Weekly Wrap
October 18, 2013
Investment Ideas
SELL
JSW Steel Ltd
CMP `809
Iron ore situation in Karnataka doesn’t improve
JSW’s performance over the last two years has been challenging due to the regulatory measures undertaken by the Government to curb illegal mining. Expectations of a faster reversal in iron ore output increased after the Supreme Court (SC) cleared the category ‘A’ and ‘B’ iron ore mines to resume operations in Karnataka, subject to necessary conditions. However, most of the mining lease agreements have expired in the past 18 months. As per the SC order, mining can resume only after they renew leases and secure statutory approvals; these mines may take anywhere between 6-12 months to resume production. We believe the impact of resumption of these mines would only be felt in FY15. However, this would not be able to boost production as it would replace the iron ore dumps to be used in FY14 and iron ore bought from other states. We expect the utilization levels at Vijaynagar to remain low at 81.5% in FY14 and 86.5% in FY15.
Challenges persist; Downgrade to Sell
Profitability of the consolidated entity would decline in FY14 as raw material costs would decline only marginally and lower profitability operations of Ispat would be merged. Iron ore costs remain flat due to the tight iron ore situation in Karnataka and the decline in global coking coal has been offset by the weaker rupee. We expect blended EBIDTA/ton to decline from `7,110 in FY13 to `5,998/ton in FY14 on account of the merger of the high cost operations of Ispat. Higher interest costs would further impact the company’s earnings. We expect pre-exceptional profit to increase 16% yoy in FY14 to `15.4bn and 25% yoy in FY15 to `19.3bn. In FY14, net debt is expected to increase by 41.4% yoy to `296bn with the merger of Ispat and a capex of `50bn. Net debt/equity too would jump from 1.2x in FY13 to 1.71x in FY14. In addition to the stretched balance sheet, we are also concerned about the foreign debt exposure (40% of total debt exposure) and ~US$1.6bn of revenue acceptances. JSW is set to be an underperformer in the near term due to the above challenges.
Source: Company, India Infoline Research
Financial summary
Y/e 31 Mar (` m) FY12 FY13 FY14E FY15E
Revenues 343,681 382,097 465,375 500,207 yoy growth (%) 42.6 11.2 21.8 7.5 Operating profit 61,019 65,040 77,628 85,200 OPM (%) 17.8 17.0 16.7 17.0 Pre-exceptional PAT 13,626 13,325 15,457 19,342 Reported PAT 5,377 9,632 6,840 19,342 yoy growth (%) (22.3) (2.2) 16.0 25.1 EPS (`) 61.1 59.7 63.9 80.0 P/E (x) 12.0 12.3 11.5 9.2 EV/EBITDA (x) 5.7 5.7 6.1 5.6 Debt/Equity (x) 1.3 1.3 1.8 1.6 RoE (%) 8.2 7.8 8.5 10.2 RoCE (%) 11.0 10.3 10.2 10.0
Share price chart
Source: Company, India Infoline Research
Steel volumes to remain flat in FY14E
0 2 4 6 8 10 12 14
FY08 FY09 FY10 FY11 FY12 FY13 FY14E FY15E (mn tons) 40 55 70 85 100 115 130
Oct-12 Jan-13 May-13 Sep-13 JSW Steel Sensex
Sensex: 20,882
52 Week h/l (`): 894 / 452
Market cap (`cr): 17,700
6m Avg vol (‘000Nos): 1,392
Bloomberg code: JSTL IB
BSE code: 500228
NSE code: JSWSTEEL
FV (`): 10 Sector: Metals Sector View: Neutral
Share holding pattern
-20 40 60 80 100
Sep-12 Dec-12 Mar-13 Jun-13 Promoters Institutions Others
%
We believe the recent rally in the stock should be used to exit the counter and downgrade the stock from Market Performer to Sell with a revised price target of `641.
