Ongoing Mutual Fund NFO : Lotus India Equity Fund

Lotus India Equity Fund is an open ended equity fund which aims to balance 'concentration' and 'diversification' risk and goes for diversification in a 'focused' manner. The fund has the following self imposed guidelines:

• Not less than 15 stocks and not more than 30 stocks in the portfolio.

• Not less than 5 sectors in the portfolio and not more than 10 sectors (Sector definition would be "Industry Level" in AMFI classification)

• Not less than 2% exposure to a single stock (excluding IPO investments)

• Not more than 10% exposure to a single stock at the time of investment

• Active hedging to mange risks

Lotus India Equity Fund Strategy
Multi-Strategy Approach

• Multi-Cap - Large cap, Mid cap, Small cap

• Multi-Style - Growth, Value and Blend

• Multi-Lifecycle - Contra,

• Attractive and Momentum Stocks

Highlights:

• Investment Objective: Lotus India Equity Fund (An Open Ended Equity Scheme) aims to generate long-term capital growth from a focused portfolio of predominantly equity and equity-related securities.
• Investment Pattern: Equity and Equity related instruments# - 70-100%, Debt* & Money Market instruments - 0-30%. #Maximum exposure to the derivatives shall not exceeding 50% of the Net assets of the Scheme, subject to the limits as specified by SEBI, from time to time. *Debt instruments may include securitized debt (excluding foreign securitized debt) upto 30% of the net assets.
• Terms of Issue: Units at Rs. 10 per Unit for cash plus applicable entry load during the NFO and at Applicable NAV plus applicable entry load thereafter.
• Minimum Application Amount: Rs. 5,000/- per application plus in multiples of Re. 1/-
• Minimum Amount for Redemption: Rs. 1,000/-. Offer Document, Key Information Memorandum and Application Forms/Transaction Slips available at ISC/Distributors. NAV will be calculated and published on all Business Days.
• Load Structure: Entry Load: Where purchase amount is less than Rs. 5 Crores - 2.25%, Where purchase amount is equal to or greater than Rs. 5 Crores & Where Units are allotted upon reinvestment of Dividends & Where the investor is a Fund-of-Funds, as defined under SEBI Regulations, 1996 - Nil; Exit Load: if redeemed on or before the expiry of 6 months from the date of allotment - 1%, if redeemed after 6 months and on or before the expiry of 1 year from the date of allotment - 0.60%, if redeemed after the expiry of 1 year from the date of allotment & For redemption, where the initial purchase is equal to or greater than Rs. 5 Crores - Nil
• Statutory Details: Lotus India Mutual Fund has been constituted as a trust under the Indian Trust Act, 1882 (liability restricted to Rs. 1 Lakh) by Alexandra Fund Management Pte Ltd.
• Sponsor: Alexandra Fund Management Pte Ltd, Singapore. Trustee: Lotus India Trustee Company Private Limited.
• Investment Manager: Lotus India Asset Management Company Private Limited.
• Risk Factors: Mutual Funds and securities investments are subject to market risks and there is no assurance or guarantee that the objectives of the Scheme will be achieved. As with any investment in securities, the NAV of the Units issued under the Scheme can go up or down depending on the factors and forces affecting the capital markets. Past performance of the Sponsor, Mutual Fund, AMC or any associates of the Sponsor / AMC does not indicate the future performance of the Scheme of the Mutual Fund. Lotus India Equity Fund is only the name of the Scheme and does not in any manner indicate either the quality of the Scheme or its future prospects and returns.

Please read the Offer Document before investing.

