Monday, January 19, 2009





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Thursday, January 15, 2009

10 rules of successful trading

Unlike investors who need markets to move up in order to profit from their investment, traders don't depend only on bull markets. They can profit even in down trends.

This is a crucial advantage traders enjoy over investors -- the ability to make money whether the market is moving up or down. This fact should not, however, lead you to believe that trading is easy; it requires both a skill-set and rigorous discipline.

Many people take to trading in the mistaken belief that it is the simplest way of making money. Far from it, I believe it is the easiest way of losing money. There is an old Wall Street adage, that 'the easiest way of making a small fortune in the markets is having a large fortune'.

This game is by no means for the faint hearted. And, this battle is not won or lost during trading hours but before the markets open but through a disciplined approach to trading.

1. Always have a trading plan

Winning traders diligently maintain charts and keep aside some hours for market analysis. Every evening a winning trader updates his notebook and writes his strategy for the next day. Winning traders have a sense of the market's main trend. They identify the strongest sectors of the market and then the strongest stocks in those sectors. They know the level they are going to enter at and approximate targets for the anticipated move.

For example, I am willing to hold till the market is acting right. Once the market is unable to hold certain levels and breaks crucial supports, I book profits. Again, this depends on the type of market I am dealing with.

In a strong up trend, I want the market to throw me out of a profitable trade.

In a mild up trend, I am a little more cautious and try to book profits at the first sign of weakness.

In a choppy market, not only do I trade the lightest, I book profits while the market is still moving in my direction.

Good technical traders do not worry or debate about the news flow; they go by what the market is doing.

2. Avoid overtrading

Overtrading is the single biggest malaise of most traders. A disciplined trader is always ready to trade light when the market turns choppy and even not trade if there are no trades on the horizon.

For example, I trade full steam only when I see a trending market and reduce my trading stakes when I am not confident of the expected move. I reduce my trade even more if the market is stuck in a choppy mode with very small swings.

A disciplined trader knows when to build positions and step on the gas and when to trade light and he can only make this assessment after he is clear about his analysis of the market and has a trading plan at the beginning of every trading day.

3. Don't get unnerved by losses

A winning trader is always cautious; he knows each trade is just another trade, so he always uses money management techniques. He never over leverages and always has set-ups and rules which he follows religiously.

He takes losses in his stride and tries to understand why the market moved against him. Often you get important trading lessons from your losses.

4. Try to capture the large market moves

Novice traders often book profits too quickly because they want to enjoy the winning feeling. Sometimes even on the media one hears things like, "You never lose your shirt booking profits." I believe novice traders actually lose their account equity quickly because they do not book their losses quickly enough.

Knowledgeable traders on the other hand, will also lose their trading equity -- though slowly -- if they are satisfied in booking small profits all the time. By doing that the only person who can grow rich is your broker. And this does happen because, inevitably, you will have periods of drawdowns when you are not in sync with the market. You can never cover a 15-20% drawdown if you keep booking small profits. The best you will do is be at breakeven at the end of the day, which is not the goal of successful trading.

A trading account that is not growing is not sustainable. Thus when you believe you have entered into a large move, you need to ride it out till the market stops acting right. Traders with a lot of knowledge of technical analysis, but little experience, often get into the quagmire of following very small targets, believing the market to be overbought at every small rise -- and uniformly so in all markets.

Such traders are unable to make money because they are too smart for their own good. They forget to see the phase of the market. Not only do these traders book profits early, sometimes they even take short positions believing that a correction is "due". Markets do not generally correct when corrections are "due".

The best policy is to use a trailing stop loss and let the market run when it wants to run. The disciplined trader understands this and keeps stop losses wide enough so that he is balanced between staying in the move as well as protecting his equity. Capturing a few large moves every year is what really makes worthwhile trading profits.

5. Always keeps learning

You cannot learn trading in a day or even a few weeks, sometimes not even in months. Successful traders keep reading all the new research on technical analysis they can get their hands on. They also read a number of books every month about techniques, about trading psychology and about other successful traders and how they manage their accounts.

