Credit profile of Indian companies getting worse

By Vipin Agnihotri

It’s official; The India Street has full evidence that the credit profile of Indian companies is getting worse. According to CRISIL, widely been regarded as the biggest and the most credible domestic rating agency in India, for the first time in five years, downgrades of Indian firms outnumbered the upgrades. Point to be noted here is that this assumption is based on their credit profile.

It is worth mentioning in this regard that this comes in the wake of the multi-billion dollar acquisitions that Indian business has pursued on foreign shores. Another concern is on the profitability front, with indications are that margins will be reduced because of high input costs.

When one adds all this with the sharp rise in debt in a high-interest rate regime, picture becomes even clearer. If experts are to be believed, even as the indices appear oblivious to these warning signs, handing out heady valuations to companies in fast-growth sunrise sectors such as financial services is recommended.

In my opinion, high cost of deposits and a slowdown in credit growth have the potential to derail the financial services sector’s gravy train. The pivotal factor here is that the high interest rates will continue to result in higher delinquencies, more so in the retail investor’s portfolio.

Over the medium term, the ratings of Indian companies will be judged on the basis of managing acquisitions and expansions along with their capital structure. The big downgrades of this year includes big name such as steel major Tata Steel and Aditya Birla’s aluminium giant Hindalco. Smaller companies such as India Glycols and Essel Mining also feature on the downgrades list.

Interestingly, most of the downgrades during the first half of 2007-08 were because of acquisitions or big funded capacity expansions, thereby contributing to the sharp reversal in the hitherto improving trend of corporate India’s credit quality.

According to sources, the total planned capital expenditure between fiscal 2008 and 2010 is expected to be around 1.4 times the aggregate net worth of the companies as on March 31, 2007.

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India Stock Market – Monthly Review for August 2007

Indices witness non stop rally; The India Street Analysis proved right!

By Sundaramurthy Vadivelu

Disclosure

A couple of weeks ago, there were some ‘worries’ about how Indian stock market is likely to perform in the near future. Reasons cited were:

• US Sub-prime mortgage crisis may have ‘continued to effect’ Indian stock markets;

• The appreciating Japanese Yen may have made the hedge funds to offload their holdings in emerging markets;

• Possible political uncertainty may ‘worry’ the markets.

In the last week’s review, we had indicated that the indices appeared to have bottomed out. We gave 3 reasons to believe so.

• Solid buying support came in after every fall

• A bullish ‘harami’ candlestick pattern in weekly chart with medium reliability

• Decreasing price and open interest in August contracts of Nifty futures

Those who were skeptical about Technical Analysis may have found out what exactly was reality.

Indeed, the indices DID bottom out. This week, the Nifty gained 273.85 points or 6.54% on a weekly close basis. In the last one year, it gained 5% or more only once during the week ended March 23, 2007. This week’s gain is only 7th such occasion in the last 3 years. That way, this week has been quite a remarkable turnaround in Indian stock markets.

The following table summarizes the daily gains of Nifty during the week.

Date	Points Gained	% Gain
27-Aug-07	112.45	2.68
28-Aug-07	18.10	0.42
29-Aug-07	38.60	0.89
30-Aug-07	53.00	1.22
31-Aug-07	51.70	1.17

It can be seen that Nifty didn’t lose a single point throughout this week.

Let’s now discuss the daily chart of Nifty.

http://groups.google.com/group/theindiastreet/web/NIFTY_DAILY_310807.jpg

The index has completed one full Elliott wave cycle as can be seen from the above chart. Waves 1 – 5 and a – c are already over. To begin a fresh cycle, the index needs to make a higher high and a higher low.

In the chart shown below, Fibonacci retracements are displayed. Nifty has successfully closed above 4401 i.e. 61.8% retracement which is the technical recovery target.

On August 27, a “Three outside up” pattern was formed in the daily chart of Nifty. Though the shadows of red candle were not engulfed by the shadows of the green candle, it is still a pattern with a lesser reliability. The green candle on Monday had a partial upward gap and this confirmed the engulfing pattern formation.

http://groups.google.com/group/theindiastreet/web/NIFTY_FIBO_310807.jpg

In the weekly chart, a bullish “Three inside up” pattern has been formed as shown below.

http://groups.google.com/group/theindiastreet/web/NIFTY_W_M_310807.jpg

The bullish pattern in weekly chart confirms the reversal. But in monthly chart, a bearish “Harami” pattern has been formed. Watch the long lower shadow. This is an indication of the lower side volatility. Previously, a bearish “Engulfing” pattern was formed as shown. But these two candlestick patterns need confirmation on the third period (day, week or month). Without confirmation, the patterns are insignificant.

Forecast for the next week:

Now that we have confirmation of reversal in short and medium term charts, we need to look for the formation of first wave in daily chart i.e. a higher high and a higher low. The index is likely to face resistance at 4530 and ideally, a close above 4530 will complete the formation of first wave.

Even if that does not happen, 38.2% and 61.8% retracement levels should hold. Considering a low of 4002 and a high of 4471 these levels work out to 4293 and 4183 respectively. So, if a correction in the index starts straightaway next week (since the index gained for six consecutive days in a row) these are the two levels to watch out for. A reversal should occur after any of these retracements are breached.

We still remain positive on Indian stock market. Any decline in the index next week will only be an opportunity to enter the Nifty futures.

Futures & Options Market:

http://groups.google.com/group/theindiastreet/web/NF_SEP_310807.jpg

It can be seen that the price and open interest are increasing for the September contracts for Nifty futures. This again, is a bullish sign, meaning more buyers enter the market as price increases.

IPO Update:

The India Street analyzed Puravankara Projects Limited IPO. Its issue price was Rs.400. It got listed on August 30. It opened with a negative premium of Rs.90 at Rs.310 and closed at Rs.362.30. However, today it gained slightly to close at Rs.377.05.

For the top 10 gainers and losers in the overall market for this month please read my earlier article, “India’s hottest stocks for August 2007”.

The top 5 gainers and losers for the month among index stocks are given below.

Scrip	% Gain	Scrip	% Loss
SAIL	12.01	CIPLA	12.75
BHEL	9.29	VSNL	12.01
TATASTEEL	5.10	HINDPETRO	8.79
RPL	3.63	GAIL	8.38
RELIANCE	3.56	TCS	7.95

The India Street analyzed BHEL in “Stock of the week: Bharat Heavy Electricals Limited” and VSNL in “Stock of the week: Videsh Sanchar Nigam Limited VSNL”. We discussed about CIPLA in my previous article, “5 More Stocks to Avoid in the Short Term”.

Our long term pick Nagarjuna Fertilizers Limited gained 72.49% this month. Our short term pick Tata Sponge Iron Limited gained 20.84% this month.

Sundaramurthy Vadivelu

Suggested Reading

India Stock Market – July Monthly Review India Stock Market – Weekly Review Indices appear to have bottomed out! How will the US sub-prime mortgage crisis effect the Indian stock markets? India’s hottest stocks for August 2007 Stock of the week: Bharat Heavy Electricals Limited