India Infoline Weekly Wrap
Market Outlook
Nifty rallied this week above the congestion of resistance levels placed between 6,050-6,150. Currently, it is on the verge of breaking out from a neckline of an inverted head & shoulders pattern. Breakout from the above pattern will be confirmed only with a weekly close above 6,200. Meanwhile, BankNifty is trading at resistance of its 100-DMA which coincides with the upper trendline of a bearish triangle pattern, indicating limited upside.
Technical View
F&O View
The nifty future and Bank nifty has seen fresh addition.of long addition in last few trading session. FIIs remained net buyers, whereas DIIs remained net sellers for the week. On option front, Nifty 6200 strike call has seen unwinding , while fresh put writing was seen at 6100 strike. The one month VWAP for the nifty future is at 6020 which may act as support in near term. Banking, Metals and Capital goods stocks have seen fresh long addition.
-600 -400 -200 0 200 400 600 800 1,000 1,200 1,400 1-O ct 3-O ct 4-O ct 7-O ct 8-O ct 9-O ct 10-O ct 11-O ct 14-O ct 15-O ct
Net FIIs inflow Net MFs Inflows
(Rs cr)
FIIs/MFs activity
0 300 600 900 1,200 1,500 1,800 27-Se p 30-Se p 1-O ct 3-O ct 4-O ct 7-O ct 8-O ct 9-O ct 10-O ct 11-O ct 14-O ct 15-O ct 17-O ct Advance Decline (No of stocks)Advance/Decline
(0.5) (0.4) (0.2) (0.1) 0.3 0.4 0.6 1.3 1.4 2.6 3.4 3.4 (1.5) (0.5) 0.5 1.5 2.5 3.5 4.5BSE Cap Goods BSE Pharma BSE Auto BSE Realty BSE Small-Cap BSE IT BSE Power BSE-200 BSE Bank BSE FMCG BSE Oil & Gas BSE Metal
Sectoral performance
(1.8) 0.5 0.9 1.1 1.5 1.7 1.9 (2.0) (1.0) 0.0 1.0 2.0 Shanghai Hangseng Dow Jones Nikkei Nifty Sensex NasdaqGlobal performance
Key Indices extended its upmove for third consecutive week on back of impressive start to the earnings season. Market participants shrugged off rising WPI and CPI inflation concerns after corporate heavyweights like Infosys, TCS, Reliance Industries, Bajaj Auto and HCL Tech beat market expectations.
Much of the current optimism can be attributed to the Indian Rupee, it extended recent gains to the highest in more than two months breaching the psychological 61 per dollar mark. This strength in the Indian unit was seen after the RBI recently facilitated a swap deal on FCNR dollar deposits. Meanwhile, inflation accelerated to a seven-month high of 6.46% in September, driven by higher food prices, and the ongoing regular hikes in diesel prices.
For the coming week, the next batch of Q2 corporate results, trend in investment activity of FIIs and movement in local currency and global markets will determine the near term trend on the domestic bourses. Wipro will announce its earnings and as seen in other Tier 1 IT players, we expect Wipro to also come out with relatively strong set of numbers for Q2 FY14 on both the revenue and margin front. We expect dollar revenues to expand 3.2% qoq to US$1.64bn and OPM to expand 127bps to 22.1%.
