Still gung ho

New FIIs continue to flock to India

There has been no shortage of bears predicting a drying up of foreign institutional investor (FII) inflows, with net FII inflows into equities turning negative in April and May.

However, the data show that the number of new FIIs entering the Indian market continues to rise at about the same rate. The table shows the monthly increase in the number of FIIs in the market.

Notice how the number has already increased by 13 this month, in spite of FIIs being net sellers. Consider also how the number of FIIs coming in is well above the levels reached in September or November last year.

The fact that new FIIs continue to come to the market indicates the strength of the long-term India story, and should provide some comfort to investors.

Interestingly, new FIIs continued to make a beeline for India even after the meltdown in the market in May 2004, the number of new entrants for June and July 2004 being very high.

That could indicate that market sell-offs are seen as buying opportunities, and there's a lot of support on the downside.

The rationale for Mifor

The Reserve Bank of India recently banned the benchmarking of rupee liabilities of Indian corporates and banks with MIFOR, causing quite a furore in the currency markets.

If a corporate or a bank has a rupee liability in the form of borrowing or deposits and it feels that the interest rate at which it is paying its liabilities is higher than the market rate, it would like to hedge its financial risk.

Hedging will help these banks and corporates to guard their payouts against a further increase in interest rates.

Till now these corporate used to swap their financial risk with savvy foreign banks which offered solutions in the form of "interest rate swaps" linked to either a domestic or foreign exchange benchmark.

Under the swap, the foreign banks pay a fixed rate to the Indian entities so that their obligations to their depositors or lenders are taken care of.

In return, the banks will receive floating rate payments as part of their receivables in the deal which are usually pegged at some spread above the LIBOR - London Interbank Offer Rate.

More specifically, they used to also link the floating rate receivables to MIFOR - Mumbai Implied forward rate which is combination of LIBOR and the rupee-dollar exchange rate.

This is where the RBI has put a spanner in the works. With good reason.

Most small banks, public sector corporates and financial institutions which do not maintain sophisticated risk management systems and depend on these banks for treasury management advice have been caught offguard when LIBOR started its rally -- 6-month Libor has gone up from around 1.75 per cent a year back to 3.51 per cent at present.

According to market sources, financial entities which had hedged their high cost fixed rate risk with the foreign banks with floating rate linked to LIBOR are in fact paying much more than their fixed rate obligations.

That's why the RBI has insisted that for such swaps the benchmark should be Indian and not foreign interest rates so that the Indian domestic liabilities are not exposed to foreign currency risk without actually taking any foreign currency obligation.

SAIL

The SAIL stock was up 3.4 per cent in Wednesday trading as its fourth quarter results beat analysts' forecasts. Net sales have grown 38.2 per cent in the March quarter, and profit before tax has grown 234 per cent to Rs. 3626.3 crore.

SAIL's steel production was up about 5.5 per cent on a y-o-y basis, while prices were also up approximately eight per cent on a y-o-y basis.

SAIL's senior management say that they have focused on improving realisations via increased production of higher value products like plates, wheels & axles.

Also, the proportion of lower value semis in total sales has been reduced.

As anticipated, cost of raw materials has jumped 54.14 per cent to Rs 2387 crore in the last quarter, largely due to higher coke costs.

However, the management's productivity improvement techniques such as efficiency in coke usage via CDI / auxilliary fuel injection has helped to minimise the rise in input costs.

As a result, operating profit has grown 165.7 per cent to Rs 3986 crore in the March quarter and operating profit margin has expanded 2042 basis points to 42.54 per cent.

Despite the run up in the stock price in Wednesday trade, the stock has underperformed the Sensex over the past one month, thanks to steel prices weakening in several developed markets.

The company management however, point out they have not experienced any signs of a slowdown in the key Chinese market.

Also, domestic steel demand is expected to remain firm in the medium term, providing the growth momentum.

Going forward, to improve productivity levels, the managment has indicated that they were evaluating the feasibility of another round of VRS.

The valuations of this stock continue to remain attractive - it trades at about three times forward earnings as compared to a discounting of 4-5 for its peers.

(With contributions from Anindita Dey and Amriteshwar Mathur)