Global recession to last 2 years: Morgan Stanley

Chetan Ahya, Managing Director of Morgan Stanley, feels economies will take more time to come out of the global recession. The recession, he said, will take long to get over, and can last for as much as two years. As real economy comes under pressure, we will see rise in non-performing loans, he said, adding that credit markets will recover only once the recession is closer to an end. Ahya added the current account deficit and strong credit growth compounds problems.

Ahya also said the issue of exchange rates remains a key challenge to emerging markets, adding that he sees rupee depreciating to lows of Rs 54-55 per dollar in five or six months.

Source: Moneycontrol

Punjab National Bank (Rs 419.60): Sell

We recommend a sell in Punjab National Bank from a short-term trading perspective. It is evident from the charts of Punjab National Bank that it was on a broad sideways consolidation in the range between Rs 440 and Rs 530 between late July and late October. The stock failed to surpass the upper boundary (Rs 530) of the sideways consolidation during mid-October and started to decline.

Subsequently, the stock penetrated the 21- and 50-day moving averages by tumbling over 6 per cent on October 22. Moreover on October 24, the stock conclusively broke out of the sideways consolidation by slipping 11 per cent, along with the broad market sell-off.

The daily relative strength index (RSI) has entered in to the bearish zone and the weekly RSI is on the verge of entering this zone. Furthermore, the moving average convergence and divergence has entered the negative territory, indicating a sell. Our short-term forecast for the stock is negative. We expect the stock’s decline to prolong until it hits our price target of Rs 375 in the upcoming trading sessions. Traders with short-term perspective can sell the stock while maintaining a stop-loss at Rs 440.

Source: HinduBusinessLine

L&T down 6.5%, loses 70.5% in a month

Engineering and construction behemoth, Larsen and Toubro continues to reel under selling pressure. On Monday, the stock was down by 6.5 per cent, touching a 52-week low of Rs 721.65. It has lost a whopping 70 per cent in the last month alone.

At Rs 729, the stock trades at a price to estimated earnings of 17 times and 14 times for FY09 and FY10 respectively.

CLSA has an 'underperformer' rating on the stock with a target price of Rs 1,000, stating that the company is facing challenging times of credit crunch and likely slowdown in growth of order inflows.

Source: EconomicTimes

Investors should focus on biggies like TCS, Infosys

There is no respite for the IT sector amidst the current market turmoil. The sector was looking forward to the September quarter results, expecting a
bounce-back in its valuations, since historically, IT companies post good performance in the second quarter.

However, despite better-than-expected Q2 results, IT companies are witnessing a sharp fall in valuations. During the current market crash, all the top five IT companies have witnessed a sharp fall in their priceearnings (P/E) multiples. The P/Es of Tata Consultancy Services (TCS), Wipro and Satyam Computer Services have halved from their levels at the beginning of the current calendar year. Global macroeconomic turmoil and uncertainty about future demand scenario are the major reasons for the decline in IT scrips.

During the current quarterly results season, all the top seven players, along with some small and medium-sized companies, have declared results so far. While the Q2 numbers are impressive in rupee terms, the dollar-term guidance given by some of the companies is a cause for concern. Most companies that have stated guidance for the December ’08 quarter have factored in a sluggish trend going ahead.

Companies, including Infosys Technologies and Wipro, expect to see barely any growth in their toplines on a sequential basis, while Satyam expects a much muted growth compared to earlier quarters. What is worse is that it expects a sharp fall in earnings per share (EPS) in the December quarter. Patni Computers has also indicated a drop in sales and net profit, going ahead.

The concern is not limited to the December ’08 quarter. Companies including Infosys and Satyam have cut their forecasts for FY09 as well. These tier-I companies now expect growth in lower single digits for the whole year. In the near term, this spells a rather gloomy scene for the sector, which had seen high double-digit growth so far.

It needs to be noted that the uncertainty about future growth has overshadowed the resilient performance shown by some of the big and small IT players during Q2 ’08. Boosted by a depreciating rupee against the dollar, the top five IT companies recorded a 9.3% sequential growth in revenue, while net profit (PAT) grew by 10.2%. This reflects a marginal expansion of 20 basis points (bps) in net margin at 19.2%. Reckoned year-on-year, sales at the aggregate level rose by 32.4% — much faster than the PAT growth of 18.6%. This means that net margin contracted by 220 bps y-o-y.

Currency fluctuations resurfaced as a potential dampener during Q2 ’08. The rupee depreciated by more than 8% during the quarter compared to the previous quarter. Further, depreciation of the euro and British pound (GBP) against the dollar also impacted the performance of Indian IT companies, which earn more than 80% of their revenues in these three currencies. Among top companies, TCS reported a currency loss of over Rs 261 crore. Wipro reported a forex loss of Rs 28 crore.