I often like to think about traders as jihadis; unless there is a fire in the belly, unless there is a strong will and commitment to win, it is impossible to win consistently in the market.

6. Always be alert to opportunities of making some money with less risky strategies as well

Futures trading, for example, is a very risky business. The best of chartists and the best of traders sometimes fail. Sure, it gives the highest returns but these may not be consistent -- and the drawdowns can be large.

Traders should always remember that no matter how good your analysis is, sometimes the market is not willing to oblige. In such times the 4-5% that can be earned in covered calls or futures and cash arbitrage comes in very handy. It improves the long term sustainability of a trader and keeps your profit register ringing.

Traders must learn to live with lower risk and lower return at certain times in the market, in order to protect and enlarge their capital.

Disciplined traders have reasonable risk and return expectations and are open to using less risky and less exciting strategies of making money, which helps them tide over rough periods in the markets.

7. Treat trading as a business and keep a positive attitude

Trading can be an expensive adventure sport. It should be treated as a business and should be very profit oriented. Successful traders review their performance at regular intervals and try to identify causes of both superior and inferior performance.

The focus should be on consistent profits rather than erratic large profits and losses. Also, trading performance should not be made a judgement on an individual; rather, it should be considered a consequence of right or wrong actions.

Disciplined traders are able to identify when they are out of sync with the market and need to reduce position size, or keep away altogether. Successful trading is like dancing in rhythm with the market.

Unsuccessful traders often cut down on all other expenses but refuse to see what might be wrong with their trading methods. Denial is a costly attitude in trading. If you see that a particular trade is not working the way you had expected, reduce or eliminate your positions and see what is going on.

Most disciplined and successful traders are very humble. Humility is a virtue that traders should learn on their own, else the market makes sure that they do. Ego and an "I can do no wrong" attitude in good times can lead to severe drawdowns in the long term.

Also, bad days in trading should be accepted as cheerfully as the good ones. So disciplined traders maintain composure whether they have made a profit or not on a particular day and avoid mood swings.

A good way to do this is to also participate in activities other than trading and let the mind rest so that it is fresh for the next trading day.

8. Never blame the market for your reverses

Disciplined traders do not blame the market, the government, the companies or anyone else, conveniently excluding themselves, for their losses. The market gives ample opportunities to traders to make money. It is only the trader's fault if he fails to recognise them.

Also, the market has various phases. It is overbought sometimes and oversold at other times. It is trending some of the time and choppy at others. It is for a trader to take maximum advantage of favourable market conditions and keep away from unfavourable ones.

With the help of derivatives, it is now possible to make some money in all kinds of markets. So the trader needs to look for opportunities all the time.

To my mind, the important keys to making long term money in trading are:

Keeping losses small. Remember all losses start small.

  • Ride as many big moves as possible.
  • Avoid overtrading.
  • Never try to impose your will on the market.
  • It is impossible to practice all of the above perfectly. However, if you can practice all of the above with some degree of success, improvement in trading performance can be dramatic.

9. Keep a cushion

If new traders are lucky to come into a market during a roaring bull phase, they sometimes think that the market is the best place to put all one's money. But successful and seasoned traders know that if the market starts acting differently in the future, which it surely will, profits will stop pouring in and there might even be periods of losses.

So do not commit more than a certain amount to the market at any given point of time. Take profits from your broker whenever you have them in your trading account and stow them away in a separate account.

I say this because the market is like a deep and big well. No matter how much money you put in it, it can all vanish. So by having an account where you accumulate profits during good times, it helps you when markets turn unfavourable.

This also makes drawdowns less stressful as you have the cushion of previously earned profits. Trading is about walking a tightrope most times. Make sure you have enough cushion if you fall.

10. Understand that there is no holy grail in the market

There is no magical key to the Indian or any other stock market. If there were, investment banks that spend billions of dollars on research would snap it up. Investing software and trading books by themselves can't make you enormously wealthy.

