Reliance Industries: Too Much Hype About R-Jio ?

For RIL, 1020-1040 may be a strong supply zone for the time being--

Pan India commercial success will be tough for RJ, 

as its a new ecosystem & switch over may not be smooth in the near term

CMP: 1004

Either sell below 1005-992 or on rise around 1020-1040;

TGT: 970-940*-910 (1-3M)

TSL>1055

Note: Consecutive closing above 1055 for any reason, RIL may further rally up to 1075*-1100 & 1145-1200 in the mid to long term.

RIL rallied almost 25% from its late Aug'15 low of around 817 on the back of its excellent results and potential of its telecom operations (R-Jio).

RIL is very ambitious and optimistic about its RJ operations and success. RJ is basically looking to revolutionize the "Digital India" concept and customer usage pattern. It aims to bring India's 1.2 bln people under "Digital Umbrella".

For this, RIL so far invested around $15 bln in the RJ, but some analysts are wary of the company's ability to generate positive returns in the next few years amid very low ARPU in India. Also there is no clarity on the business model and subscriber addition strategies for RJ till now. All will depend upon fast transition of customers to this new LTE ecosystem and 4G handsets, product pricing, user experiences etc.

For the next few years, RJ may cause negative SOTP valuation for RIL by around 300/- par share as par some calculations. 

Looking ahead, all eyes will be on Q3FY16 result of RIL to have glimpse of combination of RJ effect and possible lower GRM as spread between Crude & Brent Crude is narrowed considerably in Q3.

Analytical Charts:

Reliance Capital: Nearly 75% Rally In Last 4 Months---Is It Time For Sale ?

CMP: 432

Sell either below 437-442 or on rise around 450-470;

TGT: 414*-402-384 (1-3M) 

TSL > 480

Note: Consecutive closing above 480 for any reason, R-Capital may further rally up to 500-515-535 & 580-605 and further to 652-670 in the medium to long term.

R-Capital is another story of deleveraging in 2015 and consecutively since late Aug'15, it rallied almost 75%. 

Considering all the positive news flows including Insurance Bill (FDI) last year and price action on the scrip, 450-470 may be a stiff resistance zone for the scrip. It may come down again to 414-402 level, if it fails to sustain above this zone and one may accumulate the same from around 400 level for better risk reward ratio.   

To be cont for more news and analytics input---

Analytical Charts:

Market Mantra: Nifty Fut (Dec) Update

SGX NF:7926

NSE NF: 7904

As par early morning SGX indication, NSE NF may open around 7925 area after steady overnight US market amid initial China & oil woes. There were some market buzz of Chinese corporate debt defaults yesterday and Chinese as well as global market dipped initially amid low volumes.

Technically, NF need to sustain over 7950-7980 zone for an immediate target of 8005-8055.

On the downside, sustain below 7915-7880 it may fall towards 7855-7820 and 7780-7725 in the next few trading days.

It appears that absence of FII selling is helping a lot in the "Santa" rally for our market along with year end NAV window dressing; still we are down around 7% YOY in Nifty.

Going forward, Oil may be the one the biggest headwinds for global markets as well as EM for 2016. Some analysts believe that although lower oil prices are beneficial for major oil importing economies (such as India/China/EU), it has its darker side too. Not only that, lower oil prices already shelving projects worth billion of dollars, but it may also accelerate out flow of surplus cash from EM equities, bonds portfolio by the oil producing economies. 

In the past, these oil producing economies has invested huge amount of their surplus cash into EM countries for better yield and and that has helped to finance the current account deficit of may EM countries too. In short, oil producing economies are provider of trillion dollar liquidity in the global financial system and if oil goes down to $30-25 for any reason and stay there for prolonged time (demand supply mismatch and increasing global green initiatives), we may see serious outflow of petro dollar and panic in the global as well as EM financial system in 2016. Already various OPEC countries including Saudi Arabia are in some turmoil. Also, due to lower oil prices, Canada's (G6 country) economy was not in great shape in 2015 and 2016 is also not looking brighter at this moment. 

