>Weekly Calls (ICICI Direct)

To see report: CALLS 300309

>Weekly Derivatives (ICICI Direct)

NIFTY HIGHLIGHTS:
■ The Nifty Spot has surged by 10.72% to close at 3108 from the previous week’s close of 2807

■ The total futures OI in the market stands at Rs 28682 crores whereas all options OI stands at Rs 27755 crores

Technical Outlook
• The Nifty closed 10.74% positive posting one of the biggest weekly gains. Nifty gained in all the five trading session in last week trade

• The Nifty has formed strong bull candle after breaking out above 2800 levels

• On the upside the Nifty is now testing 3150-3170 area where profit booking is expected

• On the downside good support appears around 2,950-2900 levels

• We expect the Nifty to trade in the range of 3200 – 2900 levels for the coming week

• The resistance remains at 3150 and 3200, whereas supports exist around 3000, 2920 levels

Derivative Outlook:
• The PCR-OI has moved from 1.59 to 1.51 mark after making a high of 1.96 on the expiry day. The sharp fall in PCR-OI on Friday is because of unwinding of huge put positions of March series. In the current series, addition of put OI is more than compared to call OI. In The April series, maximum addition of OI was registered in 2900 put which added 76108 contracts followed by 72499 contracts addition in 3000 put. The 2700 and 2800 puts added 44807 and 49802 contracts respectively. On the flip side, the maximum concentration of OI was seen in call options ranging from 3000 to 3200 wherein the 3200 call added 39148 contracts followed by 33597 contracts in 3100 call and 25485 contracts in 3000 call. With rise in IVs of these call options; we conclude that decent call buying was observed in these calls in last week. The rise in put IVs also suggest significant put buying, however this could be ‘Put Hedge ‘ strategy adopted my many market participants in order to hedge their long future positions. The maximum put OI base in April stands at 2700 with 4.82 million shares whereas the largest call OI base is currently at 3000 with 2.71 million shares in OI. We feel that the 2700 level may stand as a strong support for Nifty in this series. Moreover, OTM call options have not witnessed any major call writing in last week and hence we advise participants not to go for higher OTM call writing at current levels

• The Nifty futures combined OI stands at 38.09 million shares wherein April OI stands at 37.24 million shares. Over the week, we have seen addition of 24.81 million shares in April futures OI accompanied with a 10.74% surge in Nifty price. In the expiry week, we observed significant long positions adding in April series. The rollover in the Nifty was at 69.61% wherein majority of them were long rollovers whereas Market-wide rollover stood at 77.04%. This also concludes that rollover in stocks is comparatively higher to Nifty. The April futures OI is near to the 4 crore mark, which is considered as a psychological level from where we could see some unwinding in OI. Once the Nifty crosses the 40 millions shares in OI in near month, participants are advised to book profit in their long positions. However, from the current levels we may see further upside in Nifty, possibly 3200 in near term

To see full report: DERIVATIVES 300309

>Opening bell 30-3-09(ICICI Direct)

Key points
􀂃 Market outlook — Open negative and trade negative
􀂃 Positive — MF, FII buying, crude cooling off
􀂃 Negative – Rupee weakening again, Asian markets
Market outlook
􀂃 Indian markets are likely to open negative taking its cues from the
global markets. SGX Nifty was down by 65 points. We have witnessed
a brisk rally from the recent lows and we expect profit booking to
continue. The players would like to go light on positions ahead of the
important G 20 summit and hence we may witness pressure on the
market for the coming sessions as well. Our markets will closely watch
at the developments in US markets and the outcome of G 20 summit.
We advice not to take aggressive positions for the week unless we see
decisive break on either side of the band. Trading interest will be
witnessed in Reliance for the coming session or two because of the
gas production which is anticipated to start in a day or two.

To read full report Opening bell

>KARVY BAZAAR BAATEIN

From 30 March'09 to 5 April'09

Cautious optimism in play…

The markets across the globe cheered last week as the Obama administration announced a detailed bank rescue plan to buy US$1 trillion worth of toxic assets from the country’s ailing fi nancial institutions. Moreover, a stream of better-than-expected economic indicators emanated from the US, raising hopes of an early global economic recovery. Accordingly, stock markets rallied spectacularly last week, with the BSE Sensex and the Nifty rising by about 12% and 11% respectively. In fact, this uptrend began much earlier on March 9, and since then, the Dow Jones, the BSE Sensex and the Nifty have risen more than 20%, underlining the cautious optimism that has seeped into the markets. The optimism is clearly shared by the FIIs, which have been net buyers worth Rs2,400 crore in the Indian markets during the same period. With the US bank rescue plan in place and recent indications that major banks had operated profitably in the first two months of 2009, global investors may believe the worst is over for US banks, even as economists fiercely debate over the effectiveness of the plan.