They can only give you tools and skills that you can learn to apply. And, finally, there is no free lunch; every trading penny has to be earned. I would recommend that each trader identify his own style, his own patterns, his own horizon and the set-ups that he is most comfortable with and practice them to perfection.

You need only to be able to trade very few patterns to make consistent profits in the market.

No gizmos can make a difference to your trading. There are no signals that are always 100% correct, so stop looking for them.

Focus, instead, on percentage trades, trying to catch large moves and keeping your methodology simple. What needs constant improving are discipline and your trading psychology.

At end of the day, money is not made by how complicated-looking your analysis is but whether it gets you in the right trade at the right time. Over-analysis can, in fact, lead to paralysis and that is death for a trader. If you can't pull the trigger at the right time, then all your analysis and knowledge is a waste.

Thursday, January 1, 2009

Monday, December 29, 2008

5 investing mistakes to avoid in 2009



1. Over-leveraging

Buying stocks with borrowed money is leveraging. And it is a crime that many investors committed last year.

Typically, a broker either lends or allows the investor to have a larger position than the money that has been deposited. The interest rate on such lending is higher. Consider this, often an investor has Rs 1 lakh and has positions in the market four to five times of that.

When things are good and stock prices are rising to dizzying levels, everyone is happy. The return on investment outstrips the interest cost. But when the market falls, it is a complete disaster.

For instance, when Reliance Industries was trading at Rs 2,500, you bought stocks worth Rs 4 lakh (Rs 400,000) on an initial capital of Rs 1 lakh (Rs 100,000). If the stock moves to Rs 2,700, it has gone up by only 8 per cent, but the return on investment (Rs 1 lakh) is 32 per cent.

Now if the stock dips to Rs 2,000, down 20 per cent, you stand to lose 80 per cent. Now if you add the interest cost to the total capital loss, then the initial capital might have been wiped out.

Lesson: Multiplier effect has both sides. Use the loan facility very responsibly and with stringent limits to it.


2. Averaging effect

Whenever stock markets start falling, the initial reaction from investors is to buy more. The idea being that there would be cost averaging.

However, when a slide like this happens, this should be the last thing on your mind. It's because while you may have brought down the acquisition cost, a lot of money has gone into this process. It is almost like throwing good money after bad money.

Often, this happens when one refuses to believe that things are turning sour and the recovery would take a long, long time.

Lesson: Emotional attachment to a stock can be very damaging. If you have made the mistake of buying shares at higher price, don't multiply it by buying them at every low.


3. Investing on tips or rumours

Many investors can be accused of this one. But things can go real bad sometimes. This is especially true with mid- and-small-cap stocks.

There are hundreds of examples where tips are given for penny stocks or Z category stocks. Initially, it may give you some money. In the long run, however, such investing tactics can be fatal.

Lesson: Just ignore.


4. Derivatives play

For a lay investor, this is a definite no. As investing guru Warrant Buffet had once said, derivatives are 'financial weapons of mass destruction'.

A large number of small investors used the derivatives route to invest rather than the cash segment. It was easy since futures and options allowed them to take positions on either side (long or short) with little over 20 per cent margin or little option premium.

But since they have to pay only 20 per cent, bigger risks are taken. That is, small losses are not booked. Instead, positions are rolled on in the hope that ultimately things would favour them.

No wonder, losses keep mounting and can really hurt sometimes. For example, it is better to buy futures at Rs 25 and book profits around 25.5 or 26 levels, effectively earning 10-20 per cent return on the margin amount. However, keeping the position open even while losing can be disastrous.

Lesson: Derivatives are not an investment tool but a hedging mechanism. So either don't use it or use only after you equip yourself with its pros and cons.


5. IPO investment

On an average, during boom times, initial public offerings (IPOs) of companies are oversubscribed by 40-50 times. As a result, investors use the IPO route to make quick money.

That is, on the day of listing they simply book profits. For many, it is a sure shot mantra for quick money.