Stock Idea - Balaji Telefilms

Recommendation: Buy
CMP = Rs 230 (as of Monday)
Price target: Rs 303

Key points

• The revenues of the company grew by 14.2% year on year (yoy) to Rs320.2 crore. The net profit increased by 33.4% yoy and substantially outperformed the top line growth. The operating profit margin (OPM) improved by 391 basis points to 37.3%.
• The revenue model of the TV content business is shifting more towards the high-margin commissioned programming segment. This shift is in keeping with the company's twin objectives of exiting the low-margin business of sponsored programming and focusing on developing content for its forthcoming regional language channels.
• The realisations in the commissioned segment improved by 25.5% yoy for the financial year, mirroring sustained popularity of its shows and closure of some low budget shows.
• In FY2007, BTL entered into a joint venture (JV; a 49% stake) with Star for launching regional general entertainment channels. Star brings to the JV its already running Tamil channel "Star Vijay". The JV plans to launch similar channels in Telugu, Kannada, Malayalam, Gujarati, Bengali and Marathi within a couple of years.
• I believe while the JV provides huge volume growth to its core content business, its stake in the JV promises big value creation over the medium to long term.
• After ruling the Indian small screen for years BTL has now ventured overseas to tap Asian markets with similar ethnic and cultural backgrounds. It has formed a subsidiary in Sharjah and already launched a show "Khwaish" there. It has also launched a show on Sirasa TV of Sri Lanka and also eyes the Indonesian market.
• In May 2007, it re-entered the Hindi film industry (Bollywood) with the release of its co-production "Shootout at Lokhandwala", which was a big hit. Encouraged by the success BTL is ramping up its film production and distribution business.
• I like Balaji Telefilms for the huge opportunities that are emerging in the TV content space and for its diversifying business model from content producer to a broadcaster. As against our sum-of-the-parts price target of Rs303 the stock is trading at Rs233 per share.
• I maintain Buy recommendation on the stock.

Stock Idea - JM Financial

Recommendation: Book Profit

CMP: Rs 1,330 (as of Friday)

• I have initiated coverage on the stock at Rs 214 in 2005, which gives an absolute return of 521% and a return of almost 261% on an annualised basis.
• The price target of Rs 1,352 has been achieved with the stock going on to make a 52-week high of Rs 1,385 on August 10, 2007.
• I recommend that investors book profit as most of the positives relating to the stock are already factored in its price and the risks to its valuations appear more than the rewards it promises at this juncture.

Market Commentary on Friday - Buoyancy lifts Sensex past 14,400

The market remained upbeat throughout the session and gained 261 points on sustained buying in metal, auto, oil and capital goods stocks. The markets stabilised today after witnessing wild intra-day swings yesterday.

The market regained strength after the Left Front indicated softening its stand on the Indo-US nuclear deal. The Sensex opened on a positive note at 14,237 despite weakness in global indices. As trading progressed, the market gained strength on strong buying in metal, auto, oil and capital goods stocks. A smart rally thereafter and buoyancy in heavyweight towards the close saw the index surge to an intra-day high of 14,455. The Sensex finally ended the session with a gain of 261 points at 14,425, while the Nifty added 75 points to close at 4,190.

Movers & Shakers

• EL Manufacturing rallied sharply on receiving an order worth $18 million for exporting readymade garments.
• Shree Renuka Sugars gained marginally on acquiring the ethanol plant of Dhanuka Petro-Chem.

The market breadth was positive. Of the 2,677 stocks traded on the BSE 1,563 stocks advanced, 1,067 stocks declined and 47 stocks ended unchanged. Among the sectoral indices the BSE Metal index notched up a gain of 2.84% at 10,276 followed by the BSE Auto index (up 2.37% at 4,569), the BSE PSU index (up 2.30% at 6,626) and the BSE CG index (up 2.31% at 12,622).

The heavyweights witnessed a strong buying interest. Tata Motors soared 5.93% at Rs659, BHEL rose 4.72% at Rs1,740, Reliance Energy shot up by 4.22% at Rs736, ACC jumped 3.90% at Rs1,010, Tata Steel added 3.80% at Rs582, SBI gained 3.60% at Rs1,466, Ranbaxy moved up by 3.48% at Rs361 and Satyam Computer was up 3.36% at Rs434. However, Dr Reddy's Lab at Rs626 and HDFC at Rs1,905 inched marginally lower.

