Friday, 19 September 2008

Stock Tip: Indian Overseas Bank

Hindu Business Line have given a buy on Indian Overseas Bank from a short-term trading perspective. They have given a stop loss of 104 with a target of Rs 122. CMP is Rs 110.45.


Part – A: The Lehman Story

The deepening upheaval on Wall Street has been creating ripples throughout New York.
The fall of Lehman Brothers which headed for the biggest ever bankruptcy filing ever, sale of its
competitor Merrill Lynch & Co Inc in a $50 bn stock deal to Bank of America and the efforts of
insurer American International Group all headquartered in Manhattan definitely shook up the
Global economy.

Indian Government says:

The Government of India seems to be putting up a brave face. The government believes the
bankruptcy filing by America’s fourth largest investment bank will not impact India directly. India
has been more or less insulated from the sub prime crisis in the past and prima facie, the crisis in
the US may not have any impact on India.
The details in developments would have to be watched however. Bankruptcy experts pointed that
Western investment companies might be forced to sell off their assets in India at throwaway prices.

Our Outlook:

• Cost to Indian real estate could be dear given Lehman’s existing investments worth $500
mn in realty firms especially for firms which haven’t received funds yet from Lehman.
• Signals of a deepening credit crisis for Indian developers should be watched.
• Any distress sale by Lehman will impact valuation of existing realty projects.
• IT companies might find financial clients’ appetite for considering “transformational”
change in their business models practically gone.
• The shift to quality from cost could get hastened.
• Large Indian IT firms might include innovative products from smaller IT firms under their

Part-B: Losing sleep over the Rupee

The rupee which has in the recent months been battered to almost 47/US $ and the call money
rates spiking at 16%, triggered the RBI to come up with a slew of measures last evening to stanch
market instability. Comparisons with the 1997 Asian Financial Crisis seem to be springing up.

Our View:

Forex reserves with RBI seem reassuringly large at $288.81 billion week ended 5 September.
We say this because; we considered the following areas which are inherent to decide comfort
levels in Forex and we did get positive vibes:
a) Do we have enough forex to maintain stability in times of global turmoil?
b) How many months of imports can be bought with our forex?
c) Does forex exceed the foreign debt levels and are they larger than money

We think India looks safe.

However our concerns are as follows:

• Our dependence on volatile capital inflows to finance current account deficits puts us in a
highly risky situation. This is part of deeper alterations in our balance of payments.
• Foreign institutional investors (FIIs) have already sold close to $8 billion of Indian equities
this year, and it is quite likely that there will be further selling in the weeks ahead if the
global financial system slips into deeper trouble.
• The rupee has already dropped

Till now the focus was on oil and inflationary pressures but we think there could be growing
pressure on the Indian economy and RBI may have to use more of its reserves to protect the rupee.

From the Economist’s Desk
UTI Mutual Funds

DISCLAIMER: The author is not a registered stockbroker nor a registered advisor and does not give investment advice. His comments are an expression of opinion only and should not be construed in any manner whatsoever as recommendations to buy or sell a stock, option, future, bond, commodity, index or any other financial instrument at any time. While he believes his statements to be true, they always depend on the reliability of his own credible sources. The author recommends that you consult with a qualified investment advisor, one licensed by appropriate regulatory agencies in your legal jurisdiction, before making any investment decisions, and that you confirm the facts on your own before making important investment commitments.