Shaping up of Domestic News Flow

RIL-RPL Merger:

The merger of Reliance Industries and Reliance Petroleum is no more a new concept to the shareholders of Reliance Empire. RIL had earlier merged RPL with itself in the year 2002. But, over here we’re not speaking about the recently built refinery which is going to get merged with RIL. RIL had earlier conceived RPL in 1993 in Jamnagar and later announced a merger with itself in the year 2002. At that time, the RIL-RPL merger was carried out at the share swap ratio of 1:11, creeping-in a feeling of discontent amongst RPL shareholders on the reasoning of unfavorable ratio of merger.

Later in the year 2006, RIL again came up with plans of setting up yet another refinery in Jamnagar with the view to build a refinery with EOU status. This new refinery is expected to operate with capacity of refining 580,000 barrels per day. RIL had also offered 5% stake in its refining subsidiary to US energy major Chevron corp. Now Chevron has agreed to sell-off its stake in RPL.

My Views on RIL-RPL Merger:

The merger of RPL and RIL would create a global-scale refinery for RIL. The merged entity would be seen as the world’s largest refining capacity at a single location. It would also yield various benefits of synergies, savings in expenses and costs, and it might catapult RIL into an even bigger Indian giant than ever before, in the eyes of the world. The merger would also lead to reduction in the company's earning volatility & risks, with diversified operational presence. It would, in fact, reduce the risk the shareholders of RPL were exposed to as being a stand-alone refinery. Though, RPL refineriy is touted as being one of the most sophisticated & integrated refinery in the world, it would have taken time to stabilize in terms of profits & higher GRMs in the current landscape of competitive environment & global recession.


ADVANTAGE: Reliance Petroleum Shareholders

Earlier, during the merger between RIL and RPL in the year 2002, the merger clause of share swap ratio was considered unfavourable by the RPL shareholders then. This time around the expectations were somewhat same from the RPL shareholders, on the grounds that RIL has more minority shareholders than RPL. At the time of announcement of the merger, the price ratio going by the then prevelant stock prices of RIL and RPL was around 1:17. Finally, the boards of the two companies announced the merger’s swap ratio at 1:16. This has turned out slightly positive for RPL shareholders, who had speculated the ratio of anywhere around 1:20 on the rationale that RIL has a running and a more established refinery.

Another aspect from which RPL shareholders would tend to benefit is they will get to swap their holding in RPL which is a stand-alone refinery for a much diversified RIL which has presence in various businesses apart from just refining.

Rajiv Memani of E&Y who advised RIL on the valuating merger said, "The valuation is fair and reasonable, we have assigned due weightage to relevant factors such as the market price of the shares, the earnings performance and the asset base of the company. The valuation considered all factors including the net asset value and the market price."



RBI Cuts Interest Rates:

Amid constantly declining inflation & lower than expected GDP numbers for the period October to December 2008, RBI governor D Subbarao has announced rate cuts in benchmark interest rates. Reserve Bank of India has lowered the repo rates to 5% and reverse repo rates to 3.5% from immediate effect. Both the benchmark rates are effectively lowered by 50 bps.

My Views: These rate cuts were somewhat discounted by the stock markets during the last week or two on the back of lower inflation numbers. This discounted feeling was further seconded by the fact that GDP growth numbers for the period October to December 2008 came below market expectation & witnessed a sharp slowdown.

Though, Corporate India seems to be content with the RBI’s decision signaling banking sector to further bring down their lending rates in the efforts to stimulate growth and economy. By cut in its key benchmark rates, RBI has clearly indicated to the lending institutions to lend more and not let its money remain parked idle with RBI.

Repo rates is the rate at which RBI lends to the banks & reverse repo rates is, conversely, the rate at which RBI borrows from the banks.

Keki Mistry of HDFC, feels the reverse repo rate cut is more relevant than RBI's repo step. "Currently, there are not too many banks that are borrowing under the repo window because there is so much liquidity in the system. So, everyone is parking money back to RBI through the reverse repo window. Hence, the reduction in the reverse repo is more relevant than the reduction in the repo rate because this means that there will be a further disincentive for banks to just go and park the money with RBI. It will mean that banks will be more willing to go out and lend money to industry, which is the need of the hour." (Source of this Quote: Economic Times)

Auto Sales reports robust sales in February:

Auto sales for the month of February rose unexpectedly for cars and two-wheelers. The recent efforts of lowering of interest rates by a few leading public sector banks had propped up demand for cars and two-wheelers among consumers who were postponing their buying decisions on the back of domestic slowdown and liquidity crunch. Though, Auto Analysts also attribute the rise in demand for automobiles to both declining interest rates and reduction in excise duty during the month of December 2008.

