NHAI, PFC bond buyers set for a 10-12% gain, post listing

Investors in the bonds of National Highway Authority of India (NHAI) and Power Finance Corporation (PFC) are set to reap an annualised return of as high as 10% to 12% when the instruments are listed on the stock exchanges next week, as yield-hungry investors lap up these tax-free bonds anticipating capital appreciation.

With interest rates poised to fall in the coming quarters, future bond issues are likely to be priced to yield lower than the 8.30% that NHAI bonds are offering. Hence, NHAI bond prices will rise when interest rates begin to fall. Bond prices and interest rates move in opposite direction.

But there are some who think the gains on listing may not be highly attractive immediately, since investors may want to hold on to these bonds because their prices are likely to appreciate.

"The premium will depend on the selling pressure on listing. If a large number of investors are comfortable holding on to them for a longer period, especially in a scenario where the interest rates are likely to come off in future since RBI is expected to cut rates due to the softening inflation, said Ajay Manglunia, head, fixed income, Edelweiss Fin Services.

We can expect better appreciation. There may not be immediate listing gains, but if one is willing to wait till the supplies ease, one may stand to gain," said Ajay Manglunia, head, fixed income, Edelweiss Financial Services.

Bonds are becoming investors' fancy as they give a post-tax yield as high as 12.01% at a time when equity investments are seen to be disastrous. In 2011, the benchmark Sensex fell 25%, the worst in Asia. Furthermore, some of these bonds are backed by sovereign guarantee, which gives comfort to investors in terms of principal.

NHAI's had launched a 5,000-crore issue, with an option to retain a similar amount more in case of oversubscription. It got subscriptions worth 25,000 crore. The bonds may be listed in a fortnight, after the allotment process is completed, NHAI officials said. PFC received bids worth 10,000 crore for its 4,033-crore bond issue.

The interest is being generated largely due to the fact that by the time the bonds get listed, the yields would have come off considerably, given the change in the outlook on interest rates. The yields on 10-year bonds have fallen from 8.55% that was prevailing at the time of the issue of NHAI bonds, to about 8.20% now.

The RBI has said it will not raise the rates anymore.

GOLD LIKELY TO SEE A CORRECTION

Considered one of the safest assets,gold will probably become even more appealing to investors this year as its price is likely to come down

Shobhana Chadha

The glitter of the yellow metal could probably continue to lure investors this year too,especially those who are wary of the choppy equity markets.Last year,gold provided a splendid return of 31.1%.However,investors shouldnt be overjoyed seeing the performance of the commodity since its not a true reflection of its worth.In fact,the metal is basking in glory because the rupee is weakening against the dollar.According to data gathered from Bloomberg,the metal delivered returns of only 10.52% last year in dollar terms.

The inflated returns of Indian investors were due to the falling rupee.This is why experts are warning investors not to go overboard with gold.Many believe that the prices of the noble metal are poised for a significant correction.The magnetic appeal of gold remains weak in the near term, says Naveen Mathur,associate director,commodities and currencies,Angel Broking.

Several factors are at play that can influence gold prices in the coming months.Heres a look at some of them.

A strong dollar

The greenback is regaining its safe haven appeal due to the ongoing economic uncertainty in the Eurozone,and this is likely to have a negative impact on the demand for gold.With caution over European economic status,investors will prefer holding dollar-denominated cash rather than any other financial asset, says Mathur.Investors are increasingly losing faith in the future prospects of the euro.According to Bloomberg,the Dollar Index,a measure of the dollar against six major currencies,has surged 6.05% since 28 October 2011.Considering the gravity of the global economic scenario,experts believe that the index will continue to go up.On the other hand,the yellow metal has witnessed a change in course.As investors are moving away from gold,the dollar prices have already fallen by about 16% since the record high of $ 1,900 per ounce on 5 September 2011.The magnitude of the decrease indicates that the asset class is already on the brink of a bear phase.Gold prices may see a consolidation or correction in the first half of 2012, says Mathur.