So what does the plan entail? Well, its objective is to rid banks’ balance sheets off toxic assets and illiquid loans, thereby enabling them to start lending once again. The Treasury, in conjunction with the Federal Deposit Insurance Corporation (FDIC) and the Federal Reserve, announced the “Public–Private Investment Program” as part of its efforts to cleanse balance sheets across the financial system and ensure credit availability to households and businesses.

The Federal Government would use US$75-100 billion from the Troubled Asset Relief Program (TARP) and capital from private investors to generate US$500 billion in purchasing power to buy out troubled assets. The investment programme would have the potential to expand to as much as $1 trillion over a period of time, according to the US Treasury. The participation of long-term investors, such as individuals, pension plans, and insurance companies would be particularly encouraged. The “Public–Private Investment Programme” would be designed around three basic principles—maximizing the impact of each taxpayer dollar, shared risk and profits with private-sector participants, and private-sector price discovery.

Meanwhile, back home, the annual inflation was reported at 0.27% for the week-ended March 14. While, technically, we are close to deflation levels, there is little to indicate that we would undergo the pains of a typical deflationary scenario.

To see full report: KARVY BAZAAR BAATEIN

>TRADE WINDS (KARVY)

30 March 2009 to 05 April 2009

Five potential positives for our markets…

The worst financial crisis in the global economy is likely to present a wonderful opportunity for those who have the conviction and courage to participate in the markets using calculated risks. The unprecedented efforts by governments across the globe and the coordinated action by major central banks in the form of stimulus packages, tax cuts, reduction in interest rates, and infusing liquidity into the system were aimed at getting the global economy back on track. The actions are likely to pave the way for a recovery in the global economy as well as a rally in global stock markets.

The following are some of the key positive factors that could contribute to the rally in stock markets.

■ Increased government spending: The governments in major economies like the US, European Union, Japan, China and India have increased spending on infrastructure, which is likely to trigger demand in auto, cement, construction, and capital goods sectors. The measures announced by policymakers to revive the housing market are likely to bear fruit in the next few months and is likely to boost the positive sentiment in the markets.

■ Reduction in tax rates: The Indian government has taken several measures in the form of reduction in excise duty and service tax as a measure to stimulate demand in the country. The US fiscal package signed by Obama includes tax cuts for the middle-income group in an effort to boost the economy by leaving more money in the taxpayers’ hands.

■ Lower inflation and interest rates: The global economic slowdown has brought down inflation to all-time low levels. The fall in demand for crude oil, metals and other commodities has led to lower inflation across the globe. Inflation in India has come down to 0.27%, triggering concerns over the emergence of a deflation, although there is little to indicate that India will undergo the pains of a typical deflationary scenario.

■ Increased consumer confidence and spending: Consumer confidence will be boosted once the results of these stimulus packages reach the end-user. Also, credit availability at much lower interest rates to corporates will ensure timely ongoing expansion plans. The political stability in the US has brought clarity in regard to its policies. In India, too, clarity will emerge on various policies and economic issues once the new government is formed. A clear policy environment will improve and facilitate consumer confidence.

■ Growth in EPS and FII inflows: The above factors will enable companies to maintain profit margins and increase sales. This will lead to rise in net profit and EPS. The Sensex EPS growth will attract FIIs (foreign institutional investors), besides investments by DIIs (domestic institutional investors), such as mutual funds and insurance companies, which channelize the domestic savings into stock markets.

To see full report: TRADE WINDS

>South Indian Bank (BONANZA)

Company Background
Thrissur (Kerala) based South Indian Bank (SIB) is one of the earliest banks in South India, came into being during the Swadeshi movement in 1928. It is mainly a strong regional player in South India. The Bank has grown gradually steadly. Presently, it has a branch network of 537 branches (including 17 extension counters), all with CBS technology.

Highlights
• The bank has shown decent performance. Its profits have grown very well, from Rs.8.7 Crore in FY 2005 to Rs.153.39 Crore in FY 2008, a growth of 260% compounded. It has also shown very good improvement in Assets quality. Its Net NPA stand at 0.4% presently, down from 3.81% in FY 2005.

• SIB has been paying dividend regularly. At current price the dividend yield works out to be 6.5%, if dividend payout of Rs.3/Share is maintained.

• Bank gave 1 for 4 Bonus in Q3 FY 09.

