Master And Student - All About Stock Markets

Larsen & Toubro Limited (L&T) is India's largest engineering and construction conglomerate with additional presence in electronics and IT. A strong customer-focus approach has enabled L&T to attain and sustain leadership position over last 50 years. L&T enjoys a premiere brand image in India and its international presence is on the upswing, with a global spread of over 30 offices worldwide.

Recently L&T has increased its stake in IT company Satyam Computers from 4% to 15%. Will it have any major impact on its balance sheet? We have to wait and watch, till there is some clarity on the operations of Satyam Computers.

Now let us take a look at the fundamentals of the L&T's stock.

Positives
..Order backlog up 48% to Rs.609 bn, equivalent to 30 months of FY08 sales.
..Best placed in emerging opportunities like Defence, Railways and Shipping.
..Downside risk to margins has diminished in view of softening in metal prices.
..Ability to tap opportunities in Middle East if domestic market slows down.

Key Risks
..Credit crunch and firming interest rates likely to decelerate infrastructure investment.
..Bad debts may increase as firming of interest rates and credit crunch impact project developers.
..Impact of its stake in Satyam.

At CMP of Rs.630, the stock trades at 13 times FY09 earnings estimate of Rs.49.Medium to Long term investors can Buy/Accumulate on declines, to get good returns.

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We have an action-packed week ahead with the Reserve Bank of India set to announce its monetary policy review on Tuesday and the expiry of January derivatives settlement scheduled on Thursday. Volumes recorded last week indicate that investors and traders are in sidelines and they are in wait and watch mood. Foreign Institutions (FIIS) are once more in the exit mode, having sold close to $1 billion (Rs.5000 Cr) in January.

What to expect next week:

Nifty has declined below the key support level of 2750 last week, signaling the continuation of downtrend from 3150. The next supports for the week would be at 2600 and later 2550/2500. Short sellers should watch out for sudden upward reversal from this area.

Short-term resistance for the week would be at 2750 and 2800. Failure to move past the first resistance of 2750 would imply that the downtrend is secure.

Stock levels for index heavy weights:

Reliance Industries - RIL announced its quarterly results and it did not have any major impact.The stock moved lower from an intra-week high of peak at Rs 1,250 (freak high rate of 1335).The stock is in a trading range of 1100 to 1250.An rally would be limited to 1250,from here on. Break below of supports of 1100, would drag down the stock to 1000/930.

State Bank of India - SBI declined below the key support at Rs 1,140 on Monday, but remained range bound.Near-term view for this stock is not that bullish.The next major supports would be at Rs 1000 / Rs 940.The stock will face resistance at Rs 1,220 in the week ahead.

Infosys failed to move past the resistance at Rs 1,300 as indicated last week and declined to an intra week low of Rs 1,190. The stock has key support level of 1150. Breach of this level would take the stock to the levels of Rs 1,120/1,065.

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As per last week review, Nifty recorded an intra-week low of 2701, before pulling up to close the week higher.The index moved in a narrow band between 2700 and 2850 for most of the week. Moving onto next week, major results from index heavy weights like Reliance, Wipro and Reliance Capital are due to be announced, which could be a major factor the trend decider.

Now for next week:

The short-term trend in the index is down, there could be some sideways movement before the downtrend resumes taking the index lower to 2700/2500.Resistances for the week would be at 2860/2900. Failure to move past the first resistance would indicate the downtrend to resume.Strong medium-term support around 2500 should act as a good support in sharp declines.

Stock levels for index heavy weights:

Reliance Industries - RIL rallied higher from the intra-week low of at Rs 1,067 to close the week with a 6 per cent gain. The short-term trend in the stock is down, major support being at 1050 and resistance at Rs 1,274. A downward reversal from this level will pull the stock to Rs 1,067/ Rs 1,000.

State Bank of India - SBI declined below the key near-term support at Rs 1,140 on Monday, but remained range bound.Near-term view for this stock is bearish. The stock will face resistance at Rs 1,220 in the week ahead. A movement in the band between Rs 1,140 and Rs 1,220 is likely for a few sessions before the stock declines to Rs 1000 / Rs 940.

Infosys announced its quarterly earnings, the stock surpassed the resistance at Rs 1,200 to move higher at Rs 1,307. High volume recorded on this counter during last week’s up-move denotes that buyers are interested in adding to their holdings at lower levels.The stock faces strong near-term resistance around Rs 1,320.Reversal from this level can drag Infosys down to Rs 1,100 again.

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Vibrant Gujarat event marks the transformation of Gujarat as the next big thing to hit India Inc. The event has been a thumping success, not just for Gujarat but also for the entire country. In just two days, Gujarat signed record investments of a record Rs 12,00,000 crore(Yes ! 12 Lakh Crore !) of investments to the state. Vibrant Gujarat closed yesterday and it was announced that a total of 8,500 MoUs had been signed and the investment amount was somewhere above Rs 7,50,000 crore.

Heavy-weights from the industry like Tata’s, Birla, L&T, HCC, Mukesh Ambani of Reliance, Anil Ambani of ADAG,Sunil Mittal of Bharti Enterprises, Gautam Adani of Adani Group, Pankaj Patel of Zydus and Sudhir Mehta of Torrent were among some of the industrialists present at the concluding ceremony of the event which saw the participation of more than 600 delegates from 45 countries.

It also shows how a State can actually drive the economy, without depending on stimulus packages from the Central Government. What corporate India needs is an able leader and the CEO leader has been found in Narendra Modi. Little surprise then that India Inc is now rooting for Modi as the Prime Minister of the nation.