A slump in real demand

The demand for physical gold is cooling off.According to the third quarter report of the World Gold Council (WGC),global demand for gold jewellery slumped by 10% in the quarter as compared to the previous year.India,which is the worlds largest market for gold jewellery and gold bars and coins,witnessed a corresponding decline of 26% and 18% in tonnage demand in the two segments as compared to last year.Experts are attributing the dampening consumer enthusiasm to heightened volatility in gold price.Real demand is reducing because of the high price of the metal.I hold a very negative view regarding the performance of gold in 2012, says Sandip Sabharwal,CEO,PMS,Prabhudas Lilladher.

Affirms Arindam Ghosh,CEO,Mirae Asset Global Investments: The actual demand for the metal cannot justify its price level. According to him,gold is not a productive asset class,which is why the fund house has not launched a gold fund despite the euphoria over it.

Demand driven by investment

Gold prices are in a bubble.The asset class is dangerously inflated due to speculative positioning, says Ghosh.The WGC report shows that while the overall demand for gold rose by 6% in the third quarter as compared to the previous year,the increase was primarily fuelled by the investment demand.The demand for gold exchange traded funds and similar products rose by 58%.The surge in the price of any commodity cannot be driven by investment and speculative demand alone, says Sabharwal.

Despite this increase,a sharp recovery in gold prices in the fourth quarter was restricted due to poor investor sentiments.In fact,it seems that globally,the investment and speculative demand is beginning to wobble as gold is increasingly being seen as overbought.Many experts are developing a firm view that the rally in the metal will consolidate,if not correct.

A recent report by Bloomberg stated that many hedge fund managers have sold gold in 2011 and speculators in the New York futures have not been bullish on the commodity in the past 31 months.Investor George Soros,who made $1 billion in one day in the currency market,had cut 99% of his holdings in the first quarter of 2011.All these factors will adversely impact the investment demand to a large extent as even this channel was largely driven by the long-term,safe-haven appeal of gold,which has deteriorated in the past few months, says Mathur.

Magnitude of correction

Experts have their own grades of pessimism.I expect gold prices to fall by 20-25 % by the end of the year, says Sabharwal.Ghosh expects an even more severe correction and believes that it is long overdue.The price level of the commodity should come back to the mean price level of the past five-six years, says Ghosh.This would result in a correction of 33-38 % from the current levels.

Mathur,on the other hand,has a more moderate estimate.He sees a correction of up to 11% in gold prices in the first six months of 2012 as the prices may touch 25,000 per 10 gm.Thereafter,he expects the prices to rally by about 14-19 % in the remaining half of the year with target price levels of 28,500-29,800 in the domestic market.If the rally continues,the commodity could test the level of 31,800 per 10 gm in the later part of the year, says Mathur.

However,he does not rule out the possibility of a drastic correction like the one witnessed by oil prices in 2008.The prices fell from around $150 to about $30 in just six months.If the pressure on gold prices continues,there is a likelihood of global hedge funds and speculators going short on the commodity and prices seeing a massive plunge.However,we hope that some solution will emerge for the European crisis which should help stabilise sentiments by the second half of the year.Currently,gold is performing more like a risky asset than a safe haven, says Mathur.

Should you book profits

If you intend to hold only for threesix months,then yes,book profits.But if you plan to stay invested for three-five years,there is no need to worry as the long-term fundamentals of gold remain unchanged.Though gold serves as a hedge against inflation,it should only be used as a diversifying element in the portfolio.Dont rely strictly on current trends.Assets under management data of the past few months shows that investors are allocating larger amounts to gold.This is not an ideal move as it is not the time to enter gold in a big way, says Sabharwal.Those considering gold with a longer time frame in mind should enter the gold market in a staggered manner.A lump-sum investment can be made at around 25,000 levels, says Mathur.