Discussions with industry analysts reveal that going ahead, some IT companies, including HCL Technologies, have decided not to take fresh forex hedges, while others such as Infosys have taken a short-term view on hedging. Satyam, on the other hand, has reduced its hedging exposure by half, compared to the figure at the beginning of the current fiscal.

Though the forecast given by IT players is sombre, one ray of hope is that most companies have reiterated they will continue with their hiring plans. Further, the deal pipeline appears healthy, notwithstanding the current global crisis.

Though the future performance of IT scrips depends upon how overall market sentiments shape up, investors are advised to remain focused on biggies, including TCS and Infosys, which have the size and scale to weather the storm. Among mid-sized companies, Mastek looks attractive. The company has shown a stable performance during Q2. Its acquisition last year and its strong hold on the insurance space are expected to keep the company on the growth path.

Source: EconomicTimes

'We need to have a recession'

This time last year, Charles R Morris was wrapping up ‘The Trillion Dollar Meltdown’, a prescient primer on the credit crash. A paperback edition planned for February ups the ante with a revised title: ‘The Two Trillion Dollar Meltdown’. What the US needs most, he says, is a brutal recession to throttle its debt-fuelled buying binge.

“We need to have a recession — a sharp one and a deep one,” says Mr Morris, 68, a ruddy-faced lawyer, former banker and prolific financial writer. He walked me through his revised numbers during an interview in Bloomberg’s Manhattan offices.

Mr Morris’ original calculation that the crisis will result in at least $1 trillion in losses to the banking and other investment sectors assumed an orderly unwinding, which he had predicted wouldn’t happen. Events have proved him right.

The dominoes keep falling — which bank will be next? — amid rising writedowns and losses that already total $660 billion, according to data compiled by Bloomberg. The rescue plan that US treasury secretary Henry Paulson pushed through Congress has yet to stop the rot.

“Since the Paulson plan implicitly assumes a continuing stream of bank losses on roughly the same scale for the foreseeable future, the likely losses are now $2 trillion or even more,” he writes in the revised foreword of a new electronic edition of his book.

The $700-billion bailout emerged from what Mr Morris calls “the caffeinated fog of a frenetic two weeks” that included the bankruptcy filing of Lehman Brothers Holdings, the rescue of American International Group (AIG) and the “night-time elopement” of Merrill Lynch & Co and Bank of America.

SOLVENCY, NOT LIQUIDITY :

Though Mr Paulson’s plan may help ease cash hoarding at banks, it perpetuates the misconception that “we have a liquidity problem, not a solvency problem,” Mr Morris says, leaning forward in his plaid jacket and chopping the air with his hand to emphasise the words liquidity and solvency.

To explain the difference, Mr Morris cites two precedents: The rise of US grain futures in the 19th century and the tulip bulb mania that gripped the Netherlands in the 17th century. “In the 19th century, we had these huge wheat fields in the Midwest,” he says. “But it was very risky to send grain to the East, let alone abroad.”

That was a liquidity problem, and the development of grain futures markets solved it by allowing future deliveries to be sold for cash. As this “fire hose of investment” flooded the grain belt, “we became the Saudi Arabia of food,” Mr Morris says.

TULIP BULB FUTURES:

During tulip mania, by contrast, traders leveraged up their bulb holdings, taking ever more risk until the bubble burst and prices collapsed. No amount of lending could have restored them, Mr Morris says; the episode was “a parable of insolvency.”

“It wasn’t a liquidity problem,” he says. “You don’t solve that by lending more against tulip bulbs.’

US houses, in short, became tulip bulbs. Banks that forked over cash for a claim on a home’s unrealised value were in essence “selling tulip bulb futures.” The more cash they extended, the more US consumers spent.

“Between ’00 and ’07, total US gross domestic product (GDP) was $92.5 trillion in current dollars,” Mr Morris says. “Our gross domestic purchases were $97 trillion, a $4.5 trillion overrun.”

Where did the $4.5 trillion come from? Consumer debt — almost all of it secured by houses, Mr Morris says. “Between ’00 and ’07, homeowners borrowed $4.2 trillion on their homes that they didn’t invest in their housing or use to pay down their mortgages,” he says.

‘ WATERWHEEL OF MONEY’:

Personal consumption jumped to an unprecedented 72% of GDP by ’07 from a long-term average of about 66%, Mr Morris says. The upshot: “a false prosperity based on a huge waterwheel of money, fuelling a debtfinanced, import-driven consumer binge,” as he puts it in the new foreword.

When other countries gorged on debt, the US lectured them about the need for austerity, he says. Mr Paulson and Federal Reserve chairman Ben Bernanke, by contrast, are pumping hundreds of billions of dollars into the system. “They’re attempting to avoid a recession,” he says, whispering the R word. “It will make things worse.”

