W E E K L Y

R E P O R T

Monday, 15th November 2010

JACKPOTS:

COMPANIES TO WATCH recommendations of the last week that hit the JACKPOT were DR. REDDYS Buy (Rs.1744 to Rs.1780 - by mid week), GRASIM Buy (Rs.2402 to Rs.2487).
KEY INDICES KEY CURRENCIES

Our

INDEX SENSEX

4th Nov10 20,893

12th Nov10 20156

Swing
(737)

USD / INR 44.30

EUR / USD 1.37 NIFTY 6281 6071 (210)

INSTITUTIONAL FLOW DATE 10 11 2010 09 11 2010 08 11 2010 05 11 2010 04 10 2010 03 10 2010 FIIs NET (Rs. Cr.) (PURCHASE SALES) 687.70 748.60 6906.90 NA 1297.20 928.60 MFs (Equity) NET (Rs. Cr.) (PURCHASE SALES) (99.30) (390.60) (381.70) 45.30 1,553.80 (397.50)

STOCKS RELIANCE POWER MAHINDRA FINANCE

Closing Price on 12/11/2010 (Rs.) 181.90 805.30

% Swing for the Weeks 13.5 7.9

CADILA HEALTHCARE JET AIRWAYS GUJ.NRE COKE IDFC SBI ESSAR OIL

769.60 861.05 56.95 190.55 3,030.40 140.95

7.6 7.5 (12.4) (12.3) (12.3) (12.0)

EQUITY MARKETS WEEKLY REVIEW

(8th November, 2010 to 12th November, 2010) While the festive euphoria was clearly missed post the Diwali week, it did not have any significant impact on the bullish sentiment amongst the market participants until mid week. The benchmarks continued their upward momentum until the mid week but fell short of testing the all time highs by a small margin. However from the penultimate trading day, uncertainty ahead of the G20 summit, lack of buying at higher levels and profit booking took a toll. The sell off was further fuelled by a fall in the markets of South Korea. The meltdown on the last day of the week can be attributed to an extended fall in the Asian markets, anxiety over Ireland's debt problems and disappointing IIP data. Sovereign debt issues in Europe and strengthening of the dollar against its major rivals added to the volatility which continued to remain high during the result season. Resultantly, companies that disappointed in their quarterly report cards were at the receiving end. Notably share price of public sector banking major SBI and realty major DLF each fell by more than 5 per cent after posting lower than expected numbers for the quarter. This also triggered profit booking across the stocks from the respective sectors weakening the sentiment, further. Meanwhile action outside the front liners continued as mentioned

earlier as most mid-cap and small cap stocks displayed no signs of abatement. Notably VIP Industries, Titan Industries, Lakshmi Overseas Industries, Sundaram Fasteners, 3I Infotech, Garware Offshore amongst others were some of the smart movers during the week The primary market too buzzed with the Power Grid FPO bidding that opened in the week gone by. The strong response from the investors aided the sentiments at this counter that displayed strong support at lower levels. Overall, the markets that remained range bound with a positive bias until mid week, before it turned weak. Reducing volumes, decline in the flows from FIIs and emergence of adverse news events kept the bourses suppressed over the last two trading sessions of the week.

THE WEEK AHEAD

With major result announcements already out of the way, slowdown in the FII inflows and mounting concerns over domestic liquidity scenario are some of the major apprehensions amongst the market participants. While global liquidity remains ample, the strong equity issuance pipeline back home that may correspond with monetary policy measures, focused to tame high inflation levels due to supply constraint, could increase anxiety amongst investors. Anticipation of a sell off near the previous all time high for the benchmarks has also cautioned the market participants to initiate aggressive long positions. This is also reflected in the declining volumes at higher levels. Thus, while the front line stocks may continue with their flip flop show, broader markets are likely to outperform. It is thus advised to keep taking profits off the table along with a

quick entry/exit strategy in this uncertain market condition.