But when the scrip lists lower than the offer price, getting stuck is very much possible. And if someone has taken a loan and applied for the IPO then things could get real bad. Investors who invested using IPO funding facility get hurt the most.

Long-term IPO investors may still make a decent return over a long run, but subscribe and sell on first day is out of sight at the moment.

Lesson: Invest in IPOs only when you believe in the company. Otherwise, just stay away.

Investors should realise that making money is a long-term process. However, in their attempt to make a quick buck, many suffer. In 2009, make sure that these mistakes will not be repeated.

10 stocks that can earn good returns in 2009

As uncertainties prevail and a revival expected only post second quarter of 2009, it will pay to focus on large cap companies with a proven track record, high earnings visibility and low leverage.
The year 2008 has been one of the worst years in the history of Indian stock markets. The BSE Sensex has fallen 56 per cent and individual stock by as much as 75 per cent from their peak levels in January. Globally, many countries are in a recession and domestic growth rates, too, have plummeted.

India's industrial production has decelerated significantly due to slackening demand, and many companies are cutting production, laying-off employees and postponing capacity expansions. The once robustly growing IT services sector, too, is faced with a gloomy outlook as its major customers are in recession. Export-oriented sectors like textiles, gems and jewellery, leather and apparels are also facing the heat on this count.

While the impact of these developments on financials of companies will only get clearer over the next six months, analysts have already started reducing earnings estimates. For FY10, earnings estimates for the 30 Sensex companies is projected between (-) 10 per cent and 12 per cent. In short, the year 2009 is starting with lots of uncertainties. In this scenario,The Smart Investor spoke to experts to gauge the undertone and what they anticipate in 2009, investment strategies to follow and sectors that will do well.

The silver lining is that most of the bad news is already factored in. Says Abhay Aima, head, Equities and Private Banking, HDFC Bank [Get Quote], "The gloom-and-doom scenario is overhyped as risks are built into valuations with the exception of political risk."

"Indian markets could trade up to 12 times FY10 estimated earnings. The band of 8,000-11,500 should continue till June 2009, by when the markets would bottom out. As such, there is no substantial downside from this range," says Aneesh Srivastava, CIO, IDBI Fortis Life Insurance Company.

Most experts believe that an improvement in economic and corporate numbers will start from mid-2009, led by the various policy measures undertaken.

What will click

In the aftermath of economic slowdown and fall in markets, and also uncertainty over the next few quarters, it is advisable to play safe and stick to large companies with a consistent track-record. Additionally, says Sandeep Shenoy, strategist, Pinc Research, "Companies with integrated operations, strong balance sheets, low leverage or ability to complete financial closure for capex, and low working capital requirements are preferred."

Beyond that, interest rate sensitive sectors are finding favour. Says Srivastava, "We are favourably inclined towards rate-sensitive sectors like banking, auto or even in real-estate on a selective basis. But, as the market is expected to be range bound, a trading strategy could prove helpful."

Defensive plays like FMCG and utilities, too, figure among the preferred lot even as there is already some amount of premium built in their valuations, due to the stability they provide. Additionally, users of commodities are expected to outperform. Says Manish Sonthalia, senior VP Research & Strategy, Motilal Oswal Securities, "Now, the consumption side, like auto (two wheelers) will get more importance. Among other preferred sectors are FMCG and telecom." Commodity user industries like construction, which may get a fillip on account of increased infrastructure spending, also figure in the list, although there are some issues pertaining to funding of projects.

The laggards in 2009 will be commodities (metals), capital goods (due to order slowdown), real estate and IT (weak demand).

With respect to return expectations from the market (Sensex), it ranges 10-12 per cent on the conservative side to as much as 35 per cent, by December 2009.

Regarding investment worthy companies, The Smart Investor looked at the BSE 500 (94 per cent of total market capitalisation) and excluded companies with high debt levels or weak financials. Only those with a proven track record, good earnings visibility, strong cash flows and ability to raise debt were considered, as they will be in a better position to withstand tough times. Notably, many of them are leaders in their respective businesses, and their stocks capable of delivering 18-20 per cent returns over the next one year.