India Infoline Weekly Wrap
Technical Check
Nifty 50 & CNX 500 top 10 gainers
Nifty 50 & CNX 500 top 10 Losers
NSE Nifty CNX 500
Company CMP (`) Chg Company% CMP (`) Chg%
JP Associate 47 18.4 Sintex Ind. 30 24.1
BPCL 362 6.9 Jyoti Stru. 24 21.8
Tata Steel 329 6.8 JP Associate 47 18.4
Bharti Airtel 357 6.6 Karuturi Global 1 18.2
SSLT 195 6.4 Lakshmi Vilas 74 14.9
Axis Bank 1,156 5.1 Indiabulls Sec 14 12.0
Reliance 906 4.9 Suzlon Energy 8 10.8
Wipro 506 3.7 MOIL 230 10.0
ITC 355 3.6 Delta Corp 78 10.4
ONGC 284 2.5 Eid Parry India 141 9.8
NSE Nifty CNX 500
Company CMP (`) Chg Company% CMP (`) Chg%
HCL Tech 1,103 (4.7) Dishman 57 (7.8)
Indusind Bank 414 (3.4) Supreme Petro 56 (7.6)
Cipla 415 (3.2) Brigade Ent. 56 (6.6)
Gail India 327 (2.7) Ansal Props. 18 (6.6)
Tata Power 80 (2.3) J. Kumar 137 (6.5)
PNB 476 (2.2) Sadbhav Eng. 65 (6.3)
Ranbaxy 391 (2.1) PFC 129 (5.8)
Lupin 905 (1.9) JK Lakshmi 74 (5.7)
BOB 554 (1.5) Capital first 156 (5.5)
IDFC 96 (1.5) Jindal Stainless 37 (5.5)
Technically strong
Technically weak
Company CMP (`) 10 days Moving Average (`) Total Traded Qty (lacs) 10 days Average Traded Qty (lacs) Asian paints 487 473 1.76 0.80 United Phos 156 151 4.08 1.88 Dena Bank 50 49 6.46 6.42 Dr Reddy 2460 2402 0.21 0.18 Jain Irrigation 63 62 6.23 2.33 Company CMP (`) 10 days Moving Average (`) Total Traded Qty (lacs) 10 days Average Traded Qty (lacs) Exide Ind. 130 134 1.8 1.2 PFC 129 134 2.5 2.1 Cadila Health 661 674 0.1 0.0 Renuka Sugar 19 20 8.0 5.1 Cipla 415 430 0.9 0.8
Bulk deals
Date Institution Scrip name B/S (lacs)Qty Price(`)
14-Oct Nomura Singapore Karnataka Bank B 11.7 108.0
14-Oct Jupiter The RBS PLC Prism Cements B 25.5 27.4
15-Oct Kotak Mahindra INTL Vmart Retail B 0.9 209.1
Book closure and record date
Company Date Purpose
HCL Tech 22 Oct 2013 Interim Dividend - `.2.00
Asian Paints 24 Oct 2013 Interim Dividend
Cairn India 25 Oct 2013 Interim Dividend
TCS 25 Oct 2013 2nd Interim Dividend - `.4.00
Hindustan Zinc 28 Oct 2013 Interim Dividend
Infotech Enter 29 Oct 2013 Interim Dividend - `.2.00
9600 9800 10000 10200 10400 10600 10800 11000
30-Sep 3-Oct 7-Oct 9-Oct 11-Oct 15-Oct 18-Oct
Bank Nifty Futs Close Bank Nifty Vwap
5700 5750 5800 5850 5900 5950 6000 6050 6100 6150 6200 6250
30-Sep 3-Oct 7-Oct 9-Oct 11-Oct 15-Oct 18-Oct
Nifty Futs Close Nifty Vwap
India Infoline Weekly Wrap
Commodity Corner
Base metals
Base metals traded on a subdued note, influenced by the consensus emerging from the LME week. Market participants are of the opinion that global demand will not be strong enough to absorb the excess supply expected in most of the non-ferrous metals, categorically in Copper, Aluminum and Nickel. Meanwhile, Lead and Zinc’s fundamentals seem to be improving, as growth in demand will be commensurate with the pace in supply. Copper prices may struggle, as global surplus may aggravate in the coming years. On macroeconomic front, Chinese economy grew at an annual rate of 7.8% during Q3, better than the second quarter's 7.5% increase. Meanwhile, September industrial production and retail sales numbers moderated from the previous month.
At the current juncture, base metals seem to be influenced by a contrasting situation. As a headwind, political deadlock induced slower US economic growth can dampen the investment appetite for industrial commodities. However, slower growth can corroborate the inference that Federal Reserve will maintain the monetary stimulus for at least two quarters. Ensuing weak US dollar can spell as a boon for the entire commodity pack.