Leading two-wheeler manufacturer Hero Honda recorded a whooping 24% growth in sales followed by 13% for TVS Motors. Though, Bajaj Auto posted a 17% decline in sales for the February 2009. Even Tata Motors reported a 19% drop in sales.

My Views: However, this trend in reversal in fortunes of Auto majors may not be sustainable for long. March and April sales may not be up to the mark for the Automobile sector as the lag effect of the slowdown tightens its grip on the economy, and this even before the lag effect of stimulus packages announced by government and RBI come into effect.


Standing in Foreign Trade:

India’s exports for the month of January slipped by 15.9% on the back of severe recession in key developed markets of US and Europe. Lack of liquidity & consequent delay in demand of export led goods and services from India are touted as the key reason behind tumbling of exports in January.

On the other hand, imports witnessed a negative tick falling 18.1% in the month of January. This fall in demand for imports can be attributed to the over-all slowdown in the domestic economy on the back weaker GDP numbers for the quarter October to December 2008.


Director of ICRIER Rajeev Kumar on the above data said, “The magnitude of contraction in trade suggests that the GDP numbers could be as low as 4% in the fourth quarter. There is no reason to believe that the export data will be better in the coming months. The export figures are expected to stabilize around October as the global economy improves.”


GOLD: Technicals, Fundamentals & likely 'Bubble Formation'

Traditionally, Gold has a terrific store of value as ornaments and jewellery for retail customer and coins and bars for traders and investors. Recently Gold has shot up to unprecedented levels on the back of increased risks and uncertainties around the globe. Gold is known as a safe haven and usually offers inflation adjusted returns over longer term.

Is it a 'Golden' Bubble in the making ??

Technical charts of Gold indicate that it has rallied to crucial Resistance of Rs.15,550. Now, Gold movement can witness two possibilities: one being panic fall to Rs.13,000 levels and stabilizing near to those levels. Gold has a very crucial medium term support at Rs.11,200 which would determine its long term prospects. Though, Gold is highly unlikely to test such lower levels any time soon from the current levels of Rs.15000. However, some bullion analysts are predicting that Gold may stabilize near Rs.13000 levels in medium to long term horizon.

Chartists View: From the charts tracking gold prices of last 10 years, it can be clearly revealed as to how the prices of Gold has escalated starting from the year mid-2007. The roots of the current sub-prime crisis were sowed during the latter half of calender year 2007. So, expectedly the prices of Gold has slowly and gradually risen starting from the period July 2007.

Over the period of time, as the recent global incident of sub-prime crisis slowly graduated into a liquidity crunch, the prices of Gold started to take-off sharply in the last 12 months. Eventually, now the charts of Gold quite resemble the charts of Stock markets which formed a bubble in the last stage of its bull phase.

On the other hand, Gold also stands possibility of touching dizzying heights of Rs.17000 levels on the back of deepening global recession and indiscriminate printing of money by reserve banks the world over in a bid to revive their respective economies. There is every likelihood that Gold soar at higher levels & take a 'U' turn after recording new peaks above Rs.16500 levels.

Is Gold rally backed by Fundamentals?

But, history suggets that whenever there is a bubble in any asset class, Analysts and Market participants have always suppoted the rise in the prices as being on the back of certain 'Fundamentals'. Most of the time Analysts have failed to predict a bubble in any form of Asset class. In case of Commodity rally a year ago, they supported the surge in the prices of various Metals with the base reason being 'Depletion of Natural Resources'. For Food Articles they had come out with a logic of 'Declining Land ratio to Agricultural activities & Growing Population'. For Gold, the fundamental view-point that the Analysts are forecasting is 'Increasing Risk in world environment & fall in value of various Currencies in comparison to real-asset value of Gold.'

Will this reasoning of 'Risk-Inverse' value of Gold hold true to enable the bullion to sustain at soaring levels? Only time will tell whether the Gold is, in deed, the commodity to reckon with or whether it will fall in line to its traditional value as being a mere 'Inflationary Hedge'.

ALERT: Gold charts are somewhat indicating that its price is somewhere in the last few stages of bubble blast. The charts are resembling the over-exuberance that out stock markets used to depict a year back. Investors are suggested to be cautious while buying Gold at every higher levels & traders to follow strict Stop Loss while trading in Gold counters.

A 'MUST READ' FOR NEW INVESTORS:

Read my previous article on 'Strategy for Investment' which is a must read article for all New investors. It explains in detail as to how to approach the markets & strategizing 'Entry & Exit' related to stock specific decisions.

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