Mr Morris urges the US to instead engineer a recession, as former Federal Reserve chairman Paul Volcker did when he slew runaway 1970s inflation by raising interest rates as high as 20%. Though Mr Volcker’s shock treatment was rough, the US is resilient, Mr Morris says: “We earned it back fast.” “Do what Volcker did,” he advises. “We can get out of this crisis hard and fast or painfully slowly.”

Source: EconomicTimes

Stocks to watch: SBI, Reliance, Zydus Cadilla

Equities are likely to open lower on Monday following meltdown in overseas markets on fears of slow-down in global economy and recession in the US.

Crude oil prices fell to a 17-month low Monday, extending the previous session's $4 loss, as an emergency production cut by OPEC was shrugged off by traders anxious about the onset of a deep global recession. US light crude for December delivery fell 22 cents to $ 63.93 a barrel, after touching a 17-month low of $63.67. Prices tumbled by $3.69 on Friday, taking the full-week loss to 10 percent.

Rupee continued its downward march and plunged to 50.05 against the dollar in early trade on heavy dollar demand from importers amid melting stock markets.

A committee led by the finance secretary Arun Ramanathan has made out a case for using a part of the country’s foreign exchange reserves to provide liquidity support to Indian banks for their overseas operations. The committee, appointed by the finance minister to assess the liquidity situation, has said that a portion of India’s forex reserves, aggregating $273 billion, could be used to invest in securities such as bonds issued by foreign offices of Indian banks. This may benefit banks like State Bank of India and ICICI Bank.

The government may appeal to the Bombay High Court to allow distribution of Reliance Industries’ (RIL) Krishna-Godavari (KG) basin gas through public sector Gail India’s pipeline so that the national resource can be used by gas-starved industrial units. Concerned over the on-going court battle between the Ambanis over the KG gas, and the consequent delay in its production, the empowered group of ministers (EGoM) on Thursday billed it as one of the interim solutions.

Zydus Cadila, has taken Teva Pharmaceuticals, the world’s largest generic drug maker, to court in the US seeking damages for Teva’s antitrust violations and unfair trade practices relating to a drug called risperidone. The $2.5-billion (approximately Rs 25,000 crore) drug is widely used for treating schizophrenia.

It is turning out to be a double whammy of sorts for companies that have taken a hit on account of mark-to-market (MTM) losses due to their exposure to forex derivatives. These companies may find it difficult to convince the income tax (I-T) department to allow MTM losses as deduction.

Source: EconomicTimes

RIL stock skids 66% in the downturn

From August '07 to January '08 when stocks rallied from strength to strength, Reliance Industries was the catalyst for the the 7,000-point sensex rally. But, ever since the fall started since January 10, it is again Reliance, according to data, may be the chief reason for bringing the benchmark down in the quicker and sharper downturn.

The world may have changed for Indian stocks and Sensex may have come down substantially but the the most influential stock in the 30-share bellwether index -Reliance still remains the match-maker. While the stock price has corrected by Rs 2,000 a share, Sensex came down by 12,500 points.

Extrapolating this, it is fair to say that for every one rupee shed by Reliance stock, Sensex has fallen by close to 6 points, according to analysts. When sensex went up by 49% in just 7 months (August to January) Reliance, which carried a weightage of 15.3% in early January, witnessed its stock price outperform the benchmark index and raised by 73%.

While the DLF stock went up by over 90% in the same period, the real estate company carried a meagre sensex weightage of 2%.

The impact of Reliance's rise is significant on Sensex as blue-chip firms SBI, ITC, ADAG-controlled Reliance Comm and ONGC cumulatively held a weightage of close to Reliance"s 15% in January. "The Reliance stock is pivotal to sensex's fortunes. There has hardly been any day, when Reliance has fallen and has not pulled down sensex alongwith it. Nobody remains unaffected when the big boy falls," said a large broker at Bombay Stock Exchange.

During the downturn, the Reliance stock has fallen by 66%, again outperforming Sensex which has shed 59% in the same period.

Although Sensex constituents such as RCom, Larsen & Toubro and DLF have fallen by 75-80% in the same period, which is sharper than Reliance, the three stocks have a cumulative weightage of just under 10% (which is less than Reliance's 12% influence), data shows.

One half of all Sensex companies taken together i.e around 15 stocks have just the same influence that a single scrip has: Reliance. DLF may have corrected by over 80% but Reliance's freefloat market cap is 14 times more than it. "Sensex is calculated under free-float market capitalisation method.

This means that the influence of closely-held companies such as DLF on the index is preventing even if their stock price fall is much sharper," the research head of a foreign brokerage explained.

Source: EconomicTimes