Metal stocks notched up significant gains during the day. JSW Steel surged 10.13% at Rs572, Welspun Gujrat scaled up 5.77% at Rs228, Bhushan Steel rose 4.98% at Rs655, Maharashatra Seamless Steel jumped 4.33% at Rs578, Jindal Stainless added 3.52% at Rs145 and SAIL gained 3.22% at Rs145. Over 1.29 crore Nagarjuna Fertiliser shares changed hands on the BSE followed by Tata Teleservices (1.13 crore shares), SEL Manufacturing (1.02 crore shares), IFCI (99.30 lakh shares) and Asian Granite (94.82 lakh shares).

Value wise, SEL Manufacturing registered a turnover of Rs212 crore on the BSE followed by SBI (Rs133 crore), Reliance Industries (Rs99 crore), Asian Granite (Rs97 crore) and Omaxe (Rs90 crore).

Stock Idea - Esab India

Recommendation: Buy
CMP = Rs 484 (as of Wednesday)
Price target: Rs 575

Result highlights

• ESAB India's revenues grew by 35% to Rs 87.3 crore in the Q2CY2007, which is ahead of our expectation.
• The operating profit grew by 36.8% to Rs 21.7 crore in Q2CY2007 as against Rs 15.8 crore in Q2CY2006. Consequently, the operating profit margin (OPM) also expanded by 30 basis points year on year (yoy) to 24.8%. The raw materials cost-to-sales increased by 130 basis points, while the staff cost-to-sales ratio increased by 290 basis points.
• The commissioning of a new plant at Chennai and capacity additions in its existing plants lead to an increased top line in Q2CY2007. The equipment division registered a whopping 65.5% growth in its revenues and the revenues from the consumables increased by 25.6%.
• The depreciation cost for the quarter increased by 26.7% as the company has commissioned its new plant.
• Elexvia group India B.V. along with Charter plc and ESAB Holding Ltd have made an open offer to the shareholder of ESAB India to acquire 30.78 lac shares (Fully paid up equity share of Rs 10 each) at Rs426 per share. These represent 20% of the total fully paid up capital.
• For the first half of CY2007 the net sales grew by 32.1% to Rs 168.5 crore and the bottom line grew by 36.4% to Rs 26.4 crore, subsequently generating an earnings per share (EPS) of Rs 17.2 per share.

Stock Idea - Tourism Finance Corporation of India

Recommendation: Buy
CMP = Rs 25
Price target: Rs 30

Result highlights

• For Q1FY2008 Tourism Finance Corporation of India (TFCI) has reported an 86% year-on-year (y-o-y) growth in its profit after tax (PAT) to Rs 1.6 crore.
• The profit growth was aided by improved operating performance and lower provisions. The quarter-on-quarter (q-o-q) comparison has not been presented as we feel it is not relevant for TFCI since most of its earnings are back-ended with the fourth quarter accounting for over 65% of its FY2007 PAT.
• In the first quarter, the net interest income (NII) grew by 40.7% year on year (yoy) to Rs 4.7 crore, mainly driven by a y-o-y decline of 10.3% in the interest expense to Rs 8.2 crore. Going forward, we expect the interest expense to remain subdued due to the limited borrowing requirements of TFCI for FY2008.
• The existing funds coupled with the recoveries and planned capital raising should be sufficient for TFCI's business plans.
• TFCI's operating expenses jumped by 47.8% mainly due to a significant increase in the lease rentals for its office space. The increase had come into effect from October 2006—hence the full impact of the same would keep the operating expenses elevated in FY2008. The operating profit was up by 35.4% to Rs3.8 crore.
• Provisions and contingencies declined by 33.3% to Rs1 crore, reflecting the lower provisioning requirement as the net non-performing asset (NPA) was almost nil and incremental defaults were contained during the first quarter.
• The tax outflow jumped up significantly during the quarter due a higher income and also a higher effective tax rate of 38% for Q1FY2008 compared with 23% in Q1FY2007 and 18% in FY2007. Going forward, the management expects the effective tax rate to decline but the overall tax outflow to remain higher due to a higher income.
• I expect TFCI's earnings to grow at a 32% compounded annual growth rate over the period FY2006-09. The business prospects for the company have improved significantly on the back of the capacity expansion planned in the hotel and tourism sectors for the next three to four years.
• At the current market price of Rs25 the stock is quoting at 6.1x its FY2009E earnings and 0.7x FY2009E book value.
• I maintain Buy recommendation with the price target of Rs 30.

