Dear Team member,
Sanity on the Street!
Sanity is a madness put to good use. - George Santayana
The mid-cap mania which seems to be propelling interest on side-counters needs to be watched with care. A number of stocks are running way ahead of reasonable valuations without any growth triggers in sight. It's time to get extremely cautious as these counters will take a long while to recover should they bear the brunt of a selling. The Brexit worries are crystallising as around five leading UK property-fund managers have halted trading temporarily citing exceptional liquidity pressures. Requests for withdrawals from property funds are being deferred in some cases. The outlook is a positive start. While Asian markets are mixed, US indices closed in the green. Fed minutes showed the dovish stance continues with no commitment on the timing of a rate hike though the intention remains intact. A decision will be taken today on increasing EPFO's investments in exchange traded funds.
IPO Note
L&T Infotech Ltd - Subscribe
Issue Opens: 11-July-16, Issue Closes: 13‐July‐16, Price Band: Rs705-710
L&T Infotech Ltd is the sixth largest Indian IT services player with revenue of US$887mn and an employee base of 20,000+. It has a diversified services portfolio with presence in fast growing areas of digital, IMS and testing. The US region comprises 69% of revenue and the BFSI vertical contributes 47% (much higher than most listed players). Offsetting the significant drag from Energy vertical by penetrating into large accounts, L&T Infotech has delivered a resilient constant currency dollar revenue growth over FY14-16. However, gross margin has declined materially during the aforesaid period and client concentration has increased with Top 10 accounts contributing 52.7% of revenue as of FY16. With only ~2% exposure to the UK market, L&T Infotech would be least impacted by any near-term growth volatility caused by Brexit. In our view, key risks to growth and margin outlook is reduction in IT spend by BFSI vertical and Top clients.
Issue overview
The entire issue of 17.5mn shares is an Offer for Sale by the promoter, Larsen & Toubro (L&T), and thus the company is not raising any capital. L&T's stake will reduce to 84.7% post the IPO.
Valuation reasonable; long term investors can Subscribe
Given the size, profile, track record and management bandwidth, L&T Infotech represents a credible investment option at the offered valuation. The mid-cap IT space (comprising mid-sized players like Mindtree, Persistent and Cyient) has traditionally had dearth of stable and scalable players and thus L&T Infotech should fit in nicely within investors' radar. At the upper end of the price band, the valuation of the company stands at 11.6x EV/EBITDA and 13x P/E on FY16 financials. The P/E ratio looks quite attractive as compared to the listed players, however, it is deflated by higher forex gain earned in the year. On EV/EBITDA, L&T Infotech's valuation is in-line with Wipro and Tech M. Long term investors wanting to add weight in the IT sector should subscribe to the issue without heavy expectations of substantial listing gains. Added sweetener is attractive dividend yield of 4.5% based on FY16 payout.
A Primer
Algorithm Trading: Keeping emotions aside while trading!
Last decade saw the growth of Algorithmic trading and greater than before use of technology in the financial markets. The traders intellect when coded into an algorithm (a specific set of instructions aimed to carry out a task or process), makes trading disciplined, faster and processing of complex data easier.
Algorithmic trading or popularly known as Algo Trading, is the method of using computer programs to decide when to buy or sell a financial security, at a speed and frequency that is not viable for a human trader. The automated trading rules can be coded based on quantity, price or a mathematical model, thus eradicating human emotional impacts on trading activities. The trader and / or risk manager generally keeps an eye on the net positions, risk management and profit and loss resulting from the automated trading.
Technical Acumen
After a sharp pullback from low of 7927, Nifty went through a corrective phase. Failure to sustain above pressure point of 8389 and with market breadth appearing overstretched on multiple time frames, index declined in Tuesday's trade. Gann studies suggest that confluence of supports are placed between 8270-8281 (i.e. 3 digit gann number of 827(0) and 4 digit gann number 8281). So corrective phase is unlikely to continue for a long time. But traders need to be cautious and should focus on quality stocks as small cap stocks are currently going through good times. Historically, trend in these counters fails to sustain at higher levels.
Derivatives Insight
² Nifty/BankNifty futures saw long unwinding as the headline indices traded in the negative terrain for most part of the day.
² Cues from rest of developed and emerging markets remained negative.
² Options front, maximum OI addition was witnessed at 8200put/8400 call.
² FII's stance remained extremely bullish with index futures long/short positions stand at 4.56x. FIIs added another 2.6k contracts in long position
² Despite markets showing signs of tiredness IndiaVIX was down 1.36% for the day.
² Delivery based buying was seen in Glenmark and REC Ltd
Fixed Income Market Overview
The Indian bond market ended the day in positive territory with yields falling 3 basis points over previous trading session. The global yields hitting new lows, and with the monsoon picking up in the domestic front lead to buying enthusiasm among the investors. Bond yield opened at 7.42%, at day's high and ended the day at 7.39%. Gsec volume for the day was considerably higher at ~ Rs. 1271Bn.