Major MoUs signed include:

Adani group: Rs.27,000 crores, to develop SEZs, power plant, power transmission network and education.
Cellular Operators Association of India: Rs 20,000 crore to be invested by the cellular industry.
Welspun:Rs 4,500 crore for expansion of the current facilities.
Gujarat NRE Coke: Investment to the tune of Rs 3,000 crore..
HCC: Rs 40,000 crore in tourism and hospitality.
Suzlon: Rs 9,000 crore hi-tech SEZ for solar power.
SBI: Rs 30,000 crore private equity fund for SMEs and setting up 45 branches in the state.
Birla: Rs 20,000 crore for fibre and telephony in the next three years.
Sterling Biotech: Rs 6,000 crore in SEZ, power, university and an airport.

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Punj Lloyd has commenced adjudication proceedings ( through its wholly-owned United Kingdom based subsidiary - Simon Carves) against SABIC Petrochemicals UK after SABIC terminated the contract and called the performance and advance bank guarantees amounting to approximately Rs2.14bn.

Punj Lloyd was expecting these claims to be settled from SABIC by end of Dec,2008. However, with commencement of legal proceedings against SABIC for terminating the contract, one can't expect early recovery of these costs from the client till a settlement is reached.

The company would have to make provisioning to the tune of Rs 2.14 bn in the current fiscal to factor in the present status of the project.This move is one-time negative for the company in terms of adverse impact on the profitability in FY09.

At current price, the stock is currently factoring in most of the negatives related to order inflow slowdown, SABIC order provisioning as well as negative headwinds prevailing in the economy. Moreover,this provisioning is only one time in nature.

At current price of Rs 110, stock is trading at reasonable valuations of 10.8x and 5.4x its P/E multiples on FY09 and FY10 estimates respectively. These valuations currently factor in most of the negatives related to provisions for SABIC order as well as order inflow slowdown.

Investors with long term view can accumulate on declines, for good returns.

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Just when it appeared as if the nifty would move past the 3150 mark, it was pulled down by Satyam Computers fiasco. Bears exploited the situation, thrashing stocks across sectors.Profit booking ahead of quarterly earnings announcement could partly account for the crash in some of the mid cap stocks that had recorded good gains over the past month. Volumes were significantly higher especially on Wednesday when the Satyam swindle came to light.

Now,what to expect next week?
Nifty reversed from an intra-week high at 3,147 to close 173 points lower. The weekly chart of the Nifty has been a one-week-up-one-week-down kind of move over the last four weeks.In other words, the index is confined to a narrow band between 2800 and 3150.The short-term view will be clearly defined only on a break-out beyond this range.

The index can resistance at 2,930 and supports exists at 2800. Short-term is positive as long as Nifty sustains above 2780.A strong close below this level will take the nifty down to 2701 / 2502.

Stock levels for index heavy weights:
Reliance Industries - Near-term resistance would be at Rs 1,208 and then Rs 1,274. The supports exists at Rs 1,090 and then Rs 1,020.The medium-term trend in the stock is sideways between Rs 950 and Rs 1,400.

State Bank of India - A reversal from 1150 can take the stock upward to Rs 1,260 or even Rs 1,300. Fresh long trades should be avoided in this stock on a decline below Rs 1,140. Any close below 1140 would take the stock to Rs.1000.

Infosys is one of the rare few stocks among the majors that have closed with a positive weekly close.However, another strong weekly close above Rs.1200 is required to reinforce this positive outlook. Subsequent targets for the stock are Rs 1,260 and Rs 1,307. Near-term supports for the stock are at Rs 1,140 and then Rs 1,060.

ONGC has failed to move past the resistance at Rs 740 is negative in medium-term view.The down move from the Rs 810 peak can now drag the stock lower to Rs 620 again. The stock has strong long-term support around Rs 600.Short-term supports for the stock are at Rs 668 and then Rs 627.Resistances in the week ahead would be at Rs 712 and Rs 734.

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Shares of Satyam Computer Services crashed 80%, after the founder and chairman of India's fourth-largest software company resigned, saying the company had inflated its cash and bank balances on the balance sheet by more than Rs.5000 crores.

Chairman B. Ramalinga Raju said the balance sheet as of Sept. 30 had inflated non-existing cash and bank balances.

The Balance Sheet carries as of Sept 30, 2008,

* Non existent cash and bank balances of Rs 5,040 cr.
* An accrued interest of Rs 376 cr which is non-existent.
* An understated liability of Rs 1,230 cr on account of funds arranged by him.
* An overstated Debtor's position of Rs 490 cr as against Rs 2,651 cr reflected in the books.

PriceWaterhouse Coopers - PwC India is the Auditor of Satyam Computers which let the $1 bn scam happen under its nose.

This announcement sparked a rout in its shares and rocking confidence in the broader Indian markets.The Bombay Stock Exchange's 30-stock benchmark Sensitive Index, or Sensex, closed down 7.3% at 9,586.88, having fallen as far as 9,510.

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Housing Development Finance Corporation, founded in 1977, is the leading institution focusing on home mortgages.HDFC has a wide range of distribution network of over 250 outlets and 50 offices.HDFC's marketing efforts continue to be concentrated on developing a stronger distribution network.

Positives
Demand from re-sale and new properties to remain strong barring urban areas.

Pre-eminent return ratios and healthy asset quality fetch premium valuation.
Valued on SoTP methodology, core business trading at 2.3x P/ABV of FY09E.
Loan growth outlook remains positive, FY09 loan book growth at over 20% yoy.
Liquidity conditions improving now, fund raising picks up.
The quality of builder’s loan book, comprising of 12% of the total outstanding loan book, remains healthy.

Concerns
Moderation in housing demand may impact business growth
Liquidity crunch and constrains in raising funds may pressurize margins.

At current price of around Rs.1500, the stock trades at 16 times forward earnings of Rs.90.Long term investors can buy/accumulate on declines, with a 12 month view for a good return.

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