Tuesday, April 28, 2009

>Crude down 2% as swine flu hits economy sentiment

Singapore - Crude oil futures fell more than 2% Tuesday in Asia as rising concerns over the impact of swine flu on the global economy kept traders cautious, damping buying interest.

Sentiment is also under pressure on expectations oil stockpiles held in the key U.S. market will stay well above seasonal levels.

The American Petroleum Institute industry group will put out weekly oil statistics at 2200 GMT, ahead of Wednesday's official data release from the federal Energy Information Administration.

"The trend is going to be downward...I think there's room to (fall) further. Sentiment is weak," said Ken Hasegawa at Newedge Japan.

On the New York Mercantile Exchange, light sweet crude futures for delivery in June traded at $49.04 a barrel at 0655 GMT, losing $1.10 in the Globex electronic session.

June Brent crude on London's ICE Futures exchange fell $1.21 to $49.11 a barrel.

Oil prices on both sides of the Atlantic tumbled Monday as the spread of swine flu from Mexico fueled uncertainty over the prospects for an economic recovery and by extension, the outlook for energy demand.

The World Health Organization raised its alert level overnight, with confirmed cases of infection in the U.S., Europe, New Zealand, Canada and the epicenter Mexico, where the suspected death toll climbed to 149. Several Asian countries also reported suspected cases, triggering risk aversion Tuesday across markets.

"It's possible for the market to drop to $45 a barrel" within the week, Hasegawa said.

The EIA, in its Weekly Petroleum Status Report due Wednesday, is expected to post an eighth straight weekly increase in crude stockpiles and only minor changes for products, which are above five-year average levels.

Commercially held crude inventories are expected to have climbed 2.3 million barrels in the week to April 24, according to the average prediction from six analysts polled by Dow Jones Newswires.

Stocks previously stood at 370.6 million barrels, the highest since September 1990.

Gasoline stockpiles may have declined by 300,000 barrels while distillates, which include heating oil and diesel, probably increased by 200,000 barrels, the survey showed.

Refinery utilization rates are likely to average 83.4% of capacity, unchanged on week.

Meantime, oil traders will also take their cues from movements in the dollar as well as equities, analysts said.

So far Tuesday, Asian share markets were mixed, with airline and tourism-related stocks staying weak.

The greenback fell to a fresh four-week low against the yen, which in theory should support the demand for dollar-denominated commodities, although the mood was cautious.

"Oil will be more decisive in following financial guidance lower rather than higher going forward, given decidedly bearish fundamentals," Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates, said in a note to clients.

A two-day policy meeting of the U.S. Federal Reserve under way Tuesday could further lend direction, he added.

At 0650 GMT, oil product futures also lost ground.

Nymex heating oil for May slipped 169 points to 130.60 cents a gallon, while May reformulated gasoline blendstock traded at 138 cents, 132 points lower.

Both May contracts will expire at Thursday's settlement.

ICE gasoil May changed hands at $417.50 a metric ton, down $3.50 from Monday.



Life above 200-DMA....

IDFC is doing a balancing act around the 200-DMA. Technically, the 200-DMA is a critical level above which the bulls take charge and below which, bears look to take advantage. Reamrkably, the stock is testing its 200-DMA after May 2008.

On the daily chart (as shown in this report), the stock has been trading in a rising channel from a low of Rs44 in early March 2009, thus indicating strong build up in the stock. In fact, a detailed study of the daily chart suggests that stock has given a breakout past its 6-month resistance line with heavy volumes. In the same period, the stock made three attempts to break the resistance but failed. On Tuesday, it finally broke the crucial level with highest volumes in April 2009. Even if it declines from the current level, the short-term moving averages should act as a strong support for the stock.

IDFC was listed on the bourses in August 2005 at Rs 60, 76% premium to its issue price. Thereafter, it fell to a low of Rs44 in July 2006. Between July 2006 and January 2008, the stock saw a rally up to the levels of Rs229. A worldwide fall out in global financial markets brought IDFC back to the levels of Rs45 in October 2008. Since then, the stock has bounced back at several occassions from the critical support levels.

