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Fundamentals May 2, 2013


Nik's Diary
The Indian markets open in the red tracking weak cues from SGX Nifty and major Asian markets following weaker than expected US payroll data and slowdown in the pace of growth in the US manufacturing sector. The US markets ended on a negative note on Wednesday as disappointing batch of US economic data weighed on the markets, prompting traders to indulge in profit booking. Sparking the negative sentiments, payroll processor ADP released a data showing that private sector employment increased by 119,000 jobs in April following a downwardly revised increase of 131,000 jobs in March. Economists were expecting an addition of about 155,000 jobs. Adding to the worries, the ISM report showed a slowdown in the pace of growth in the manufacturing sector in April. The purchasing managers index fell to 50.7 in April from 51.3 in March. Further, stocks saw continued weakness in afternoon trading following the Federal Reserve's announcement of its latest decision on monetary policy. The Fed left interest rates unchanged and maintained the US$85bn per month pace of is asset purchase program. Meanwhile Indian shares rose on Tuesday, with FMCG shares rallying after consumer goods giant, Unilever Plc., offered to pay `600/share in an open offer to raise its stake in its Indian subsidiary to 75% from the current 52.48%. Going ahead, markets will keenly watch the European Central Bank's monetary policy announcement which is scheduled today.


Fed maintains stimulus to support growth
The Federal Reserve said Wednesday that its economic stimulus campaign would press forward at the same pace it has maintained since December, putting to rest for now any suggestion that it was leaning toward doing less. The Fed emphasized that it was ready to increase or decrease its efforts to spur growth and reduce unemployment as necessary, a more balanced position than it took earlier in the year, reflecting the reality that a strong winter has once again yielded to a disappointing spring. It was the first time that the Fed had explicitly mentioned the possibility of doing more in a policy statement, although officials, including the Fed’s chairman, Ben S. Bernanke, have made the point repeatedly in public remarks. Analysts disagreed about the central bank’s intent. Some saw it as a signal that the Fed’s next move could be an expansion of its stimulus. Others, however, said the Fed was simply underscoring that it did not plan to reduce its asset purchases. It is buying $85 billion a month in Treasury and mortgage-backed securities. “I don’t think there’s much chance of them stepping it up,” said Jim O’Sullivan, chief United States economist at High Frequency Economics in New York. “But this is certainly their way of saying there’s no bias toward scaling down.” The Fed maintained a relatively sunny economic outlook in its statement, released after a two-day meeting of its policy-making committee. It said that the economy was expanding at a “moderate pace” and that the labor market had shown “some improvement.” It added, however, that federal spending cuts were “restraining economic growth,” an implicit critique of the rest of the government. That language was stronger than the Fed had used in previous assessments of the economic impact of fiscal policy. Fed officials have repeatedly expressed frustration that fiscal policy is working at cross-purposes with their own monetary policy. The statement also noted that the pace of inflation had slackened, a potential sign of economic weakness. Bringing the annual rate of inflation closer to its target of 2 percent has been a primary goal of the Fed’s four-year-old stimulus campaign, but the statement expressed little concern about the recent deceleration to a pace of only about half that level. Investors and the Fed have taken the view that inflation is likely to return to a more normal pace