Stock Idea - Ranbaxy Laboratories

Recommendation: Buy
CMP = Rs 352 (as of Monday)
Price target: Rs 500

Key points

• Pfizer Inc has lost the initial bid for a new patent on Lipitor, the world's best-selling drug that could extend the company's monopoly on the medicine until June 2011.
• The rejection of Pfizer Inc's plea to reissue the invalidated '893 patent by the US Patent & Trademark Office brightens Ranbaxy Laboratories' (Ranbaxy) chances of entering the $8.5-billion Lipitor market in March 2010, 15 months ahead of the expiry of the invalidated '893 patent.
• Lipitor is the world's largest selling drug with annual sales of $8.5 billion in 2006. Using the discounted cash flow (DCF) method, we have valued the Lipitor exclusivity opportunity for Ranbaxy at Rs48 per share.
• Ranbaxy has created a rich pipeline of one-time opportunities for itself, the current ones being for Pravastatin 80mg, Valtrex and Isoptin SR (an authorised generic). Further, the company has a First-to-File (FTF) status on approximately 20 Para IV abbreviated new drug application (ANDA) filings, representing a market size of about $26 billion.
• The management is confident of monetising one such opportunity every year during CY2008-10.
• Ranbaxy has underperformed the market by over 30% over the last one year, largely due to the overhang of the regulatory issues with the company's Paonta Sahib plant and the raid by the US Food and Drug Administration (USFDA) on its US offices. However, we believe that all the negatives relating to the company have been priced in, with limited downside potential from the current levels.
• To account for the lower dollar/rupee exchange rate for CY2007, we have adjusted our CY2007 revenues and earnings estimates by 5.7% and 10.9% respectively.
• At the current market price of Rs 352, Ranbaxy is trading at 19.0x its estimated CY2007 and 19.9x its estimated CY2008 earnings.
• I maintain Buy recommendation on the stock, with a price target of Rs 500.

Invest in DSP Merrill Lynch World Gold Fund - NFO closes on August 23

DSP ML World Gold Fund is a ‘unique’ international investment opportunity, which was so far not available to Indian investors. DSP ML World Gold Fund would invest into Merrill Lynch International Investment Funds (MLIIF) - World Gold Fund, one of the largest funds in its category# with a 12 year performance track record. Merrill Lynch International Investment Funds (MLIIF) - World Gold Fund invests predominantly in highly profitable gold mining companies, whose profitability tends to increase with rise in the price of gold.

This is not a exchange traded fund (ETF).

The NFO closes on Aug 23, 2007 and the units will be available at Rs.10 per unit. Please click here to know more. You can now also invest in Mutual Funds/NFO with a click of a button.

NFO Details

• Mutual Fund Family: DSP Merrill Lynch Mutual Fund
• Fund Type: Open-ended
• Investment plan: Growth, Dividend

Friday, August 10 - Sensex drops 1.54% amidst high drama

The market erased most of its losses from the early crash, with the Sensex ending 1.37% lower and the Nifty dipping by 1.39% at close.

The market expected carnage today against the backdrop of weak Asian indices and yesterday's crash, but the Sensex recovered most of its losses on substantial buying in heavyweights, information technology and consumer durable stocks. The Sensex gyrated over 300 points amid high volatility. After crashing in early trades the Sensex touched the day's low of 14,571, down over 500 points to its previous close at 15,100. However, the market witnessed a steady to firm buying in the afternoon and the Sensex rallied sharply, erasing most of its earlier losses. Finally, the Sensex ended 1.54% lower or down 232 points at 14,868 whereas the Nifty was down 1.59% or 70 points at 4,333.