We believe the stock has formed a nottom at Rs44-45 levels. Rebound from here is in progress and further upside cannot be ruled out. Technical charts are appearing interesting from a long term view. The longer term target for the stock is above Rs 100, and corrections should be used as entry points. The near-term support is at Rs 56. We recommend traders to buy the stock in the range of Rs70-78 for a target of Rs 100 and Rs 105.

To see full report: IDFC

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty near month witnessed closure of long positions to the tune of 3.17 million shares whereas the May series added 5.60 million shares in OI. With the May futures premium narrowing from 10.30 points to 8.45 points we feel few long positions have been added at lower levels in yesterdays session. No aggressive long rollovers are witnessed in Nifty since

past couple of sessions

• The options data shows addition of 11048 contracts in 3500 call followed by 9760 contracts addition in 3600 call while unwinding of 9762 contracts was seen in 3300 call. The IVs of all options have surged since the overall volatility in market has risen. Some call writing
was seen in 3600 call whereas short covering was seen in 3300 call. On the other hand, accumulation of 13039 and 19356 contracts was seen in 3400 and 3500 puts where we feel some put writing could have happened at 3400 level. Almost all other puts witnessed unwinding in OI. The 3400 put with 4.80 million shares may continue to hold as a decent support for Nifty on closing basis in today’s session

• FII Index options depicted a rise in OI by 4.36% along with a net buy of Rs 831 crores

To see full report: DERIVATIVES 280409

>Daily Calls (ICICI Direct)

Sensex: We said, "Previous resistances can attract profit-booking ... However, till Friday's low holds, positive bias should continue ... " Gap-down opening held Friday's low, encouraging recovery to previous highs, where profit-booking was seen. While Sensex ended flat thanks to ICICI Bank, Realty lost 2.7%. A/D turned -ve.

The action formed a bull candle but with an upper shadow, which is indicating suspected profitbooking at previous resistance. Monday's profit-booking got absorbed without violating Friday's low. Today, see if any profit-booking can hold Monday's low of 11176. Positive if it does, else Green support line can be tested.

To see full report: CALLS 280409

>Daily Market & Technical Outlook (ICICI Direct)

Key points
Market outlook — Open flat on mixed global cues
■ Positive — FIIs & MFs Buying
■ Negative — Swine flu dampens economic outlook

Market outlook
■ Indian markets are likely to open flat, taking cues from the global markets. Asian markets were mixed in the morning trade on fear that an outbreak of swine flu could become a pandemic brought a new threat to the global economy, just as some economic indicators appeared to be bottoming out. The World Health Organisation is moving closer to declaring the first flu pandemic in 40 years as more people are infected in the US and Europe. Rupee is expected to ease for a second consecutive day on Tuesday due to month-end demand for dollars from oil refiners, and traders will be looking to the stock
market for direction

■ The Sensex has supports at 11180 and 11080 and resistances at 11490 and 11600. The Nifty has supports at 3440 and 3390 and resistances at 3515 and 3550

■ Asian stocks advanced, overshadowing declines among the region’s commodity producers. Nikkei increased 38.5 points, or 0.4%, to trade at 8,764.9. Hang Seng rose 55.1 points, or 0.4%, to trade at 14,895.5

■ US stocks fell on Monday on concerns the spreading of a new strain of flu could dampen optimism about the economy, overshadowing a sweeping overhaul of General Motors Corp and gains in biotechnology stocks. The Dow Jones fell 51.29 points, or 0.64 %, to 8,025.00. The S&P 500 dropped 8.72 points, or 1.01 %, to 857.51. The Nasdaq shed 14.88 points, or 0.88 %, to 1,679.41

■ Stocks in news: 3i Infotech, Mirc electronics, Omaxe, Sun Pharma, Glenmark Pharma, ONGC

To see full report: OPENING BELL 280409

>Smart Ideas (LKP SHARES)

MAY 2009

Focus Issue of the Month

We have analysed the composition of India's GDP and attempted to present the opportunities in each of the components in the wake of the ongoing slowdown in the focus issue for this month.

Company Reports

Integrated business model with robust order booking, which in our view should grow, going forward as revenues from government contracts start kicking in and the company would strengthen its market leadership. BIL growing at 75% and trading at 5xFY09E is an attractive investment bet.

With a dominant position in the railway haulage business we expect Concor to benefit from the growth in the logistics space driven by port capacity additions.