Crazy Little Thing Called Growth

Nifty 50 companies are expected to report better numbers for the December 2011 quarter,helped by new capacities,better employee utilisation and one-time gains for some.But at a time when macroeconomic parameters are pointing to a deceleration in the economy,the big question is whether the good show will continue

i nvestors appalled by India Inc's lukewarm performance over the last two quarters may be in for a surprise once the financial numbers for the December quarter start flowing in.Helped largely by factors such as one-time windfalls,lower base of the previous year,business consolidations,and a weaker rupee in the case of exporters,India Inc is expected to report a better quarter this time around.The ET Intelligence Group expects the net profit of the Nifty 50 companies to grow by 11.4% year-onyear for the December 2011 quarter on a robust 25% growth in revenue.While the estimates look positive against the backdrop of a 6.5% fall in net profit and 23.5% increase in sales last quarter,it is still too early to conclude that there has been a reversal in the trend.This is because domestic as well as global macroeconomic parameters do not look any better than what they were during the previous quarter.As our coverage on India Inc's September 2011 quarter performance on November 21,2011,pointed out,there continues to be sluggishness in demand indicators including slowing industrial production,and stagnation in industrial capital expenditure.Read on to know what can be expected from India's top frequently traded companies and which factors will impact 12 key sectors.

UP AND NOT AWAY

After dipping to 23.5% in the September 2011 quarter from above 27% in the preceding two quarters,sales growth of the Nifty 50 sample is expected to inch up to 25.5% for the December quarter.The performance,however,will be less secular this time around with only a handful of companies reporting robust sales growth.According to our forecast,15 companies will be able to post a bigger jump in their revenues compared to the sample's average sales growth.During the September quarter,24 companies had topped the sample growth rate Companies including BPCL,Reliance Power,Tata Motors,and Cairn India are expected to clock a higher sales growth during the third quarter of FY12.These companies will be benefited by factors like new capacities coming on stream,the weak rupee or one-time benefits.For instance,BPCL's performance will depend a great deal,as usual,on how much the government decides to compensate it for selling products below cost.In the first half,the government chose to pay very little leaving the company high and dry.We have estimated that BPCL will get 2,500 crore of upstream support and 5,000 crore in compensation from the government for the December quarter in projecting a net profit of 1,008 crore.This will be five times more than the profit of 187.4 crore a year ago.IT players including TCS,Infosys,and Wipro would show a better year-on-year growth on account of a steeper depreciation in the rupee.Reliance Power and Tata Power are likely to reap the benefits of new capacities.Kotak Mahindra Bank has started reporting dividends from subsidiaries on a quarterly basis since the September 2011 quarter.This had resulted in 44% jump in its revenue then.We expect the private sector lender to report a 34% increase in the December quarter boosted by dividends.

THE ROAD AHEAD

Macroeconomic factors such as fiscal deficit,currency movements,exports and growth in gross domestic product look unfavourable at the moment.Given the government's plan to raise borrowings by 40,000 crore in the second half of FY12,net borrowings are expected to touch 4.4 lakh crore according to economists at Barclays Capital.This may result in the fiscal deficit exceeding the target of 4.6% of GDP,they think.Though food inflation has fallen by 3.36%in the fourth week of December,experts consider it to be more as a result of a higher base in the corresponding period last year than actual relief in food prices.In addition,the wholesale price index reported a year-on-year increase of 9.1% in November though marginally lower than the previous month reflecting that prices have not cooled off significantly.The situation on the export front is not encouraging either.Though India's merchant exports rose by 33.2% in the first eight months of FY12,the pace has reduced significantly in recent months.In October,exports grew by 10.8%,and in November,at an even slower rate of 4%.This may continue in the near term due to uncertainties in western economies.Some industry trackers believe that a possible easing of interest rates by the Reserve Bank in the coming months may help in resuming dwindling credit offtake in the economy thereby supporting growth.The banks credit disbursal relative to deposits has been consistently falling in the last few months.In the second week of December,the ratio fell to 0.72,the lowest in 21 months and 38 basis points lower from the corresponding number a year ago.India Inc is likely to report slower growth in the remainder of FY12 and a trend reversal can only be expected in the second half of FY13 if policy-related issues that have created bottlenecks are addressed by then.We have provided a detailed analysis of 12 key sectors to help you gauge which sectors are likely to be affected more during the December quarter and which companies may sail through the tough times.