COMPANIES TO WATCH
GOLD BEES: The buzz is that gold could soon become the benchmark for global currencies and this could lead to fresh gold rush. Consider accumulating. STATE BANK OF INDIA: Lower than expected net profits on account of higher provisioning along with slippage in the asset quality on account of agriculture related debt relief does not seem to have gone down well with the investors. The sharp decline could attract punters. HUL: The FMCG leader seems to be a good defensive option in this uncertain market. One may consider investing into this high dividend paying stock by accumulating at declines. INDUSIND BANK: Inclusion in the MSCI index could lead to positive traction at the counter as funds that track MSCI would try to buy into this stock. Any takers ? DELTA CORP: After a strong price upswing, investors can consider booking profits at the counter as the price now seems to be discounting potential earnings of 2013, whereby the risk associated is multiplied.

STOCKWATCH ELECON ENGINEERING

CMP: Rs.93 Recommendation: Buy

Background

Elecon Engineering (EEL) is a leading manufacture critical Material Handling Equipment (MHE), Industrial Gears and Power Transmission products. The company manufactures composite range of almost all types of Bulk Material Handling Equipments to cater to the demand from core sectors such as power, steel, cement, ports and mining. It is also one of the largest manufacturers of industrial gears in India and has one of biggest manufacturing facilities in Asia.

Analysts Note
The MHE division contributes close to 60 per cent of the total revenues and the balance is contributed by the Industrial Gears. The former division being cyclical in nature, the latter provides diversification and stability to companys revenues at the same time also offers better operating margins as compared the MHE division. The company through its 100 per cent subsidiary (step-down) Elecon USA Transmission Ltd also acquired standardized gears and gearboxes business of UK based Benzlers-Radicon Group (BR Group) in Oct10. The group comprises three business units viz, UK-based Radicon, Sweden-based Benzlers and David Brown in Thailand. With a gross value as a going concern (debt and cash free basis) of GBP 18.40 million to be financed through debt (80 per cent) and internal accruals (balance), the foreclosure of this acquisition is expected to be completed by the end of the current month. The benefits of the same are likely to accrue from Q4 FY 2011. This acquisition will not only provide geographical diversification but also provide access to new customer base in European, North American and Scandanavian countries. With 'Benzlers' and 'Radicon' brands amongst the most recognized brands in the power transmission business globally, it will not only enhance the product profile of EEL but also enable it to capitalize on outsourcing opportunities in the Gear division. Overseas acquisition will also help EEL to focus on exports which is likely to increase by 10-15 per cent as per company estimates.

Moreover, pick-up in industrial capex activity in core sectors such as power, steel and cement, aided by the Governments thrust on infrastructure in the country also augurs well. As EEL dominates MHE and Industrial gears segment, it appears well-positioned to reap the benefits of the increasing infrastructure spend in the country. Its order-book too seems to be steadily increasing. With orders close to Rs 15,000 million in hand (Rs 11,660 million in MHE segment and around Rs 3,350 million from industrial gears), EEL is also likely to benefit from expected revival in industrial capex cycle. At present the order-book to sales (FY 2010) ratio stands 1.35 times. Thus healthy order book position and order pipeline provides good visib ility for future. On the flipside, the business of the company is highly vulnerable to industry cycle, delay in execution of projects and slowdown in capex expenditure by core sector companies. Moreover the recent acquisition is likely to inflate the debt levels on its books leading to high interest outgo and thus could strain margins. On the financial front, the revenues grew by only 9.6 per cent to Rs.2794 million in Q2 FY11 on account of delay in execution of material handling equipment (MHE) orders. EBIDTA margins declined marginally to 14.4 per cent on account of increase in raw material, employee cost and other expenses. Resultantly EBIDTA rose by only 7.7 per cent to Rs 404 million on a Y-o-Y basis. However bottom-line increased by 32 per cent to Rs 142 million due to decline in Interest cost.

Investment Rationale
For now, EEL trades at a forward earnings of 11 times and is therefore not inexpensive. However on account of its presence in the diversified infrastructure growth segments, strong revenue visibility on account of healthy order book position and orders in

pipeline, those betting on the revival of capex cycle can consider accumulating the stock at declines with a long term view.

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