Note: This market commentary is written at 12:00 PM IST
Precious metals
Gold prices registered impressive gains regardless of the fact that the political deadlock in US is partially resolved, which has paved the path for resumption of government services and extension of the debt ceiling deadline. After two weeks of turmoil, US Congress have eventually kicked the can down the road, implying that the exercise of a mutual consensus on fiscal discipline and debt ceiling extension will take place a few months later. In this respect, US Senate has passed the bill to extend US federal borrowing until February 7 and allow the Treasury to provisionally avert default if Congress does not raise the debt ceiling by the mentioned date. Markets are trying to factor in the fact that the recent shutdown of US government services did some damage to the real economy and slowdown in Q4 growth may persuade the Fed Reserve to persist with its loose monetary policy stance for quite some quarters.
On price front, we believe that gold should trade steady in the short run, as the recent shutdown of US government has compelled the Federal Reserve to procrastinate the decision of tapering the monetary stimulus. Effectively, October FOMC policy meet will be considered as a “non event”. However, it will be crucial to see any concrete uptick in the investment demand (particularly ETF buying). Without any notable improvement in investment demand, prices may find it difficult to sustain any substantial upside.
Base Metals (US$/ton) High Low LTP* Chg(%)
Copper 7,300 7,105 7,230 0.4
Nickel 14,121 13,723 14,005 0.6
Zinc 1,938 1,824 1,932 0.8
Aluminium 1,890 1,826 1,850 (1.7)
Lead 2,177 2,069 2,176 3.5
Precious Metals (US$/ounce) High Low LTP* Chg(%)
Gold 1,328 1,252 1,321 3.8 Silver 22 20 22 2.9
LME prices
Tons Abs Chg. Chg (%) Copper (LME) 5,00,325 (9,000) (1.8) Nickel (LME) 2,29,812 942 0.4 Zinc (LME) 10,65,850 67,950 6.8 Aluminium (LME) 54,22,925 94,525 1.8 Lead (LME) 2,33,025 (3,700) (1.6) Tin (LME) 12,885 55 0.4 Shanghai Copper 1,72,109 10,524 7 Shanghai Zinc 2,50,717 - - Shanghai Aluminium 2,14,627 6,594 3Weekly inventory update
1000 1150 1300 1450 1600 1750 1900 2050 Ja n-10 Ap r-10 Ju l-10 Oct -10 Ja n-11 Ap r-11 Ju l-11 Oct -11 Ja n-12 Ap r-12 Ju l-12 Oct -12 Ja n-13 Ap r-13 Ju l-13 Oct -13
US$/ ounce Gold
5500 6500 7500 8500 9500 10500 Ja n-10 Ap r-10 Ju l-10 Oct -10 Ja n-11 Ap r-11 Ju l-11 Oct -11 Ja n-12 Ap r-12 Ju l-12 Oct -12 Ja n-13 Ap r-13 Ju l-13 Oct -13
US$/ ton Copper (LME)
LME Copper
COMEX Gold
India Infoline Weekly Wrap
Chartbook
IIP and Six core Industries
Crude (Brent/ Nymex)
Inflation
30 40 50 60 70 80 90 100 110 Ja n-07 Ma y-07 Se p -07 Ja n-08 Ma y-08 Se p -08 Ja n-09 Ma y-09 Se p -09 Ja n-10 Ma y-10 Se p -10 Ja n-11 Ma y-11 Se p -11 Ja n-12 Ma y-12 Se p -12 Ja n-13 Ma y-13 Se p -13 (INR/EURO) (INR/USD) (INR/GBP) (INR/JPY)Currency Movements
Interest Rate
70 75 80 85 90 95 Ja n-08 Ma y-08 Se p -08 Ja n-09 Ma y-09 Se p -09 Ja n-10 Ma y-10 Se p -10 Ja n-11 Ma y-11 Se p -11 Ja n-12 Ma y-12 Se p -12 Ja n-13 Ma y-13 Se p -13 Dollar IndexDollar Index