• Bank has maintained its PLR at 16%. This should improve the net interest income for the bank.

• The bank has high capital adequacy ratio of 14.62%.

• SIB has good market share of large South India based NRIs and their families in India. It serves the niche market due to its decades old relations in specific regions. About 24% of bank’s business is from NRI market.

• SIB is a very good M&A target, due to no dominant promoter group and strong presence in South Indian market.

To see full report: SOUTH INDIAN BANK

>Macroeconomic Research (FIRST GLOBAL)

Food for Thought: Will the rate cuts help?

Benefits of earlier rate cuts yet to percolate down the system & help arrest economic slowdown…

Is the headroom from low inflation for further rate cuts merely theoretical…

The Story…

The Reserve Bank of India (RBI) has been on a rate-cutting spree, along with most other Central banks of the world. Lately, it has lowered its policy rates, the Repo rate (the rate at which RBI lends short-term funds to banks) and the Reverse Repo rate (the rate at which overnight funds are parked with it), under the Liquidity Adjustment Facility (LAF), each from 5.5% and 4% to their new levels of 5% and 3.5% respectively. Before the rate-cutting cycle started, the Repo and Reverse Repo rates were at 9% and 6% respectively. The RBI has maintained its status quo on the Cash Reserve Ratio (CRR), the amount of cash balances parked by banks with it as a percentage of the net demand and time liabilities, at 5% since the last cut by 50 bps.

The easing of RBI’s monetary policy began from October 2008 onwards and so far, it has slashed the Repo rate by 400 bps, the reverse Repo by 250 bps, and the CRR by 400 bps. The RBI’s key aim behind the cuts is to signal banks to lower their lending and deposit rates and shed their risk aversive approach by passing on the benefits of the easing of its monetary policy to the productive sectors in order to stimulate demand and increase confidence in the economy. The lowering of the reverse Repo rate lowers the incentive for banks to park their surplus funds with the RBI on its LAF window, as a result of which, banks are expected to cut their lending rates. Though banks have reluctantly reduced their PLR rates, with the benefits of these cuts have not really percolated down the system and arrested the economic slowdown, as evident from the continuous negative data coming in. In April’08-January’09, the IIP growth stood at 3%, which is almost one-third the growth of 8.7% recorded during the same period in same period in the previous year, due to the slowdown across all the key sectors. Exports have recorded a decline for four consecutive months from October 2008 to January 2009. Theoretically at least, the low wholesale price inflation provides the RBI with sufficient headroom to extend rate cuts in the absence of any fiscal measures during the code of conduct period.

■ The Inflation provided monetary policy cushion may be illusory : The WPI inflation is expected to touch 0% to a negative 1.3% by the end of March 2009 and shall remain negative till October- November 2009, mainly due to the double-digit base effect. While part of the reason for the discrepancy between the WPI and CPI is the lag effect, the differences in the basket weights are also to blame. Food inflation, for instance, remains fairly high even in the WPI basket. This means that an easy monetary policy may not be a costless proposition.

■ Bond yield movements: The RBI’s borrowings have already surpassed the targeted levels by 80% to Rs.2.61 trillion for FY09 vis-à-vis Rs 1.45 trillion in FY08. As a result, the long-term (20-year and 30-year) and medium-term (5-year and 10-year) G-secs have lost their attractiveness, based on the expectation of a deluge of G-secs entering the market in the coming months. Rate cuts and falling inflation alone cannot ensure a softening in the soaring medium and longterm G-sec yields and it is only consolation in the form of the RBI’s decision to purchase Gsecs under OMO that could provide the much-needed relief.

■ Key sectors that may benefit:

• Auto: The policy rate cuts will signal banks to provide cheaper finance to these segments in order to help stimulate consumption and help the ailing Auto sector. Hence, banks could further lower their lending rates for these segments.

• Banking: Instead of sitting on idle cash, banks can choose to lower their lending rates in the coming months and also reduce their deposit rates, primarily to improve margins. The trade-off here will depend on how the government bond rates move.

• Real Estate: Since the interest rates have already been reduced significantly, the possibility of a further cut in lending rates appears unlikely, unless banks lower their deposit rates from the current 8.5-9% level.
  

■ Conclusion: We maintain our view that another cut in the policy rates by the RBI is imminent, though the exact timing of these cuts cannot be predicted, as inflationary pressures will vanish in the next two months and provide more room for such rate cuts.

To see full report: MACROECONOMIC RESEARCH

>Hero Honda Motors (KARVY)

Way ahead of the competition....