We expect the domestic rural demand to partly offset the lower growth in overseas business going forward given its large share in the ruralmarket and niche positioning.

FAG Bearings
Most profitable and de-risked bearing company trading at 4.5xCY'10E earnings is well placed to capitalize on an upturn in demand from its well diversified user industries.

The market leader in tyres should be done with the higher raw material inventory this fiscal and in our view the first half has seen the worst at MRF.

MIC Electronics
The pioneer in LED having seen the worst of the global credit crunch on its overseas business is beefing up its product offerings for the emerging opportunities in India.

SKF India
Investment phase in a highly challenging business environment would in our view enable the market leader to reap the benefits from next fiscal onwards.

Although gas supply and tariff structure regulations remain a concern, we believe that newer sources of gas supply would add to the top-line and we remain optimistic.

To see full report: SMART IDEAS

>Reliance Industries (BNP PARIBAS)

All priced in: time to get out

Recent rally overdone – no major catalysts lined up

RIL’s shares have gained 43% YTD, compared with the BSE Sensex at 15%. During this time, the gas sale ban on RIL has been lifted and the company has had favorable pricing of USD4.20/mmbtu to sell the gas (reflected in our TP). In addition, the company successfully started gas production and commenced sales from Reliance Petroleum Ltd (RPL). We believe all the above positives are priced in the shares at current levels. The current price factors in GRMs of 13.0/bbl and Petchem EBIT margins of 13.3%, which are significantly higher than our expectations, and also do not tie in with the global outlook for the refining and petchem businesses. For FY10, we expect consolidated GRMs at 9.5/bbl and petchem margins of 10.3%.

In-line quarter; no positive surprises
RIL reported its 4QFY09 results in-line with our estimates with PAT coming in at INR38.74b versus our estimate of INR38.53b. RIL’s GRMs came in at USD9.9/bbl versus our expectation of USD11/bbl. In our view, the GRMs were disappointing considering there was little crude volatility for 4QFY09 and lack of meaningful inventory losses as seen in
3QFY09. However, the weakness in refining was more than offset by the petchem business, which saw ~4% q-q increase in EBIT while the EBIT margins jumped from 13.1% for 3Q to 17.7% for 4QFY09 led by a combination of price increases and inventory valuation gains. Overall, the petchem business offset the weakness in refining.

Valuation – limited case for upside to TP
We are downgrading RIL to a REDUCE rating, primarily on the back of recent rally which we believe fully prices any near-term catalyst. Our TP goes up to INR1,450/share from INR1,322/share accounting for USD4.20/mmbtu for the entire production and change in house crude and currency estimates. We estimate GRMs of USD9.5/bbl and Petchem EBIT margin of 10.3% for FY10. We value the refining and petchem business at 6x EV/EBITDA, which is at the high-end of trough multiples for refiners and petchem companies as seen in the previous downcycles. We do not assign any option value to any block, wherein production/reserve news flow is not expected in the next 18-24 months.

To see full report: RIL

>Special Report: (ECONOMIC RESEARCH)

Magnitude of the declines in global growth during recessions: What explanations?

We will study the scale of the shortfalls in global growth during recessions, and we try to understand why this shortfall is so substantial during the current crisis.

What explanations can we think of?

− the greater correlation of economies due to greater global trade;

− the higher level of indebtedness, which requires more substantial deleveraging during recessions,
especially as the indebtedness is linked to asset prices;

− the inefficiency of monetary policies, due to the high level of indebtedness;

− the transmission of the crisis via finance.

To see full report: SPECIAL REPORT


Strategic Direction – Finally?

Strategic direction – signs of a more prudent, and return-oriented one — ICBK does appear to be following in deeds (and words) a more prudent, returnoriented and ‘market palatable’ strategic direction. This is showing through in better margins, lower/negative growth, signs of asset quality and balance-sheet mix management, and apparently greater respect for capital (while not closing out the growth option). There are gaps – off-shore strategy remains debatable, asset risks/funding gaps could widen and the new strategy could be environment induced (reverts, when economy turns); but combined with a meaningful management revamp, we are more positively biased than skeptical.