For our market, investors may wait for another three months up to March budget session to see the outcome of GST passage and possibility of any "dream" budget apart from Q3 results in Jan-Feb. Till then, 7500-8000 may be the broad Nifty range.

Analytical Charts:

Reliance Infra: Changing Its Business Profile ?

R-Infra has to sustain above multiple resistance zone 
of 500-525 for 600-650;

Otherwise, sustaining below 480-460, 
it may again come down to 440-414-370  

For, R-Infra/ADAG : 2015 may be the year of deleverage---
A reflection Of Corporate India's increasing effort for the same in the coming days--

CMP: 493

Sell below 500 or on rise around 510-520-530

TGT: 480-460*-440-414-370 (1-3M)

TSL>535-545

Note: Consecutive closing above 525-545, R-Infra can further rally up to 555-575-600-650 in the near term in the alternative technical scenario. 

As we all know, R-Infra is in great deleveraging mode for the last few months to prune its massive consolidated current BS debt of around Rs.26630 cr. The current standalone debt of R-Infra is around Rs.16500 cr with D/E ratio around 0.97 which is at par industry standard.

As par the management, the aim to make R-Infra debt free by FY-17 by selling various core (?) & non-core assets (BOT road projects, cement divisions, Mumbai Electricity Business). As par market reports, by selling these assets, R-Infra can raise up to Rs.30000 cr and as we all know, the company is entering big into defence business and basically changing its business profile. At the same time, R-Infra will concentrate more on its existing EPC business (smart cities, entire power chain, roads & metros). Thus, in future, EPC & Defence manufacturing sector will be the main focus area of the company.

R-Infra has already signed a non-binding agreement with PSP Investment of Canada to sell its 49% stake in Mumbai Power Transmission Business and as par reports, Cement business sale deal is almost final and will be officially announced by next week. Potential buyers are Blackstone, Carlyte, KKR and Ultratech.  The Cement deal may be in the range of Rs.5000-6000 cr and the company is expected to get 50% of this amount after paring the relevant debt.

As par management, R-Infra has a portfolio of  eleven BOT road projects (4600 km lane) at high growth traffic urban corridors (GQ & EW) at Delhi, Bangalore, Pune, Jaipur etc, in which it has invested around Rs.9000 cr and the company is confident to sell these road projects at a premium valuation of around Rs.11000 cr because of its premium locations and future revenue prospect.

Thus the company is expecting a gross amount of more than Rs.15000 cr from its road & cement assets sale and it is confident to be debt free (at least on standalone basis) by FY-17.

After selling these core & non-core assets (Road/Cement/Mumbai Power), R-Infra is expected to be debt free and will enter big into Indian Defence sector. As par the management, the Defence sector has relatively lower capital intensive and low gestation period with minimal regulatory uncertainties and have better ROE unlike road projects. 

The likely size of the Indian Defence opportunities will be around $250 bln over the next ten years and the Govt is aiming to bring the defence import to around 30% by then on the back of NAMO's "Make In India" & "Skill India" initiatives. So it translates a domestic defence market of around $175 bln and R-Infra is expecting to get a sizeable chunk of that.  

R-Infra has also hired experienced professionals from Defence industry at leadership position to foray into its Defence business initiatives. But there will be also severe domestic competition, which may come from M&M, Bharat Forge, L&T, RIL, Tata & Adani groups.

Few weeks ago, R-Infra has acquired around 35% stake for Rs.1669 cr with full management control in Pipavav Defence (active in Defence Ship building), which will be renamed as Reliance Defence & Engg Ltd. R-Infra has applied for various licenses and nods for wide range of Defence procurement in land & naval systems (like aircraft, helicopters, all-terrain combat vehicles, unmanned aerial vehicles, night vision devices, sensors, navigation and surveillance equipment, propulsion systems and simulators). R-Infra may invest another Rs.1200-1600 cr in Pipavav for the defence sector in the near term.