Hero Honda Motors Limited (HHML) is the undisputed market leader in the domestic two wheeler industry with 48.6% share (59.4% market share in domestic motorcycle segment). We believe HHML would benefit from Bajaj Auto Ltd’s (BAL) change in strategy to focus on 125cc+ segment as the sub 125cc segment still accounts for majority of domestic sales volume. HHML has a strong presence in the rural and semi urban market which is expected to perform in the current economic slowdown. On back of margin improvement and tax benefits from the new plant the company is expected to continue its strong earnings growth for the next two years. We are optimistic about HHML's future prospect and therefore we initiate coverage on the stock with an Outperformer rating.

HHML to continue its dominance in the domestic motorcycle segment: HHML has a strong presence in the sub 125cc segment and is expected to further strengthen its position in this segment on back of BAL's shift in focus from the 100cc segment to the 125cc+ segment. HHML would take advantage of the benefits ushered to the rural economy through its strong rural distribution network and thereby survive the current difficult economic scenario. Furthermore, the company's higher dependence on cash sales (relative to its peers) would facilitate strong performance vis-à-vis its peers in the current high credit risk situation. Improvement in EBITDA margins: HHML's margin is expected to improve on account of cooling off of raw material prices and excise duty benefit. Major raw material like steel and aluminium which accounts for ~75% of the total raw material cost have been on a declining trend since the past few months. Due to lowering of excise duty by the government and excise duty exemption at Haridwar plant the effective excise duty is expected to come down significantly. We expect the company to report EBITDA margin of 13.8% and 14.0% for FY10E and FY11E respectively.

Haridwar plant to help boost bottom line: During FY09, HHML started production at its 0.5mn unit capacity plant at Haridwar (Uttaranchal). Haridwar plant offers various fiscal benefits which include 100% excise duty exemption for 10 years and 100% income tax exemption for the first 5 years and 30% for the next 5 years. Due to lower effective excise duty and lower effective tax rate, net profit is expected to grow at CAGR of 19% over FY08- FY11E as against 10.4% expected CAGR growth in revenues during the same period.

Valuations: HHML is the market leader in the Indian two wheeler space having presence in all the significant sub segments and categories. Better EBITDA margin and lower tax rate would help the net profit to grow strongly at a CAGR of 19% over FY08-FY11E. HHML is a debt free company having cash reserves of Rs27bn and the same is expected to double by FY11E. HHML enjoys strong return ratios with FY08 RoCE and RoE of 49.2% and 35.5% respectively. HHML is trading at 15.6x and 13.3x its FY10E and FY11E estimated earnings respectively. We initiate coverage on the stock with an Outperformer rating and value the stock at Rs1,250 (15.3x its FY11E EPS of Rs81.7). In our view, HHML’s high return ratios, strong balance sheet, double digit earnings growth, negative working capital cycle, positive net cash flow and huge cash reserves justifies the premium valuations assigned to the stock.

To see full report: HERO HONDA

>Bharti Airtel (MERRILL LYNCH)

Cutting margins; growth still strong

Earnings & PO cut by 4-10%; still offers strong growth - Buy
We have cut Bharti’s FY10E & onwards earnings by 4% & lowered our DCF-led PO to Rs715/sh (-10% vs earlier). Despite the PO and earnings cut, we believe Bharti remains one of the strongest growth stories in AsiaPac & offers ~20% YoY EPS growth potential at a PE of ~11x FY10E. This compares with local market PE valuation at ~11x FY10E for no YoY grwth expected & avg. AsiaPac-wireless PE of ~10x CY09E for ~3% YoY earnings fall. We expect Bharti to sustain ~15-20% LT earnings growth despite new competition.

Margin hit: USO deferral, lower termination, pot’l SMS cut
We have cut wireless FY10E-11E EBITDA margin by ~70bps vs earlier, to 30.1%. This reflects 1) reported deferral of USO concession by the government (assumed to be ~100bps for Bharti), 2) lower termination charges (10p cut) announced earlier (~40bps margin hit) and, 3) potential cut in roaming SMS tariffs (~30bps margin hit). These factors coupled with competitive pressures will likely offset the margin cushion (~100bps) from stable spectrum charges.

Government defers USO concession
As per media reports, today, the government has decided to defer the USO concession that was scheduled to apply from April 2009 onwards. Earlier, in Oct ’08, the government had announced 200bps concession in USO levy (part of licence fee) on achieving >95% coverage of a service area. We had assumed that Bharti would qualify for the concession in ~50-60% of its coverage area.