(2) 0 2 4 6 8 10 12 14 Fe b -0 7 Au g -07 Fe b -0 8 Au g -08 Fe b -0 9 Au g -09 Fe b -1 0 Au g -10 Fe b -1 1 Au g -11 Fe b -1 2 Au g -12 Fe b -1 3 Au g -13 (%)Monthly Inflation MFG Products
2 4 6 8 10 12 14 16 18 Ja n-08 Ma y-08 Se p -0 8 Ja n-09 Ma y-09 Se p -0 9 Ja n-10 Ma y-10 Se p -1 0 Ja n-11 Ma y-11 Se p -1 1 Ja n-12 Ma y-12 Se p -1 2 Ja n-13 Ma y-13 Se p -1 3
(%) 10yr Gsec yield 5yr AAA bond yield 3mth CP rate (8) (4) 0 4 8 12 16 Ap r-10 Jun-10 Au g -10 Oct-10 De c-10 Fe b -1 1 Ap r-11 Jun-11 Au g -11 Oct-11 De c-11 Fe b -1 2 Ap r-12 Jun-12 Au g -12 Oct-12 De c-12 Fe b -1 3 Ap r-13 Jun-13 (%)
Six core Ind. IIP
20 40 60 80 100 120 140 160 180 Ja n-08 Ma y-08 Se p -0 8 Ja n-09 Ma y-09 Se p -0 9 Ja n-10 Ma y-10 Se p -1 0 Ja n-11 Ma y-11 Se p -1 1 Ja n-12 Ma y-12 Se p -1 2 Ja n-13 Ma y-13 Se p -1 3
Nymex Crude Brent Crude
India Infoline Weekly Wrap
Chartbook...
0 10 20 30 40 50 60 70 80 90 100 Ja n-08 Ma y-08 Se p -0 8 Ja n-09 Ma y-09 Se p -0 9 Ja n-10 Ma y-10 Se p -1 0 Ja n-11 Ma y-11 Se p -1 1 Ja n-12 Ma y-12 Se p -1 2 Ja n-13 Ma y-13 Se p -1 3 VIXVolatility Index
1,250 1,300 1,350 1,400 1,450 1,500 1,550 No v-12 No v-12 De c-12 Ja n-13 Ja n-13 Fe b -1 3 Ma r-13 Ma r-13 Ap r-13 Ma y-13 Ma y-13 Jun-13 Ju l-13 Ju l-13 Au g -13 Se p -1 3 Se p -1 3 Oct-13 (Rs) FY14Sensex Earning Estimates
0 5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000 Ap r-99 Fe b -00 De c-00 Oct -01 Au g -02 Ju n-03 Ap r-04 Fe b -05 De c-05 Oct -06 Au g -07 Ju n-08 Ap r-09 Fe b -10 De c-10 Oct -11 Au g -12 Ju n-13 21x 13x 9x 5x 17x
Sensex PE Band
200 300 400 500 600 700 800 Ja n-08 Ma y-08 Se p -0 8 Ja n-09 Ma y-09 Se p -0 9 Ja n-10 Ma y-10 Se p -1 0 Ja n-11 Ma y-11 Se p -1 1 Ja n-12 Ma y-12 Se p -1 2 Ja n-13 Ma y-13 Se p -1 3Initial Jobless Claims ('000)
US Initial Jobless Claims
40 45 50 55 60 65 70 Fe b -1 1 Ap r-11 Jun-11 Au g -11 Oct-11 De c-11 Fe b -1 2 Ap r-12 Jun-12 Au g -12 Oct-12 De c-12 Fe b -1 3 Ap r-13 Jun-13
(%) India Euro Zone China
Germany US
PMI
6.00 8.00 10.00 12.00 14.00 16.00 18.00 20.00 D ow Jone s Nas d aq S& P 500 FT SE DA X H ang S eng N ikke i Sh an g hai C om p Me xi co B ol sa Ko sp i Ta iw an St ra it s Se ns ex PE (x) Cur. Yr 1-Yr FwdPE Comparision
Source: BloombergIndia Infoline Weekly Wrap
News Recap
IIFL, IIFL Centre, Kamala City, Senapati Bapat Marg, Lower Parel (W), Mumbai 400 013
The information in this newsletter is generally provided from the press reports, electronic media, research, websites and other media. The information also includes information from interviews conducted, analysis, views expressed by our research team. Investors should not rely solely on the information contained in this publication and must make their own investment decisions based on their specific investment objectives and financial position and using such independent advisors as they believe necessary. The materials and information provided by this newsletter are not, and should not be
Event Calendar
Period : 28
thOctober - 1
stNovember
US
• Q3 GDP qoq (30 Oct) • FOMC rate decision (30 Oct) • Oct ISM manufacturing (1 Nov)
India
• RBI policy meet (28 Oct) • Sep fiscal deficit (31 Oct)
• Oct Markit manufacturing PMI (1 Nov) China
• Sep leading index (28 Oct) • Oct manufacturing PMI (1 Nov)