Another thrust area of R-Infra will be railways modernization & EPC, specially for metro rail and freight corridors. Currently, the EPC order book stood around Rs.4000 cr.

Few days ago, R-Infra entered into an agreement with a Russian Co (USC) for manufacturing four frigates for the Indian Navy, which is estimated for Rs.30000 cr spanning over next ten years. This shipbuilding exercise will be done at Pipavav's shipyard facillity.

In the just concluded Moscow visit, as a part of business delegation along with our PM, R-Infra Chairman signed an agreement with a Russian Co (Almaz Antey) to manufacture missile & radar system in India along with R&D and maintenance & overhauling for the Almaz systems already used by the Indian military.  

Also there are some favourable policy announced on Pre-Christmas day regarding promotion of defence manufacturing in India under "Make In India" initiative and all the stocks associated with defence sector, including R-Infra has a good Santa Rally.

Now, all the above positive news flows regarding R-Infra is already known to the market and almost priced in by the scrip, which rallied by over 77% since late Sep'15 and more recently by over 33% since early Nov'15.

Looking ahead, ambitious foray & success into defence sector of R-Infra will hinge upon Govt's actual fiscal position and expenditure towards modernization of Indian Defence  as huge amount is involved here and there are also many liabilities like 7-th Pay Comm including that of Indian Railways, OROP, pending bills of fertilizer & food subsidy etc, totaling around Rs.245000 cr. In that sens, it may be also tough for our Govt to keep the targeted fiscal deficit at 3.5% of nominal GDP by FY-17.   

Also over reliance on Govt's "Smart City" theme may be counterproductive for R-Infra as there projects are still in the "visionary" state. If there is not so much "economic recovery" as expected in FY-17, Govt's fiscal position may not improve substantially and projected public expenditure by the Govt may also be in jeopardy.

In India, BOT road projects and also metro railway services are highly sensitive to political compulsions & popularism. Its not easy for operators to increase toll or fare incrementally higher to match with increasing input costs. Recent Mumbai Metro fare issue is such an example.  

Some analysts are also skeptical about much hyped foray of R-Infra into defence sector without any clarity about the business model and related cash-flow. As of now, its too early to attribute any SOTP valuation to this defence business and one needs to wait, till the business is revenue (EPS) accretive.

The management of R-Infra has also indicated that the defence business will be negative on working capital (cash-flow) initially, but has an asset-turnover potential of around for times in future.

Some analysts are also believe that R-Infra's focus on defence & EPC business and together with steady cash-flow from the power distribution business (even after 49% proposed stake sale in Mumbai electricity) can create value for share holders in the long term with limited capex expenditure.

But ultimately with some revenue generating assets sales (both core & non-core) to prune massive debt, it will be interesting to see, how R-Infra's bottom line (EPS) will look like in the coming years.  

Technically, the R-Infra scrip has strong strong zones around 500-525 and it has to close consecutively above this zone for next upside target of around 600-650 or even 700-735 in the mid to long term (FY:17-18). 

For the time being, it has positional support of around 480-460 and sustain below that it may fall towards 414-370 area, where accumulation for portfolio investment may be good considering the favourable risk reward ratio.

As par BG metrics & current market parameters:

(on consolidated TTM & FWD EPS)

Present median valuation of R-Infra may be around: 550 (FY:15-16/TTM)

Projected fair valuations might be around: 590-635 (FY:17-18/FWD)*

* without considering the proposed assets sales & defence foray.

SCRIP	EPS(TTM)	BV(Act)	P/E(AVG)	Low	High	Median	200-DEMA	10-DEMA
RELINFRA	67.06	995.15	10	530.56	549.45	540.00	419.76	450.19

RELINFRA

70.95

1092.55

10

545.73

565.16

555.45

419.76

450.19

RELINFRA

79.75

1162.95

10

578.58

599.19

588.89

419.76

450.19

RELINFRA

92.5

1244.25

10

623.12

645.31

634.22

419.76

450.19

462.75

Analytical Charts:

.