The market breadth was weak, with losers outnumbering gainers by 1.57:1 on the BSE. Of the 2,662 stocks traded on the BSE 1,597 stocks declined, 1,016 stocks advanced and 49 stocks ended unchanged. Barring the BSE IT index, most of the BSE sectoral indices continued to trade weak and dropped around 1-2% each. The BSE Bankex Index was the major loser and lost 2.53% while the BSE Realty Index shed 2.47%.

Majority of the 30-Sensex stocks ended in the red. Among the major losers Bharti Airtel shed 3.61% at Rs 838, HDFC plunged 3% at Rs 1,955, ONGC crumbled 2.94% at Rs 841, NTPC crashed 2.92% at Rs 165, Hindalco slipped by 2.85% at Rs 152, ICICI Bank tumbled 2.84% at Rs 865, M&M lost 2.69% at Rs 670, Reliance Communication dropped 2.69% at Rs 522, SBI slumped 2.52% at Rs 1,608 and Tata Steel fell by 2.41% at Rs 637. Select front-line counters rebounded from their intra-day lows and ended in the green. Satyam Computer rose 2.63% at Rs 479 and Bajaj Auto advanced 1.49% at Rs 2,325, while Tata Motors, Infosys, Wipro and Grasim gained marginally.

Volatile Markets - Time to be Cautious - it's happening everywhere!!

I have a strong feeling that it is time to turn cautious on the equity market (and stop dancing!). There is too much complacency about India / Asia being immune to the sub-prime lending crisis as well as the continued strong growth in the domestic economy and corporate earnings.

I feel this complacency is not warranted given:

1. The market's high dependence on foreign fund flows;
2. The mounting evidence that the economic growth is slowing down; and
3. The signs that the earnings growth momentum has peaked.

The complacency is not restricted to investors or TV commentators but, more worryingly, is also present among the policy makers and central bankers who feel that strong domestic growth is a given and are only fighting mythical inflation battles. I would like to make my readers cautious about:

• High dependence on foreign institutional investor (FII) inflows
• Slowdown in all economic growth indicators
• Sharp deceleration in exports
• Likely worsening of the current account deficit
• Slowdown in earnings: For the first time in several quarters the earnings of the Sensex companies were below expectation after stripping out the foreign exchange (forex) gain.
• This slowdown in the earnings momentum would become more visible from the second quarter onwards when the forex gains will not be there. A slowdown in the earnings growth would itself lead to a derating of the market's price/earnings (PE) multiple—investors would be OK paying 17-18x for a market growing at 30% but would they do the same if the growth were 15%? We discuss these factors in more detail.

Stock Idea - Cadila Healthcare

Recommendation: Buy
CMP = Rs 355 (as of Tuesday)
Price target: Rs 425

Result highlights

• The total operating income of Cadila Healthcare (Cadila) increased by 28.4% year on year (yoy) to Rs 572.2 crore in Q1FY2008, driven by a 19.7% growth in the domestic business and a 49.9% rise in the exports. The sales growth was ahead of our expectations.
• The domestic business was driven by an 18.2% increase in the sales of branded formulations, a 44% rise in the sales of active pharmaceutical ingredients (APIs) and a 52.4% jump in the consumer business.
• The improved performance of the French business (a growth of 49.8% yoy) and the US business (a growth of 122.6% yoy) contributed largely to the robust growth in the exports.
• The operating profit margin (OPM) shrank by 70 basis points to 19.4%, largely due to a 245-basis-point decline in the gross margin due to lower realisation on exports and a changing product mix. Consequently, the operating profit grew by 23.8% to Rs 111.2 crore. The net profit surpassed all expectations.
• In order to incorporate the impact of the recent acquisitions and the appreciation of the rupee against all the other major currencies (on account of which the realisations on exports have reduced), we are revising our estimates for Cadila. We have upgraded our revenue estimates by 5.2% and 5.1% to Rs 2,241.0 crore and Rs 2,600.8 crore for FY2008E and FY2009E respectively.
• At the current market price of Rs 355, the company is trading at 16.4x its FY2008 and at 13.6x its FY2009 estimated earnings. With all the growth drivers in place and on track, I reiterate Buy recommendation on Cadila with a price target of Rs 425.

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