The demand at the fixed Repo window was Rs.24Bn, whereas supply from fixed Reverse Repo stood at Rs.185Bn. The Call WAR closed at 6.25% vs. 6.22%.
The benchmark five-year OIS and one-year OIS closed lower, with the five-year OIS closing at 6.55% vs. previous day's close of 6.63%; the one-year OIS closed at 6.51% vs. previous day's close of 6.55%
Commodity & Currency Cues
Precious metals are on a tear, as another big crisis seems to be brewing in Europe. The focus is shifting from Brexit towards the banking mess in Italy. In this regard, Italian Bank equities have fallen 30% post Brexit, as concerns loom large over high ratio of NPAs for the country's third largest lender. Investors seem to be sceptical on whether such stressed banks are going to survive without any aid. As a case in point, Italian government has already briefed EU about this situation, expecting that Brussels will help in recapitalising Italian banks, however there are various hindrances, considering EU's stringent rules. In US, minutes of recent FOMC policy meeting convey that several members of Fed were uncertain whether economy can absorb a rate hike soon, considering dismal May non-farm payroll numbers and uncertainty over Brexit Consequentially, global sovereign bond yields continue to tumble on account of growing risk aversion. US 10yr yields went as low as 1.33%, while German 10-year Bund yields are now well below -0.2%. At the current juncture, gold prices are above US$1,370/oz and it is getting clear to us that the prevalent environment is conducive for a very strong upside rally in the coming months.
Amid the non-ferrous pack, Nickel prices have been the new outperformer, underpinned by concern that nickel ore supply from Philippine will decline further in light of government reviews of environmental norms for mining industry.
British Pound plummeted to fresh lows, as repercussions of Brexit are getting gradually adverse, where several Investment entities have suspended trading in UK Real estate funds, citing growing pressure from massive redemptions.
Corporate snippets
² Poly Medicure Ltd plans to invest Rs600mn in a new green field project at IMT Faridabad in Haryana. (BL)
² Edelweiss Asset Reconstruction Company (ARC) has loans worth of Rs16bn to Essar Steel extended by private sector lender ICICI Bank. (BL)
² Dabur India is launching fruit-based carbonated drinks to cater to customers wanting fizzy beverages without feeling guilty about consuming them. (ET)
² NTPC, will not import any coal this year for the second year running. It plans to source its entire requirement of 155mt from home to run 40GW of thermal capacity. (ET)
² TransUnion has raised its stake in its Indian subsidiary Cibil to 77.1% by buying out ICICI Bank and Bank of Baroda's holding in it. (ET)
² Alembic Pharmaceuticals has received tentative approval from the US health regulator for Febuxostat tablets used for treatment of hyperuricemia in patients of gout. (BL)
² Adani Ports and Special Economic Zone Ltd has raised Rs2.52bn through issuance of non-convertible debentures on a private placement basis. (BL)
² Larsen & Toubro (L&T) has bagged export orders worth USD71.3mn (nearly Rs4.80bn) from Mitsubishi Hitachi Power Systems Ltd through its two joint venture (JV) firms. (BS)
² Hindustan Construction Company Ltd (HCC) and MMS of Russia formed a joint venture to execute a contract worth Rs25.23bn for the Mumbai Metro Rail Corporation Limited (MMRCL). (BS)
² Essar Projects has bagged a Rs850mn order from Indian Oil Corporation to replace its 141km of pipeline. (BL)
² The Cabinet Committee on Economic Affairs allowed Axis Bank to raise foreign shareholding to 74% from the current 62%, which will bring in investment of around Rs130bn. (BS)
² Larsen & Toubro (L&T) along with its partner, STEC of China has bagged an order worth Rs52.73bn from Mumbai Metro Rail Corporation (MMRC). (ET)
² Petronet LNG Ltd has plans to set up a Rs50bn LNG import terminal at Kutubdia islands in Bangladesh countries. (BS)
² Aurobindo Pharma Limited is likely to be the second Hyderabad-based company actively looking at acquiring the 'overlapping products' from Teva, this time in Europe.
Economy snippets
² Business activity in the services sector grew at its second slowest pace in the last 12 months and the Nikkei India Services Business Activity Index recorded 50.3 in June. (BS)
² Merger & acquisition (M&A) deals involving Indian companies increased 82% in the first half of 2016 at USD27bn in the first half of 2016, the highest in the first six months in any year since 2011 led by a four and a half time increase of Indian acquisitions abroad at USD4.5bn. (ET)
Happy Investing!
Amar Ambani
Head of Research
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