 

TATA STEEL : Another Example Of India's Failed Globalisation Effort ?

For TS, 268-282 may be a good resistance zone

Although the proposed UK deal may help the Co in reducing cash burn, 

its too small amount for any significance deleverage for TS

CMP: 264

Sell either break below 262 or on rise around 268-282;

TGT: 236-223-215 (1-3M)

TSL>285

Note: Technically, for TS, consecutive closing above 285 for any reason, the stock can further rally towards 295-300 & 320-340 area in the near term. This is purely a technical trading idea, based on price action for some recent new flow.

TS and all the other metal/steel sectors are in news for the last few weeks due to Govt's initiative to provide adequate protection of domestic steel manufactures from Chinese aggression.

Moreover, TS came to the limelight amid news flow of its UK long products division sale negotiation to Greybull Capital. Though the negotiation is not finalized and a LOI has been executed, as par reports, the deal value may be near GBP 500 mln. In consolidated BS of TS, this long products div has zero BV and as par some estimates, this is causing around $160 mln annualized loss for TS.

Thus the deal amount is too small wrt TS's huge consolidated debt of around Rs.72000 cr as on Q2FY16, which is double its NW.

Although, there is some uncertainty about whether the deal goes through and what price, the proposed sale of this loss making long products units may help TS certainly to reduce its current cash burn. But the deal amount is not so significant for overall deleveraging effort of the company.

As par analysts at Jefferies, most EU steel companies are trading around 0.2-0.5 x P/B, the turnaround investor (Greybull) is unlikely to pay a strategic premium for this long steel products assets of TS in UK. Also, there are many headwinds for steel industry in EU/UK for currency volatility, unfavorable demand supply situation and Chinese imports.

Analysts are also of the opinion that although, the above potential deal could help curtail loses at TSE partly, there are other UK units, which continue to weigh on its EBITDA.

Over the years many Indian corporates, went into globalisation spree at 2007-08 recession price, but even that is now causing headwinds for its BS as most of these overseas assets are either making loses or negligible profits and ROE is far less than standard in the domestic market. Thus the Indian companies are trying to exit at any cost, even in loss to repay massive debt.

For TS, this UK deal news was there in the market for the last few days even before official announcement and that's why the stock broke the previous strong resistance zone of 250 and now trading around 265. Still this is more than 32% rally in the last three months from its recent bottom of around 200. 

Technically, if TS fails to sustain above 268-282 zone, it may consolidate and a fall below 262, it may again come down to 223-215 zone in the near term, from where one can again buy for portfolio investment, considering the favorable risk reward ratio.

Analytical Charts:

     

 

Voltas: 310-315 May Be A Good Supply Zone

CMP: 304

Either Sell below 298 or on rise around 310-315:

TGT: 277-260-250-242 (1-3M)

TSL>323

Note: Consecutive closing above 323 for any reason, Voltas may further rally to 331-348*-360 & 380 in the near term.

Voltas rallied by over 27% since last Sep'15 on the back of festival season sale, expected 7-th Pay Comm induced liquidity in the low/medium ticket consumer durable goods like AC, hope for GST etc. Overall, the stock outperformed the broader market quite well.

Looking ahead, some analysts are concerned over likely intensified competition in AC market and that can lead to margin squeeze and some loss of market share for Voltas.

In any way, Voltas is a good company for portfolio investment having a great brand & strong distribution network. But recent price action suggests that 310-315 is a strong supply zone and technically its has to sustain above this zone for further rally up to 360-380 zone in the mid to long term. On the downside, 298 zone is now acting as a decent support and sustain below that it can again fall towards 277-250 area. Considering the risk reward ratio, thus buy on dips around this level may be good for portfolio investment.

Analytical Charts:

 

Market Mantra: Nifty & Bank Nifty Fut (Dec) and S&P500 Update

SGX NF: 7834 (CMP)

NSE NF: 7838 (LTP)

As par early morning indication, NSE NF may open around 7840-50 after overnight stable US holiday market. 

