematic savings plan of HDFC deposit for a four-year period. This also runs like a recurring deposit (RD). Deposits in NBFCs may yield slightly higher returns. Interest rates may begin to slide this year, in which case your RD rates will also start falling.
Use the RD sums and sell required units in the mutual funds to meet your daughter's education expenses. Once the RD is closed, increase SIPs in HDFC Children's Gift and Canara Robeco MIP for your son's education. At least two years before your son starts college, move this to bank fixed deposits or liquid funds. Please note that we expect a return of at least 8.5 per cent annually from your portfolio. While your RD may fetch lower, we hope the mutual funds will still make up in the long term.

3 Feb: Morning News (click on link to read article) IFCI research,

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Morning News (click on link to read article)
Economic Times

Business Standard

 Business Line
Mint

Financial Express

Financial Chronicle

   (Click on link to view article)

Thanks and Regards
IFIN: IFCI Financial Services Limited

3 Feb: Watch Nifty Ø IFCI research,

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Watch Nifty
Ø   Nifty closed with ‘Long Legged Doji” candle body and this implies a loss of sense of direction and that there is a great amount of indecision in the market. Breakout of neither 5290 nor 5220 levels would dictate the intraday trend. On the higher side, If NIFTY sustains above 5290/5320, and then we could see 5360 levels. On the downside, the support would be at 5160/5130 levels. Short term traders are advised to avoid fresh long positions at this point of time as the ceiling of the downward price channel formed on weekly chart at 5290/5320 will act as a strong short term hurdle and move above this level is needed before traders can initiate fresh long positions. If NIFTY breaks above 5290 on weekly closing basis, and then we could see 5380/5400 levels. Failure to move above 5290 levels will keep the index moving in the band between 4900 and 5,300.

3 Feb: Equity Buy/Sell (Technical View) Ø Ø IFCI research,

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Equity Buy/Sell (Technical View)
Ø  SOBHA (280.50 ): The stock is looking buying momentum with strong volumes and above 282 levels, it can move towards 310 and 327 levels in near term. On the downside, the support will be at 270 and 261 levels. Buy for short term gains

Have strict stop losses