Apollo Hospitals [Get Quote]

Apollo Hospitals has been growing its sales at an annual rate of 21 per cent in the last five years. The company has leveraged its core healthcare services business to launch pharmacies, and testing centres, and is now looking at manufacturing its own drugs and offering clinical trials. A focus area will be the growing medical tourism market (current market size of Rs 2,000 crore, and expected CAGR of 55 per cent till 2012). For Apollo, while foreign patients account for 17 per cent of the total patient volumes and roughly a third of revenues, the company expects this to improve to 25 per cent and 40 per cent, respectively.

The pharmacy segment, which accounts for a fifth of the revenues, is expected to grow at a much faster pace as the company ramps up the number of centres to 1,000 in FY09 from 750 currently. While operating margins are hovering around 17 per cent, numbers will improve going ahead, when the pharmacy segment (yet to make a profit at the EBIDTA level) turns corner and the company's asset light strategy (manage hospitals rather than build) comes into play.

With strong demand for quality medical services, Apollo, a leader with a network of 43 hospitals (10,000 beds) will be able to grow its current revenues of Rs 1,123 crore by about 30 per cent over the next two years. At Rs 429, the stock trades at a reasonable EV/Ebidta of around 11. Expect returns of about 18-20 per cent over the next one year.

Bharti Airtel [Get Quote]

While Bharti is not growing as fast as an Idea or a Vodafone, which have rolled out their services in new circles, the market leader with a share of 25 per cent, continues to add about 2.7 million subscribers every month. Although revenue growth for Bharti is a given, the problem is the declining margins (mainly in the wireless business on account of falling average revenue per user and per minute numbers; Rs 350 and 67 paise, respectively).

With 77 per cent of the population covered, expect these figures to stabilise or dip slightly from these levels offset by the upward movement (based on expansion of subscriber base) in broadband/internet services where the average ARPUs are around Rs 1,250.

Although there are investments to be made in the 3G license fees (reserve price at Rs 2,020 crore for an all India license) and the company has net debt of about $402 million (Rs 2,010 crore), strong cash flows (Rs 3,365 crore cash profit for Q2, FY09) will enable Bharti rollout its 3G network without having to stretch itself.

At Rs 686, the stock is trading at 12.25 times its estimated FY10 EPS and should offer about 22 per cent return over a one year period. For aggressive investors, Reliance Communications [Get Quote] could be considered. The stock is trading at Rs 205 (FY10 P/E 8.9). Lower valuations are largely due to concerns on large scale investments on GSM infrastructure and additional funds needed for 3G rollout.

HDFC

Growing urbanisation, rising disposable incomes and favourable demographics would ensure that demand for housing continues to remain robust. Housing Development Corporation of India (HDFC), is a market leader in the housing mortgage space. Retail mortgage accounts for around two-thirds of its total loan book.

In the retail segment, more than 90 per cent of the individual borrowers are in the salaried class, where default rate is nominal. Strict monitoring and lower loan-to- value allowed to borrowers, has enabled HDFC to its assets quality. Says Keki Mistry, VC and MD, HDFC, "We have always focused on loan quality and not market share, ensuring that the loan appraisal systems and loan recovery processes are aligned to achieve this objective."

The company's gross income and net profit have grown at a CAGR of 27 per cent in the last five years, which reflects a consistent track record. The recent RBI initiatives of hiking the priority sector lending limit to Rs 20 lakh for housing loans should further ease liquidity. Reduction of risk weights on loans and advances to commercial real estate, along with cut in CRR and repo rate would lead to lower cost of funds.

Leveraging the distribution network of its subsidiary, HDFC Bank, to source loans in Tier 2 and 3 cities would ensure greater business from these regions. Among other subsidiaries are HDFC Standard Life and HDFC Mutual Fund, which also have huge growth potential. Together, they are valued at Rs 700 per share of HDFC. Currently, the stock trades at 2.7 times its FY10 price-to-book value (standalone). Overall, HDFC's track record of sustaining earnings in all the business cycles and an underpenetrated mortgage market, would ensure healthy returns for many years to come.

