Indian stock market and companies daily report (February 22, 2012, Wednesday)

Indian domestic markets are expected to open flattish tracking global markets worldwide. Asian stocks fell for a second day and oil retreated from a nine-month high as Greece’s approval for a second bailout failed to spur confidence among investors.

Euro-zone finance ministers early Tuesday gave a green light to a second rescue package for Greece, unlocking a €130bn in bailout money for the cash-strapped nation. The new bailout would leave Greece with sufficient funds to repay a €14.5bn bond due on March 20. The European markets finished Tuesday's trading with modest losses, while US markets managed to close marginally in the green as deal on the Greek debt bailout prompted some profit taking.

Meanwhile Indian shares continued to extend their recent gains driven by positive developments in the Euro zone area. Investors worldwide would keenly watch out for German PMI and US home sales data due for release today.

Markets Today

The trend deciding level for the day is 18,339/5,597 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 18,502 – 18,575/5,632 – 5,657 levels. However, if NIFTY trades below 18,339/5,597 levels for the first half-an-hour of trade then it may correct up to 18,325 – 18,221/5,572 – 5,537 levels.

IPO Note: MCX LTD. – Subscribe

Sustainable competitive position: Multi Commodity Exchange of India Ltd. (MCX) is a leading commodities exchange, which received permanent recognition from Government of India on September 26, 2003. The company reported a market share of 87.3% as of December 2011. MCX is also the fifth largest commodity futures exchange globally in terms of the number of contracts. As of June 2011, MCX was the largest silver exchange, the second largest gold, copper and natural gas exchange and the third largest crude oil exchange for this period globally.

Growth strategy in place: MCX has introduced a variety of new commodity futures contracts; and since inception, the number of products offered by the company has grown from 15 to 49 as of December 31, 2011. MCX has 2,153 members nationwide with over 296,000 terminals, including CTCL spread over 1,572 cities and towns in India. The company intends to continue to increase the number of participants by introducing new products on its exchange by expanding to more geographical areas, which is expected to drive growth going ahead. Regulatory changes can also lent a fillip to MCX as currently option contracts are not allowed to be traded in commodity. Any changes in favor of MCX can lead to a major increase in revenue and profitability going ahead.

Outlook and valuation: MCX currently has zero debt on its book, and major capex to fuel growth has already been incurred by the company. Secondly, the company reported investment and cash worth Rs.1,324cr at the end of 9MFY2012, which works out to Rs.260/share. On an annualized basis, shares will be trading at 15.1x and 18.1x at the lower and upper band on FY2012E earnings, respectively, which we believe is fair compared to global peers, which trade at 18x-19x TTM EPS, and the recent off market deals value MCX’s Indian peers NSE and BSE at 22x-24x 9MFY2012 annualized earnings. We believe MCX being the only major commodity exchange in India and the world’s fifth largest exchange can witness strong growth in revenue and profitability going ahead, which makes its valuation much more attractive than global and Indian peers. Hence, we recommend Subscribe to the issue on account of the relatively fair valuations.

ECL receives MOEF nod for its iron ore mine

Electrosteel Castings (ECL) has received forest stage-I clearance for its iron ore mines located at Kodolibad, West Singhbhum, Jharkhand, from Ministry of Forests and Environment (MOEF). ECL expects to receive stage-II clearance in the coming 2-3 months and then sign mining lease with the state government. After signing the mining lease, ECL can develop the mine and resume production. The mine has reserves of 91mn tonnes with 64% Fe content. ECL expects to commence production from this mine in FY2013. However, procedural delays cannot be ruled out in our view.

With upcoming production from coking coal and iron ore, ECL will turn into a fully integrated steelmaker. Although there is lack of clarity on the timelines for commencement of meaningful production from its coking coal and iron ore mines, ECL’s margins are expected to be significantly higher than its peers once it reaches optimum production capacity at its mines. Moreover, ECL’s associate, Electrosteel Steels (34.8% stake) with 2.2mn tonnes of steel capacity is expected to benefit the most, as ECL will supply coking coal and iron ore from its mines to Electrosteel Steels at subsidized rates (cost + 20%).

We have a positive stance on ECL’s initiatives of gradually venturing into steel making through its associate Electrosteel Steels. Furthermore, the company’s backward integration initiatives through allocation of coking coal and iron ore mines are expected to result in cost savings from FY2013. The stock is currently trading at 0.4x each for FY2012E and FY2013E. We recommend Buy on the stock with an SOTP target price of Rs.32.

Economic and Political News
- Economic slowdown likely to be temporary: Finance Minister
- India’s January consumer price inflation (CPI) at 7.65%
- RBI may consider CRR cut at next policy review meeting: Deputy Governor
- Government ready for dialogue with states on NCTC

Corporate News
- Coal India to incur additional Rs.6,500cr burden due to new labor pact
- Suzlon arm, REpower wins 250MW order from French firm
- Tata Motors to launch 230 Nano showrooms in one year
- M&M looks to assemble products in Russia through SsangYong distributors
- HCL Infosystems bags Rs.278cr order from Tamil Nadu government
- Kingfisher assures of normal operations in 5-7 days

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