The performance of the auto sector is expected to remain under pressure at a time when the rupee has weakened and pushed up input costs.In the four-wheeler segment,Maruti Suzuki,the leading player in the sector,reported a 27.6% fall in total vehicle sales during the quarter under review,given the problems arising from its earlier labour problems and auto finance at elevated levels.As a result,its net profit is expected to fall nearly 58% y-o-y in the December quarter.M&M is also expected to post a 16.3% y-o-y fall in its standalone net profit despite strong demand for its tractors and SUV portfolio.And that's largely due to a rise in purchase of traded goods during the quarter under review.However,Tata Motors is expected to report a 46.6% growth in its consolidated net profit for the third quarter of FY12,helped by strong demand for its recently-launched SUV Evoque.Twowheeler player Bajaj Auto is expected to report a 20.4% y-o-y growth in its net profit in the quarter under review,helped by strong overseas demand for its models like the Pulsar.

The slowdown in economic and industrial growth in the country is likely to increase pressure on the asset quality of banks with exposure to affected sectors like SME,real estate,textiles,power and infrastructure.Credit growth is expected to be modest as capital expenditure by companies is close to stalling.As a result,NPAs (non performing assets) are likely to increase.Gross slippages,especially for public sector banks,are likely to rise from 3.7% last quarter to 4% in the October-December quarter.Despite the sharp decline in banking stocks,the perception of default risk will remain high until the macroeconomic situation improves.

The capital goods sector may witness yet another quarter of dreary growth as not much has changed for it in the past three months from the macroeconomic perspective.While companies in the sector may witness an increase in the pace of order execution in order to meet their target revenue guidance for the year,pricing pressures and high input costs are likely to impact margins in this quarter as well.The only respite for the industry,especially for companies catering to the power sector,is the increase in the ordering activity from Power Grid Corporation India Limited (PGCIL) this quarter.The order activity is expected to be healthy,at least until March 2012,as PGCIL needs to meet its targets for the XIth Five Year Plan that ends this fiscal.

Realisations for an all-India player like ACC are likely to improve nearly 10% y-o-y in the quarter under review,helped by better realisations in the southern and western regions.In the northern region while cement prices have shown some signs of easing over the past few weeks they are still higher on a y-o-y basis.Higher realisations should help companies to deal with a rising cost structure.Although imported coal prices have eased by 8% sequentially during the December quarter to about $110,this has been more than offset by the rupee depreciation.A higher tax burden is expected to weigh on the Holcim-controlled companies (ACC and Ambuja) in the December quarter given a rather low base a year ago.Ambuja Cements is also anticipated to post a growth of barely 8.5% growth in net profit in December quarter,while net sales should grow 22.1%.

FMCG companies are likely to continue their good performance in the quarter ended December.Most players including HUL have increased prices of their products.This may affect volume growth,but easing of raw material prices will help them to improve margins.The companies are also likely to control costs by rationalising ad spend and changing the product mix.While there are fears of a slowdown in demand in the urban and rural markets,HUL,ITC and Nestle are likely to be the best performers in the sector.

IT exporters are likely to report lower volume growth,measured in terms of billed man-hours,during the December quarter due to New Year festivities.Top players are expected to log 3-5 % sequential volume growth with a similar growth in dollar-denominated revenue.But,when converted to rupees,revenue is expected to grow in double digits from the previous quarters for each of the top four players,which are publicly listed in India.This is because of a near 12% sequential drop in average rupee rate for a dollar during the December 2011 quarter.The mark-to-market losses on forex hedging,however,may increase.The commentary by managements on future demand traction will be crucial in anticipating the trend in US technology spending in 2012.

Steel makers will not benefit much from the 15% decline in international coal prices as the rupee declined by 10% during the same time making imports costlier.They will not be able to pass on the cost increase to their customers amidst a demand slowdown.The mining ban in Karnataka will continue to negatively impact volumes of steel makers dependant on that region for iron ore.Sesa Goa is also expected to see slow volume growth as a result.In the base metal space,higher cost of power will severely impact margins of aluminium producers like Hindalco and Sterlite.With LME prices on the decline,realisations will be under pressure.Companies which have borrowings in foreign currencies are likely to take a further hit on their loans.