Hero Honda

The country's largest two wheeler maker has not been as badly hit by the slowdown as its peers. Its year-to-date sales volume growth at 13 per cent is twice the two wheeler sector growth helping the company increase its market share in motorcycles (62 per cent) and scooters (14 per cent). The company has been able to perform better than its peers (Bajaj Auto [Get Quote], TVS [Get Quote] Motors) by focussing on the high growth rural markets, which now constitutes 55 per cent of its sales. Secondly, 90 per cent of its overall sales are cash purchases, while both its peers are dependent on vehicle finance.

Going ahead, growth in the second half, is expected to be muted as the slowdown drags down purchase activity. Operating margins, now at around 13 per cent, might move up due to reduction in raw material cost and excise duty cut. Once volumes move up, the doubling of capacity at its Uttaranchal plant to 1.2 million units and increase in sub-contracting to 60 per cent levels in the current fiscal would help.

While its focus continues to be the 100 cc segment and the company aiming for six new launches over the next one year, expect volume growth to trend down to about 10 per cent in FY10. At Rs 813, the stock can deliver 15-18 per cent returns over the next 12 months.

Despite the current trend of falling sales, lower demand and lack of credit financing (up to 70 per cent of sales), another stock in the auto space that can be looked at is Maruti Suzuki; trading at an attractive 8.7 times FY10 EPS estimates.

ITC

With three out of four cigarettes consumed in India coming from its stable, ITC is a clear leader in the business. Together with paper, agri commodities and hotels, these businesses generate annual cash flow of Rs 3,600 crore. The last two years though have cigarette volumes remain under pressure (down 2-3 per cent in H1, FY09) thanks to adverse changes in duty rates (excise duty raised, VAT imposed in FY08, duty on non-filter cigarettes introduced). Even then, ITC has managed to grow its sales and profits in this business, led by cost cutting measures, upgrading customers to filter-cigarettes and price hikes.

On the other hand, ITC has been deploying its cash flows towards promising businesses like non-cigarette FMCG (processed foods, personal care, etc). Even as they are in nascent stages and continue to report losses, ITC's consolidated profits have steadily risen (except in H1, FY09, when they were flat due to a 35 per cent rise in other expenditure to Rs 1,612 crore). These losses are expected to decline in the coming quarters, as most of the product launch expenses (reflected in other expenditure) are through.

Importantly, cigarette volumes are seen rising by 2-5 per cent in FY10 and rub off positively on ITC's profitability; sufficient to offset the recent pressure in the hotel business (9 per cent of profits). The paper business (11 per cent share in profits) is also expected to do well, due to easing of raw material prices and expanded capacities. Overall, with improving prospects in the FMCG business (cigarette and others; accounts for 76 per cent of profits), expect ITC to deliver healthy earnings, and the stock to return 18-20 per cent.

IVRCL Infrastructures

In the infrastructure and construction space, IVRCL Infrastructures & Projects is better placed given its low leverage. According to analysts, the company will require a minimal Rs 270 crore as funding gap for its pending projects. The company's debt-equity position is also comfortable, allowing it space to raise funds and continue with its growth plans. IVRCL recently raised Rs 200 crore (Rs 2 billion) by issuing debentures (interest rate of 12.5 per cent) to Life Insurance Corp of India.

IVRCL's order book of Rs 15,000 crore (Rs 150 billion) is four times its FY08 revenue, and provides strong earnings visibility. Estimates suggest that its revenue should grow at 33-35 per cent and earnings by 25-27 per cent over the next three years. Besides, the company will benefit from the government's emphasis on infrastructure, related to irrigation and water management. IVRCL is a leading player in water and irrigation (about 69 per cent) segments and importantly, most of its projects come from the government sector.