US market has undergone around 4% correction in S&P500 after Fed day and is now trading around 2016. Looking ahead, it has strong positional support of 1990-80 and sustain below that 1960-50 & 1860-50 might be the lower target. On the upside, S&P need to sustain above 2025-32 area for target of 2050-61 & 2080-2105 in the near term. 

NF, on the other hand is showing remarkable resilience even after Fed induced global equity market slowdown (except China, for its own stimulus effort) and no GST in this winter session of Parliament amid political war. But this unusual resilience amid negative or not so positive news flow came in extremely tepid volume amid holiday thinned trade (as most of the institutions desks are now enjoying Christmas holidays) !!

Technically, NF need to sustain over 7865-7900 zone now for further "Santa" rally up to 8015-8110 area. On the downside, sustain below 7834-7800, NF will target 7760*-7725-7691 and consecutive closing below it, 7625-7540 zone may be the target in the near term.

Similarly, BNF (LTP: 16798) need to sustain over 16910-990 area for a "Santa" target of 17177-380 & 17550 in the near term. On the downside, sustain below 16800-750, BNF may target 16692-625 & 16494-16200. Consecutive closing below 16200 zone for any reason, BNF may further fall towards 15780-700 area in the near term.

BNF got support from the not so much "hard" base rate calculation method of RBI (based on marginal cost of funds) as anticipated by the market and passage of "Bankruptcy" bill in the LS. Though, after implementation of this bill, Banks may show more NPL in their books.

Despite there is now virtually no possibility of GST passage in the current Winter session of Parliament, which will end tomorrow amid ongoing political war and game of blame & counter blame, our market is showing remarkable resilience, although with very low participation. This is perhaps on the back of some reports that, Govt will be able to pass GST in the forthcoming Budget session (March'16) in the RS, when BJP will gain some 3-4 seats and Cong will loose some 7-8 seats as respective terms will end. In that scenario, Govt (NDA) will take help of all other political parties except Cong for passage of the same.

But as par various permutations & combinations, NDA, which has now around 64 seats in the 245 seats strong RS, will be able to get maximum 75-80 seats in 2016 and in that case, it has to take support of all the other major political parties in RS for passage of the GST & Land bills. Considering the coming election in WB/Assam/UP, these may be a daunting task and without Cong's help (direct/indirect), it may not be possible at all even in 2017-18 !!. Its only after 2019, BJP/NDA may garner the required 2/3-rd majority in RS (165 seats). But, by that time, the term of the present Govt will end and if all goes well with NAMO wave, its only after 2019, we may see BJP having absolute majority in both houses of our Parliament and only then, we may see Nifty towards 9700-10250 area and new Bull market amid real recovery and implementations of various reforms.

There is another theory in this ongoing GST politics. Cong want this GST to be effective from 2017-18, because in that case, inflationary effect (if any because of increase in service tax etc) will be visible in the economy by 2019 election time (generally it takes 1-2 years for transmission of GST effect in an economy). On the other hand, BJP will hesitate, if  implementation of GST goes beyond Oct'16-Apr'17. Corporate world is not so much concerned in reality, as this is a "flawed" GST and roll out of the same may also require massive IT infra cost upgradation amid their stretched balance sheet. 

Clearly BJP will need to believe in its own economic & reform agenda more boldly and the Govt could easily pass these vital bills by calling Joint Session Of Parliament, rather than repeated begging to Cong. The political scenario is also getting murkier day-by-day, with Patiala House Court fast becoming the next "Parliament" of Indian democracy !! In that sense, BJP need to manage the oppositions & Cong more effectively as it will be not able to gain RS majority even by 2019.

Analytical Charts:

Sun Pharma: What's TA Is Saying Amid Halol Plant Warning Letter Confusion ?

Sun Pharma has to sustain over 810-830 for any further upside;

Otherwise, it may again fall towards 720-700 zone.