Europe
• Sep unemployment rate (31 Oct) • Oct CPI core yoy (31 Oct)
The World Bank has revised downwards India’s economic growth forecast for the current fiscal to 4.7 %.(BL)
The Planning Commission has estimated that the current account deficit for 2013-14 will be around 2.5 % of GDP (Gross Domestic Product), sharply lower than Finance Minister P. Chidambaram’s ‘red line’ target of 3.7 % of GDP. (BL)
Reliance Industries has told the government it would start selling gas from its coal bed methane (CBM) blocks at US$13 a unit, and will not wait endlessly for official approval because the contract says the market-discovered price is deemed to be approved in 60 days. (ET)
The chances of Reserve Bank of India Governor Raghuram Rajan reducing key lending rates on October 29 look remote with both wholesale price index (WPI)-based inflation and retail inflation for September coming in at higher-than-expected levels. (BL)
Cairn India wants to exploit the maximum returns from its prolific Barmer oilfields in Rajasthan. The company is undertaking a US$580- mn Enhanced Oil Recovery (EOR) programme, simultaneously with its ongoing exploration activities. (BL)
Coal India Ltd (CIL) has suffered a production loss of about 1.2 mn tonne (MT) in the past three days on account of Cyclone Phailin which has affected the key Coal producing states of Odhisha, Jharkhand and West Bengal. (ET)
Reliance Jio Infocomm Ltd (RJIL) has paid `16.73bn to the Government as entry fee to migrate to unified licence. (BL)
The Reserve Bank of India (RBI) would soon come out with major reforms in the banking sector that would allow foreign banks to enter India in a big way and even take over domestic lenders, Governor Raghuram Rajan said.(BS)
UK regulator Medicines and Healthcare products Regulatory Agency (MHRA) ordered pharmacies, dispensing clinics and wholesalers to return five “prescription-only” medicines of Wockhardt Ld(BL)
Wipro and HCL Infosystems are in race for supplying handheld devices to post offices under a project that is estimated to cost ` 15bn. (BS)
Sesa Goa, a division of Sesa Sterlite, is moving towards resuming iron ore mining in Karnataka(BS)
A consortium of ONGC Videsh, Indian Oil and Oil India has decided against buying 11 % stake that their partner Petronas of Malaysia is selling in a US$20 bn oil project in Venezuela. (ET)
ONGC Videsh Ltd (OVL) said it has signed definitive agreements to acquire additional 12 % participating interest in block BC-10 in Brazil. After the deal, OVL’s share in the acreage would increase to 27 %. (BL)
Hindalco will have to buy coal from other sources at a very high cost for its `170bn aluminium project in Odisha (BS) The planned 310-km natural gas pipeline project of GAIL (India) Ltd in Tamil Nadu will be brought under the purview of the new land acquisition Act from January 1, 2015 – a year after it comes into effect. (BL)
Period : 21
st- 25
thOctober
US• Sep IIP data mom (21 Oct) • Aug trade balance (21 Oct) • Sep unemployment rate (22 Oct)
India
• Sep eight infrastructure industries data (25-31 Oct) China
• Markit flash manufacturing PMI (24 Oct)
Europe
• 2012 govt debt/GDP ratio (21 Oct)