The sector is expected to show mixed results.Upstream oil producers such as ONGC and Cairn India will report high realisations thanks to strong oil prices and a weak rupee.ONGC's one-time gains on recovery of royalty on Rajasthan oilfield will be a further booster.The midstream refiners are facing margin pressure,with the benchmark gross refining margins coming down in the quarter.The downstream marketers Indian Oil,BPCL and HPCL are suffering the worst with the industry's under-recoveries shooting up to 388 crore per day.The domestic natural gas industry and its leader Gail India are facing stagnation,as the domestic availability of natural gas isnt growing.

On the whole,the pharma sector's performance is likely to continue on a healthy trajectory although individual companies may perform differently.While a 10% depreciation in the rupee is beneficial for most pharma companies in terms of export realisations,the rupee effect would be neutralised for companies with high imports.Ranbaxy and Cipla are likely to report better growth on the back of Lipitor sales for the former and higher sales from Indore SEZ for Cipla.Dr Reddys performance may be disappointing as the company has not performed well in India and Russia.Sun Pharma's performance may also be impacted,as Taro may not be able to sustain the exceptional performance logged in the preceding quarter.

Most powerutilities will feel the pinch of rupee depreciation as they import coal.This would increase the overall cost of power generation,forcing these companies to operate at lower plant load factor or capacity utilisation.Companies mainly dependent on imported coal include Adani power,JSW Energy and KSK Energy.The plant load factor of these companies would also be lower due to the extended monsoons.This will have an impact on the power companies'revenues and higher input cost would reduce profitability too.Coal India's production would be lower year-on-year due to waster-logging in its mines.NTPC and Power Grid Corp would perform better than industry peers as these companies are not much dependent on external fuel supply like others and have a relatively safer business model.

With economic conditions not much different from the preceding quarter,it will be a poor show for the real estate sector in the December quarter.Slowdown in demand will continue to lead to low revenue recognition for most companies.Most of them have not launched any new projects during the quarter a sign of difficult times as they struggle to raise funds.Many companies have little choice but to trim their debt as interest costs are denting their bottom line.For instance,DLF,the largest real estate company,has an interest cost of 20% of its revenues.However,companies with projects in tier II and III cities have been able to perform better due to the ongoing demand.

Higher interest outgo to service loans taken to establish 3G services will continue to weigh heavily on telecom operators during the December quarter due tothe pan-India launch of the platform by most operators.This will hamper net profitability since these services are yet to gain momentum and hence would not contribute to the bottom line significantly.Bharti Airtel is expected to report a strong sequential growth of 9% in its African operations during the quarter,helped by higher subscriber penetration and the currency movement.This will more than offset the sluggishness in its Indian operations.But the company is likely to report a fall in net profit due to higher interest expenses.After reporting a fall in sales for the past few quarters,Reliance Communications is expected to show a 10% sequential growth for the third quarter backed by stable per minute revenue and sustained subscriber addition.

Media Deals Point to Consolidation: Analysts

With more than 700 television channels in India and only a few making money, experts believe a shake-up in the industry is inevitable

Purveyors of news are rarely objects of news themselves, but India’s splintered media landscape has made news in the past two week’s.A flurry of deals or talk of more similar transactions has stirred up the sector in recent days, putting the spotlight on the possible motivations and some crystal-ball gazing on what lies ahead.

Last week saw a little-known chemical and fertiliser company Oswal Green Tech buying a 14.17% shareholding in New Delhi Television (NDTV) through two block stock market deals. RIL said on Tuesday that it will invest in Network18s holding company. Before him, younger brother Anil’s firm Reliance Capital increased its shareholding in UTV News, which runs Bloomberg TV, by buying out UTV founder Ronnie Screwvalas 66% stake. News reports have suggested that Ramoji Raos Eenadu TV is in talks with more than one company, including Network18,to sell its news and non-news channels.

Industry executives and experts believe the consolidation trend will pick up momentum in 2012,separating the men from the boys in this highly splintered sector that is being increasingly hobbled by cost pressures and revenue challenges in a slowing economy. With more than 700 television channels in India and only a few making money, experts believe consolidation in the industry is inevitable.