Although the US FDA warning letter possibility regarding Halol Plant 

was widely anticipated, it may not be fully discounted by the market yet.

CMP: 790

Sell on rise around: 810-830

TGT: 755-721-702-690*-675-655 (1-3M)

TSL> 850

Note: Consecutive closing above 850 for any reason, Sun Pharma may rally up to 875-895-916-966 in the near term in alternative bullish case scenario.

For Sun Pharma, it seems that "ghost" of Halol Plant (Ranbaxy) is still there. On last Friday, after market hours, the company disclosed that they had received the warning letter (WL) from US FDA on 18/12/2015.

Although this WL was widely expected after DRL fiasco, the same may not be fully discounted by the market yet. 

Although the company is confident to resolve the issue, in the worst case scenario, an import alert may also be issued by US FDA in future for this Halol Plant, but the possibility of the same is lower, considering the integrity & professionalism of Sun Pharma management. 

The company needs to disclose fully the contents of this warning letter publicly, but that may not be possible at this moment, unless US FDA disclosed that officially. The company is focusing on US FDA compliance for this Halol Plant, rather than transferring its manufacturing facillity to other compliant plants and is also taking necessary corrective measures for its other plants..

Analysts are optimistic that present WL is procedural in nature ( consistent with previous Form-483) and not something new, like data integrity etc.There is also no issue of global audit for all facilities from 3-rd party consultants (like DRL) and in that sense, the present WL issue may be the last negative thing for Sun Pharma in this issue. (Although the company is taking help of external consultants to ensure that its present remediation effort in plant automation and personnel training are completed in a time bound manner). 

Thus there is low probability of any import alert in future from this Halol Plant. But there may be delay in new product approval from this Halol Plant as the company expects twelve months to resolve this issue with US FDA. The management believes that the present WL issue is for inadequate communication rather than any material remediation.

Analysts are cutting FY-17 EPS by around 6-15% and have new 12M TP, ranging between 762-950 (median TP 835) !!  

This Halol plant contributes around 8% & 15% of Sun Pharma's global and US sales. Overall, more than 50% of the annual revenue comes from the US market for Sun Pharma. Incidentally, its the only plant in India from where Sun applied for product approvals for injectable drugs (apart from one such facillity in US).  Thus, its also an important plant for Sun. Any clampdown (import alert) for this plant may take further 12-24 months to restore compliance standards (another Sun plant in Karkhadi, which received a US FDA import alert in 2014, is still yet to become US FDA compliant). Sun is already facing such US import bans for five of its manufacturing facilities in India.   

As the present corrective steps are being implemented by Sun Pharma for the last one year, a WL means that additional effort is also required by the management for quick remediation of the same in the next twelve months. Till re-inspection is completed by US FDA, no new approvals is possible from this Halol Plant and the timing of the full resolution is quite uncertain as of now.
     

After steep fall in Nov on the back of this Halol Plant "legacy issues", (thanks to Ranbaxy), the scrip recovered to some extent from the bottom for various reasons and product approval of Gleevac (a block buster anti cancer drug) from US FDA may be one of them. Sun Pharma managed to shift this product to one of its US plant from the Halol. But, this may not be possible for every other product.

Technically, the scrip may be in the C-Wave (A-B-C) in the daily EW cycle and in that scenario, 1-st corrective wave in the fresh EW cycle (1-5 & A-C) may bring it again around 720 level in the days ahead. It may consolidate near 720-690-655 zone for some months until this US FDA issue is fully resolved and further clarity emerges. 

But having said that, worst may not be over yet for the scrip, as the market may further discount it for any possible import alert. Thus buy in dips for Sun Pharma around 690-675 level will be better, considering the favourable risk reward ratio.

The recent US FDA WL issues with Sun & DRL also highlighted the fact that the Indian Drug Industry is still grappling with strict US standards, ranging from data integrity to quality/hygiene issues.    

Analytical Charts: