Sell Equities & Base Metals

On October 20th 2009 Bloomberg reported a news snippet saying that " European finance officials are concerned the Euro’s climb to a 14-month high against the dollar is eroding exports”.

The same day French President Nicolas Sarkozy called the move a “disaster” for the economy.

Since February Euro has gained almost 20 percent against the dollar making the Euro zone’s exports more expensive to overseas buyers and threatening the economic recovery from the worst recession since World War II.

Sarkozy’s counselor, Henri Guaino, said that the U.S. is “flooding the world” with dollars and that the currency’s weakness may become “unbearable.” An exchange rate of $1.50 per euro “is a disaster for the European economy and manufacturing sector.

Treasury Secretary Timothy Geithner said on Oct. 3 that it is “very important” for the U.S. to have a strong dollar the reason being US is primarily an importing country and a further weakening of dollar could lead to significantly high levels of current account deficits

In view of this, I strongly believe that the European Central Bank would take every possible step to ensure that its currency does not appreciate further.

Couple of weeks back when Euro was near 1.5, Nifty index was around 5200 and other major global indices was also at their peak. Then what happened was the Nifty corrected to 4500 levels and other global indices also had the same fate. This however was accompanied by Euro reaching almost 1.47 levels unnoticed.

The relation is that, if Euro weakens form here, that means dollar will gain strength and with dollar gaining strength comes the correction in all major base metals and crude. Moreover, in almost all the top world indices, whether Dow Jones or Nikkei or Nikkei, the weight of commodity driven stocks is the maximum. Thus a correction in global commodities because of a weakening euro will inevitably lead to a correction in the global equity markets.

Again since a correction did take place some time back, there is a strong possibility that it shall repeat itself, given the fact that Euro is nearing 1.5.

Hence, I believe the trading strategy one could adopt currently is to go short on the Nifty Index, base metals, crude and commodity driven stocks like Crain India, Reliance Industries, Hindalco, Tata Steel, Sesa Goa, Sterlite, etc. The stop loss one should keep is a Euro level of above 1.51.

Steel Sector – Results Update

The recent recovery in industrial growth and in the real estate sector augurs well for Indian steel makers and the resultant rise in demand is already evident. India and China are two markets where steel units are operating at quite high levels of capacity utilization; 86% for China and 80% for India, compared with the world average of 64%.

• The four major steel companies came with their Q2FY10 results in October 2009. Tata Steel Ltd., India’s biggest producer, reported a nearly 50.0% slide in profit and state-run Steel Authority of India Ltd. posted a 17.0% decline in net income last quarter. Net profit of Jindal Steel &Power Ltd. And JSW Steel Ltd. improved by 7.5% and 42.2%, respectively

• Most companies benefited by selling more of their products as demand picked up because of the stimulus package and lower raw material prices but it did not translate into higher revenues and profits due to poor prices

• Indian steel prices fell almost 35.0% from a year earlier, trimming earnings at local steelmakers.

• Steel exports during the period declined by 40% to 0.93 million tonne as the global economy continues falters

• The steel companies have reduced the price of flat steel products on account of global weakening of prices and appreciation of the rupee, as well as a dip in Chinese domestic prices

• The margins have also contracted mainly on account of lower realizations and higher raw material prices

•I believe that the Steel Stocks have gone way above their fundamentals and most of the demand recovery and other such factors are already factored into their prices. Thus entering them at the current levels would be taking on significantly higher risk and so one should wait for at least 2 more quarters to see whether or not fundamentals improve and then enter

Telecom Sector Result Update

The three major Telecom Sector Operators Bharti Airtel , Reliance Communications & Idea Cellular came out with their Q2FY10 results in October 2009. The Key Highlights were:

• While Bharti Airtel & Idea cellular came out with results around analysts expectations Reliance Communications posted figures which were way below street expectations

• The companies witnessed muted growth on top line front with sales not growing as analysts expected. This was due to less than expected growth in subscribers and with a decline in ARPU’s and MOU’s over the last five quarters

• Among the key revenue segments Wireless services registered a less than expected increase with Passive Infrastructure(towers) business registering a healthy increase The companies witnessed muted growth in EBITDA margins but PAT margins registered a healthy increase mainly on account of cost cutting and decreasing interest costs

• The current outlook of the telecom operators looks bleak considering growth which was a major factor for the valuations which the companies used to command is bottoming out because we are witnessing teledensity of more than 100% in the major metros which are major revenue drivers, intensifying competition because of entry of new players like MTS, Tata DOCOMO and with companies like Uninor, Swan, Loop due to start operations existing operators do have to slug it out to fight competition of falling call rates and subscriber churn

• Increasing competition and muted growth has made telecommunication a matured play and with the rural market being a low margin segment the rural growth story will not command higher valuations and with new services like 3G and Wimax being delayed due to regulatory hurdles the present outlook for the industry doesn’t looks favorable and with Mobile Number Portability (MNP) due to come there would be a churn in subscriber base making it all the more difficult for the existing players

• Our analysis concludes that declining sources of revenue, a declining trend witnessed in ARPU’s and MOU’S, saturation of urban customer base, increasing competition and regulatory hurdles makes telecom an unfavorable play to be in at the moment and until there is a clear picture on revenue front which would come out after 3G auctions and with the regulatory hurdles sorted out any valuations made for these companies would be unjustified so we would suggest staying away from this sector even though all major players have seen their stock price tumbling by 30-50% and with most of the damage already being discounted

• We strongly believe that Bharti Airtel is the only stock in the sector which is to some extent suited to investmentand one can add the stock to their portfolio since it would benefit with entry into the 3G spectrum (largest 2G subscriber base) and value unlocking from Bharti Infratel and Indus Towers

For More details and analysis of Individual companies result, please use the following link to download the report

Telecom Sector Result Update.

Happy Investing..

Brokerage Sector Result Update

India Infoline, Motilal Oswal & Geojit BNPPARIBAS, the three major brokerage under our coverage universe have come up with their Q2FY10 results

• All three have delivered results which are better than the street expectations
• The companies scored on top line front mainly on account of increased revenue realization from equity and commodity brokerage segments while segments such as Mutual Fund advisory and Wealth management also registered healthy increase.
• The companies witnessed significant growth in margins mainly on account of an increased customer base, increased participation from the retail investor segment and an overall positive breadth on the market front also added to the cause
• The recent credit policy aimed at tackling inflation will have an impact on the revenues of the companies because reduced participation on the retail front and with the markets heading back to positions which we would term as expensive considering the valuation parameters a wait and hold approach from investors could dampen revenues
• However considering the fact that the companies are regularly innovating their product portfolio and with an ever increasing demand for professional money managers the industry sure has a bright future

Moreover I believe that with SEBI giving clearance for the extension of timings of equity market, would lead to higher revenues by the brokerage houses and thus we retain our earlier BUY call on each of the three stocks.

One could start doing SIP in these three stocks with equal weights for good long term investment returns.

You could also read our Result Update report on the same by using the following link