without additional effort. “The committee expects that, with appropriate policy accommodation, economic growth will proceed at a moderate pace and the unemployment rate will gradually decline” to a level the Fed regards as acceptable, the statement said. Michael Feroli, chief United States economist at JPMorgan Chase, said the stability of the Fed’s economic outlook suggested that policy, too, would remain stable. “In effect, the Fed signaled that the pace of asset purchases would be data dependent in both directions, but that right now the data gives them little reason to change in either direction,” Mr. Feroli wrote Wednesday in a note to clients. The statement won support from 11 of the Federal Open Market Committee’s 12 members. Esther George, the president of the Federal Reserve Bank of Kansas City, cast the dissenting vote, as she has at each meeting this year, citing concerns about potential “economic and financial imbalances” and the risk of excessive inflation. The pace of economic growth appeared to slow in the weeks between the Fed’s previous meeting and the one this week. Inflation slackened in March to the slowest pace in two years, while employers added the fewest jobs in any month since last summer. And economists say that the pain of federal spending cuts is just beginning to tell. Inflation was 1.1 percent during the 12 months ending in March, according to the most recent data from the Fed’s preferred inflation gauge, the Commerce Department’s index of personal consumption expenditures. That is well below the 2 percent annual pace that the Fed considers healthy. The central bank is modestly expanding its stimulus campaign each month, as it increases the size of its bond portfolio. The Fed’s most recent economic projections, published in March, showed most officials expected persistently low inflation and persistently high unemployment for years to come. Officials, however, are reluctant to do more. They see modest benefits and uncertain costs in buying more bonds. The volume of the Fed’s first-quarter purchases already roughly equaled the volume of new mortgage bond issuance and about 72 percent of the volume of new issuance of long-term federal debt. And the Fed already has tied the duration of low interest rates to the unemployment rate, announcing in December that it intended to hold its benchmark short-term interest rate near zero at least as long as the unemployment rate remained above 6.5 percent, provided that inflation remained under control. An official account of the Fed’s previous meeting, in March, showed that officials discussed reducing the monthly volume of bond purchases. Some officials who supported the purchase program when it began last year said they saw evidence that the economy was growing more quickly, and that the Fed might be able to curtail the volume of its asset purchases by the third quarter. An account of this week’s meeting will be released in three weeks, providing a comparable look at the latest round of internal debate. But analysts said that the changed language in the statement reflected a shift in that debate. The statement said, “The committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation as the outlook for the labor market or inflation changes.” The Fed’s previous statement said it would adjust the level of purchases based on economic conditions. Michael Gapen, director of United States economic research at Barclays Capital, wrote in a note to clients that the statement was “a fairly obvious nod to some of the recent softness in economic activity, labor markets and inflation.” He said it reinforced his view that the Fed would maintain its $85 billion pace through the end of the year. The Fed also could increase the impact of its campaign by telling investors how long it will run — either in terms of a date or an economic target. But officials say that it has been impossible to reach a consensus on that issue. Source: nytimes