Revised estimates safe unless usage collapses
We think our FY10E earnings forecasts are safe as they imply virtually no usage elasticity (flat MoU/sub YoY) despite f’cast 12% decline in tariffs (rpm). Our industry feedback so far, post RCom’s GSM launch, suggests that tariffs are not seeing major pressure (-1-2% QoQ) & usage (MoU/sub) maybe down ~2-3% QoQ

To see full report: BHARTI AIRTEL

>Alpha Bet Strategy (KOTAK SECURITIES)

Switching it on. We initiate four new trades-(1)long RIL, short GAIL on positive catalysts for one versus none for the other, (2)long REC, short PEC on lowering of valuation differential, (3) long Ultratech cements, short ACC on market share gains, cost leverage and valuations and (4)long IBREL, short DLF on contrasting business developments.

■ Trade 1: Long RIL, Short GAIL-Relative potential triggers in the near team
We recommend a long Reliance Industries(RIL), short GAIL pair trade given relative catalysts for the stocks which will determine the performance on the near term. We see potential triggers for RIL on account of (1)availability of income tax exemption for gas production, (2)availability of gas for internal consumption and (3)disclosure of reserves. We do not see any positive triggers for GAIL in the near term, which will result in muted stock performance.


■ Trade 2: Long Ultratech, short ACC-Growth for a song
We recommend a long Ultratech Cements, short ACC pair trading offering 10% returns on the following-(1) unjustified valuation premium of ACC trading at US$87/ton on FY2010E production relative to US$77/ton for Ultratech; (2)declining market share of ACC versus gains for Ultratech and (3)cost leverage available from switch over to coal-based captive power plants will reflect in better March 2009 quarter performance versus ACC.


■ Trade 3: Long REC, short PFC-Valuation differential to narrow
We recommend a pair trade of long Rural Electrification Corporation(REC) and Short Power Finance Corporation(PFC) based on the 20% valuation gap between the two despite the two superior ROE profile of REC. REC trades at 1X FY2010E PBR versus 1.2X PBR for PFC.


■ Trade 4: Long IBREL, short DLF-Contrasting business developments
We recommend a pair trade of long India Bulls Real Estate(IBREL) and short DLF on account of (1) IBREL trading a higher discount(52%) to the NAV versus DLF(42%); our comfort on NAV of IBREL is higher, (2) leasing concerns of INREL's Mumbai commercial properties will reduce in the near term while business concerns for DLF will persist for atleast three quarters and (3) we expect weak March 2009 quarter performance from DLF.

To see full report: ALPHA BET STRATEGY

>KEC International Ltd. (RELIANCE MONEY)

Encouraging domestic order inflow during Q4FY09
During the 4th quarter of FY09, KEC International Ltd (KEC) has seen addition of seven significant orders largely from domestic markets. The management earlier in post Q3FY09 results conference call had indicated the company intended to increase focus in domestic market. In Q4FY09 KEC received domestic orders to the tune of ~Rs.12.5bn as against Rs.11bn in Q3FY09 (out of which Rs.8.8bn were export order). We remain impressed with the order inflow and remain confident about earnings for FY09E and FY10E. But the major risk we foresee is possibility of lower order inflow during Loksabha election period.

Easing of input material cost and interest rates
The key input raw materials like steel, copper, aluminum etc have corrected significantly from the highs during 1st Quarter of FY09. Steel Billets prices have fallen by 24.5% from the high of Rs.40025/Tonne during April’08 to Rs.30200/ Tonne in Feb’09. Similarly RBI has cut repo and reverse repo rates for three times during last 6 months which has resulted in reduction in interest rates by most of the banks. We expect the company will able to improve its profitability with these positive developments.

Order inflow uncertainty foreseen during 1st Half of FY10E
As 15th general elections are near the corner, the first half of FY10E is expected to be muted in terms of new order inflow both from state and central utilities due to funding arrangement and other regulatory issues.

Well equipped to compete in current scenario
Domestic market is likely to witness high competition and due to which the margins are likely to come under pressure, which is expected to intensify further as bigger players like BHEL are also expected to enter the market. We believe KEC is better equipped with its planned tower capacity of 200,000 MT and established execution skills for this competitive scenario.

Business Outlook and Valuation
KEC currently has a healthy estimated outstanding order book position of ~Rs.54.5 bn. We continue to remain cautious in terms of new order inflow from international market as well as domestic market during the 1st half of FY10E. At current market price of Rs.144, the stock is currently trading at P/E of 4.2x and EV/EBITDA of 3.9x of its FY10E earnings. We maintain our HOLD recommendation on the stock with target price of Rs.147.

To see full report: KEC INTERNATIONAL