Going forward, lower commodity prices and interest rates along with improving liquidity suggest that the business environment should improve for the sector. At Rs 143, the stock is reasonably priced on a PE basis. Even on a sum-of-parts basis (assigning different values to its core business, real estate subsidiaries, BOT projects and stake in Hindustan Dorr Oliver), IVRCL's per share value, as estimated by analysts, works out to Rs 200-250.

RIL [Get Quote]

Reliance Industries (RIL), India's largest private sector company, is an integrated player in the oil and gas sector, with interests in Exploration & Production (E&P), refining, marketing and petrochemicals. In the recent past, RIL's gross refining margin (GRM), although superior to Singapore benchmark GRM, have been under pressure due to the global slowdown.

While the benchmark GRM is expected to see some recovery, the start of refining operations of its 70.4 per cent subsidiary, Reliance Petroleum [Get Quote] (RPET) will help offset the decline in margins. RPET has a capacity to refine 0.58 million barrels of oil per day (BOPD), and would take RIL's consolidated capacity to 1.24 million BOPD in the refining business, which accounted for 56 per cent of profits.

The start of gas production from RIL's KG-D6 block, which is estimated to reach peak production levels of 80 mmscmd in the next 6-8 quarters, will also significantly contribute to the consolidated financials of RIL. Although, EBIT contribution from E&P is at around 12 per cent as of Q2 FY09, analysts expect this figure would reach up to 50-60 per cent by FY11E. In the near-term though, there are issues like those pertaining to the pricing of gas, which would weigh on stock valuations, until they get resolved.

The fortunes of the petrochemical business (33 per cent of profits) have been subdued in the last few quarters. Here, analysts expect the polymer cycle to bottom out by June 2009. Overall, with expanded capacities and production from new oil and gas blocks, expect RIL's profits to rise in the next two years. The stock can deliver 20-22 per cent in one year.

SBI [Get Quote]

State Bank of India (SBI) is often compared to an elephant for its size. Although earlier, it has lost some share to private banks, its aggressive stance now, to shore up its business when most of its peers are cautious is noteworthy, is helping SBI enhance its market share. SBI's market share in terms of business volumes has been on an ascendency (around 16 per cent in deposits and advances) from its lows in 2007. Well-diversified loan portfolio, strict monitoring and risk management measures, would help it to tide over the current economic slowdown.

SBI's presence in rural and sub-urban regions is a distinct advantage over its private peers. A large branch network and improving distribution network would sustain greater volumes from rural areas. Greater propensity to mobilise low-cost deposits and technology-driven connectivity would ensure profitability, besides volumes from these regions.

State Bank of [Get Quote] Saurashtra's amalgamation with the parent could pave for another round of consolidation with its associates. Together, the SBI group in terms of scalability and size has a large 15,000-branch network and balance-sheet strength of over Rs 10 lakh crore, which would help tug competition, when the banking sector is eventually opened to foreign competition.

SBI also has interests in financial services businesses like life insurance, asset management through its subsidiaries. Conservatively, analysts put the value of these businesses at Rs 220 per share. SBI is trading at an estimated P/BV of 1.3 times its FY10 standalone book value, and can deliver 20-25 per cent in the next one year.

Sun Pharmaceutical

A presence in lifestyle and chronic therapy categories such as diabetes and neuro-psychiatry ensures higher growth and twice the margins for Sun Pharma [Get Quote]ceutical vis-�-vis peers. The company has a consistent growth track record with sales growing annually by 36 per cent over the last four years and net profits by 47 per cent during the same period. While the domestic formulation sector is growing at 11 per cent, Sun Pharma has managed to grow its domestic business by 19 per cent for H1, 2009.

In the international segment, expect the US (40 per cent of sales) business to grow at about 25 per cent for the current fiscal. While the company is awaiting approval on the 96 ANDAs it has filed with the US FDA and plans to file 30 more, FY10 might see a slight correction as generic sales move down due to the recessionary trends in the Top 8 global markets.

While uncertainties on Taro acquisition and FDA queries on its Caraco plant are negatives for the stock, expect these to be resolved in the next one quarter. The comfortable cash position at $500 million (Rs 2,500 crore) ensures that Sun Pharma can tide over the tight liquidity conditions prevailing currently and also look out for acquisitions at attractive valuations. At Rs 1,057, the stock can deliver returns of about 25 per cent over the next one year.