ONGC makes three major oil and gas discovery
ONGC on Tuesday said it has strike oil and gas at three locations in KG deep offshore basin and Kutch shallow offshore. However, the explorer did not reveal potential hydrocarbon that may be drilled out of these discoveries. The discoveries are made in the blocks NELP block KG-DWN-2005/1; NELP Block KG-DWN-98/2 and GK-28 PML Also, the company’s Board gave its go-ahead for investments up to Rs 2,000 crore. These include acquisition of new well stimulation vessel for Mumbai Offshore (Rs 1,384 crore); development of shallow-water wells in Eastern offshore (Rs 284.82 crore) and access control and surveillance system (Rs 407.50 crore). Source: thehindubusinessline

Unilever makes a voluntary open offer to increase stake in HUL
Encouraged by the promise of growth in emerging markets such as India, and ostensibly wanting to keep a larger share of the profits for itself, Anglo-Dutch consumer goods giant Unilever on Tuesday offered shareholders in its Indian subsidiary Hindustan Unilever (HUL) R600 apiece for their shares. The price represents a 20.6% premium to the stock’s Monday closing. On Tuesday, the stock rallied 17.28% after the announcement of the open offer, closing at R583.60, after it rose 20% to an all time-high of R597 in intra-day trades.  The tab for the open offer will be R29,220 crore ($5.4 billion) and, if fully successful, will take Unilever’s stake in HUL to 75%, the maximum that can be held by promoters if the stock is to stay listed. Unilever, which currently holds a stake of 52.48%, wants to buy up to 48.7 crore more shares or 22.52% of the total outstanding shares of HUL. The open offer is expected to begin in June 2013, subject to regulatory clearances.  The open offer marks the latest international corporate bet on long-term consumer demand in India despite tepid economic growth. The offer price of R600 values the stock at a multiple of 35 times one-year forward estimated earnings, above the historical trading range for HUL of between 25 and 30 times, a sign of how confident Unilever is about its prospects in India. Nikhil Vora, managing director, IDFC Securities, said the price offered was a thumbs-up for the Indian consumer space, which was likely to get re-rated. “Shareholders might want to trade their HUL stock and buy into other consumer goods companies,” Vora said, adding there was no compulsive need to own HUL at these valuations. “The long-term growth potential of emerging markets is central to our strategy —we already have over 57% of our turnover coming from emerging markets,” James Allison, head of investor relations and M&A at Unilever, said. “This represents a further step in Unilever’s strategy to invest in emerging markets and to increase our exposure to countries which offer great structural growth potential through population growth and rising income per capita.” The HUL stock has been a favourite with investors having rarely underperformed the market and with the FMCG major having been generous with dividends – average dividend payout in the last 15 years has been 80%. Between March 1991 and now, the stock has returned 5,158%, compared with a gain of 1,168% for the Sensex. The only other stock that has outdone HUL in the consumer space is ITC which gained 23,061% between March 1991 and now but ITC’s dividend payout has been smaller at 44%. HUL’s market capitalisation is currently Rs 1.26 lakh crore compared with ITC’s Rs 2.6 lakh crore. Over the past 10 years, the company’s net profit has more than doubled to Rs 3,828 crore for FY13 on a consolidated basis, with more than 50% of the increase coming in the last five years. Meanwhile, revenues have increased 25% to Rs 26,317 crore in FY13 since the company changed its accounting period four years ago. Several global companies have considered delisting their local units but some have been deterred by the high cost of buying out minority shareholders. Several market watchers said investors might be unwilling to part with their shares at the offer price, which could force Unilever to settle for a smaller stake or raise its offer price, but Unilever was keen to stress that it was paying “a fair price.” “The offer is being made at a premium of 26% to the one month average price, 25% to the last one week average price and 29.5% over the mandatory floor price required under Indian regulations. We think we are paying a fair price,” Unilever’s Allison said. According to the company’s website, HUL’s shareholding is distributed among about 3.6 lakh individual shareholders and financial institutions. In a similar deal last November, UK-based GlaxoSmithKline Plc offered to buy a further 31.8% stake in its Indian consumer products business for about $940 million, lifting the parent company’s stake to 72.5%, just shy of its 75% target. The company traces its roots back to 1931 when Unilever set up its first Indian subsidiary, Hindustan Vanaspati Manufacturing Company, followed by Lever Brothers India Limited (1933) and United Traders Limited (1935). These three companies merged to form HUL in November 1956.four years ago. Several global companies have considered delisting their local units but some have been deterred by the high cost of buying out minority shareholders. Several market watchers said investors might be unwilling to part with their shares at the offer price, which could force Unilever to settle for a smaller stake or raise its offer price, but Unilever was keen to stress that it was paying “a fair price.” “The offer is being made at a premium of 26% to the one month average price, 25% to the last one week average price and 29.5% over the mandatory floor price required under Indian regulations. We think we are paying a fair price,” Unilever’s Allison said. According to the company’s website, HUL’s shareholding is distributed among about 3.6 lakh individual shareholders and financial institutions. In a similar deal last November, UK-based GlaxoSmithKline Plc offered to buy a further 31.8% stake in its Indian consumer products business for about $940 million, lifting the parent company’s stake to 72.5%, just shy of its 75% target. The company traces its roots back to 1931 when Unilever set up its first Indian subsidiary, Hindustan Vanaspati Manufacturing Company, followed by Lever Brothers India Limited (1933) and United Traders Limited (1935). These three companies merged to form HUL in November 1956. Source: financialexpress








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