“Consolidation has to happen. It is required, says Haresh Chawla, who recently announced his resignation as group CEO of Network18 and Viacom18 after leading the company for more than a decade.

One major problem for the industry is that it has been too dependent on advertising revenues, while subscription revenues have been elusive. Analysts say some signs of consolidation are already visible, as media companies cobble together bouquets of channels. It is already starting to happen and going forward, media companies will look at building a portfolio of broadcast assets across genres, geographies and languages to create a national setup, says Jehil Thakkar, head of the media and entertainment practice at KPMG.

The move towards regional channels, spread across geographies and genres, is triggered by the high growth in advertising revenues in the segment. Growth in advertising revenues in big cities has been around 12% to 13% even in good times because of an inventory overhang, while regional advertising has been growing at more than 20% for the last few years, say analysts.

Analysts say this could explain why Network 18 may be looking at Eenadu TV.Network 18 does not have any regional channels in its portfolio. This move will give them an entry into the fast growing regional market, says one analyst. Buying Eenadu TV could give Network18 a bouquet of 11 regional channels. What may also be attracting new investors such as the Ambanis and foreign media companies such as Walt Disney is the promise of higher revenues and growth as the full benefits of digitalization kicks in. Collateral benefits of media ownership include access to content sources to power non-media business and potentially even some influence. In the case of Reliance Industries, which is setting up a national 4G broadband service,ownership of a media company will give it an edge over competition, with access to exclusive content from a bouquet of channels as well as web properties.

The Cable Television Network (Regulation) Amendment Act, enacted two weeks ago, could help subscriptions finally become a good source of revenues for media companies, reducing their dependence on advertising. Today, a viewer pays as little as 50 paise to watch an hour of TV. Even this revenue does not reach the channels completely because of under-reporting by local cable operators. This (the digitalization law) will be a game-changer for the television business if well executed, says Sunil Lulla, managing director and chief executive officer of Times Television Network, which runs Times Now, ET Now and Movies Now channels.

Meanwhile, some deals have already happened in the non-news segment, in anticipation of large changes in the sector. In July this year, Walt Disney Co said it is buying out the rest of the 49.56% stake in UTV Software Communications that it does not own from public shareholders and other promoters of the company for.2,000 crore. There is clearly a need for sellers to look at strategic investors. For the buyers, in the long term there is value in Indian media, says Nikhil Vora, managing director and head of research at IDFC Securities. India's entertainment and media industry is estimated to grow at a compounded annual rate of 13% to.1,19,890 crore in 2015 from.64,600 crore in 2010,PwCs India Entertainment and Media Outlook for 2011 revealed earlier this year.

The sectors woes notably because of high costs and low subscription revenues, coupled with the general weakness in the markets have cast a dark shadow over media stocks. The market value of NDTV stood at.171 crore on December 21,2011,the day Oswal Green Tech, ormerly Oswal Chemicals & Fertilizer, acquired its stake for around.24 crore. The company was worth.215.66 crore on January 3,2012,.552.5 crore at the beginning of 2011 and.3,300 crore at its peak in January 2008.Network18s market value has dropped from.1,540.7 crore on January 1,2011 to.535 crore as on January 3,2012,while that of TV18 has dropped from.2,122.4 crore to.1,220.13 crore in the same period.

The sector trades at price earnings multiple of 18.3 compared with nearly 19 for the telecom sector or 21.43 for the technology sector. While digitalization will help increase subscription revenues and remove capacity constraints, it will also aid the process of consolidation in the sector by forcing smaller regional channels into the embrace of larger, pan-India players. Smaller regional channels are enjoying better advertising growth today, but after digitalization they could face problems in getting themselves well placed in the lineup of channels and may feel the need to be aligned with larger players either by selling out or through a distribution deal.

Larger players with a bouquet of channels will have more bargaining power with cable operators.Smaller channels will find it difficult to get into prime tiers, says Chawla of Network18.With valuations low,experts feel now may be the time for consolidation.The overall multiples for media companies have been low for a while.This is a good time to buy.Broadcasting does present a good opportunity, says Thakkar of KPMG.