Tata Power [Get Quote]

Tata Power scores high on the yard sticks of business model and execution capability and offers both, growth and value. The company is expanding its power generation capacity from 2,474 mw, to about 12,861 mw by FY 2013, translating into a CAGR of 40 per cent. Though this provides good visibility, there could be challenges in terms of funding these plans, given that its parent company recently decided against conversion of warrants (worth Rs 1,340 crore) allotted to it.

Tata Power currently has about 5,660 mw (including the 4000 mw Mundra UMPP) of power projects under execution. According to estimates, the company would need to infuse equity in the range of Rs 3,500-4,000 crore (Rs 35-40 billion) during FY10-11, including for its Mundra project. Barring this, which could be an issue in the short-term, the company is trading at attractive valuations of 1.3 times FY10 estimated book value.

Analysts have put a price target of Rs 850 per share based on the sum-of-parts, including the value of different investments like Tata Communication, Tata Tele (Maharashtra), Tata Tele and Indonesian coal mines. "On standalone basis, the valuations might not look attractive, but if we exclude the value of its stake in the Indonesian coal mines at about Rs 300-350 per share, the stock becomes more attractive," says Mohit Kansal, analyst, KR Choksey Shares and Securities.

Within the power space, which is relatively a safe haven providing stable growth, investors looking for high safety, could also look at the India's largest power utility, NTPC. The company's execution capability, strong cash flows, low leveraging and huge expansion plans, make it safer bet. However, the stock trades at a premium valuation of about 2.3 times FY10 estimated book value.

Friday, December 26, 2008

Believe it or not: Oil cheaper than packaged water

Black Gold has lost its sheen, and how! Today, the cost of a litre of petrol or diesel for Indian oil majors is less than the price of the bottle of packaged water that you buy.

Back-of-the-envelope calculations show that a litre of petrol costs about Rs 11 and diesel about Rs 13, excluding transportation and sundry other charges etc. In contrast, you pay Rs 12-15 for a one-litre bottle of water.

Here's how the arithmetic goes: A barrel of crude oil contains about 190 litres. At $38 a barrel, the current price in the international market, each litre of crude works out to Rs 10, taking the exchange rate at Rs 50 to a dollar.

On an average, approximately 28-29 litres of petrol and 85 litres of diesel are refined from each barrel of crude.
Admittedly, this figure can vary according to the type of crude being processed and the technology deployed in a refinery. So how much would the price of a litre of motor fuel be after incurring the cost of refining, if there were no other charges?

The calculation is so mind-boggling that sometimes even executives of oil marketing companies get confused by the myriad central and state taxes - levied at incremental rates - and complex charges such as "freight equalisation levy'' and dealer margins, etc. Such levies taken together constitute 45-55% of the sale price of petrol or diesel.

So if petrol costs a little over Rs 45 a litre in Delhi pumps, taxes and levies make up about Rs 22 and another Rs 12 constitutes the oil-marketing firm's profit. That leaves a basic cost of about Rs 11 per litre. Similarly, at Rs 32 a litre - the Delhi price of diesel - the actual cost can be taken as Rs 13 as the companies are making a profit of almost Rs 3 a litre.

These calculations are admittedly simplistic and do not take into account other products such as kerosene, jet fuel, cooking gas, naphtha, etc., that are produced along with petrol and diesel and have a bearing on the final cost of each product. However, there won't be big difference between these figures and the figures worked out by the industry.

With crude projected to slide further in the coming days as the global slowdown gets a firmer grip on industry and pushes demand further down, the obvious question is: When will our pump prices go down further?

ToI has repeatedly said this will happen just before the elections are announced, possibly around February. In the meantime, the government is looking to rejig the petro-tax regime to make way for lower prices without hurting oil marketing companies that have accumulated huge losses during the extended run of high crude prices.