Asset deterioration continues, but is not worsening — ICBK continues to see almost 2.5%pa deterioration; poor and lags industry, but retail appears to be stabilizing (in-line with industry trends). There is 1.5% of new restructured loans (not a big surprise); we do see further deterioration (management cautious on outlook), but would not expect ICBK to lag industry here-on.

P&L disappoints, but there are positives — 4Q09 profits are down 35%, and 12% below our estimates; primarily on weak fee incomes (-30% yoy, flat qoq), and possibly suggesting some recent franchise damage. But margins have bounced 20bps qoq, and management has put out a robust medium-term outlook (well grounded too); ICBK’s core profitability problem being addressed?

Maintain Buy, High Risk — If ICBK were to continue down its espoused strategic path (with some tweaks and changes), and gets support from the economy; it could well retrieve more of its lost profitability and valuations.

To see full report: ICICI BANK

>Oracle Financial Services Software Ltd. (BONANZA)

Company Background
Oracle Financial Services Software Ltd (OFSS) is a world leader in providing products and services industry. The company has a host of products that offer a gambit of solutions and services for the BFSI segment

Investment Rationale
Growth in Turbulent economic condition: ‐ OFSS would witness growth of nearly 60% in FY09 over the topline of FY08. The company, which is a leader in financial services software, has been able to maintain a robust growth despite a slowdown in the industry that is its chief client. The increase in revenue vindicates company’s software solution prowess for financial institutions.

Strong product pipeline: ‐ Company has a strong product pipeline that commands premium in the BFSI industry. OFSS’s Flexcube suite of product is a market leader and its products have more than 320 clients world over. Its other products such as Reveleues and Mantas are also well received in the industry. Going forward, we expect the company’s new products such as daybreak etc would rake in more revenues for the company.

Growth from key area of software products robust: ‐ The Company has witnessed a robust growth in its product business, which includes product licensing. The products business, which is a high margin business and adds significantly to the bottom line, has witnessed good growth. The company has witnessed 33.3%.

To see full report: OFSS

>India Steel (Deutsche Bank)

Global steel production down 24% YoY

Global crude steel production declines for the seventh consecutive month...
The cavalry of global steel production cuts continued for seventh consecutive month with a 24% YoY decline in global crude steel production in Mar'09 taking cumulative decline for 1QCY09 to 23% YoY. EU and North America continue to stand out as regions with the most aggressive supply response with YoY production decline of 45% and 52% respectively in Mar'09. China is the only major region that has defied global trends with only a marginal decline of 0.3% YoY in crude steel production in Mar'09.

…But global steel pricing remains weak
Though the global production response has been very aggressive, we are yet to see any sustainable recovery in global steel prices. Our global steel pricing table (Page 3) shows a WoW decline across all major world geographies. Our global team recently cut the HRC price forecasts for U.S. and Europe by an average of 14% in 2009 and 7% in 2010 to reflect market surpluses and reduced costs.

Demand scenario in Europe remains weak; more production cuts required
While Europe has been quite aggressive in reducing steel production – down 44% in 1QCY09, our global steel team believes that it lags US in the inventory destocking cycle and more production cuts are likely required to restore the demand supply equilibrium. Arcelor Mittal has already guided for the continuation of its steel production cuts in Europe into the second quarter in response to the exceptionally weak economic conditions.

Marginal capacity in China remains the key focus area
China continues to stand out as the only major region in the world that has not participated in the global steel production response. The importance of China in the present scenario can not be over emphasized given that its contribution to global crude steel production has increased to 49% in 1Q’CY09 from 38% in CY08. The flexible excess capacity in China remains nimble in responding to the fluctuating cash margins. Though our Chinese steel analyst estimates that the cash margins are negative now, he also expects the cycle to repeat itself over the
course of 2009.

Reiterate SAIL as top pick
We continue to prefer SAIL (SAIL.BO, INR108, BUY) as our top pick in the Indian steel sector. The high exposure to domestic demand and low risk government funded projects provides visibility over SAIL’s ability to push volume sales. Also, strong balance sheet and net cash position removes any refinancing risk. We value SAIL on a FY10 EV/EBITDA of 2.7x leading to a TP of INR108/share. Tata Steel (TISC.BO, INR263, HOLD) remains a Hold with its high exposure to the weak. European steel market through Corus and highly levered balance sheet. We have a TP of INR192/share for Tata Steel based on SOTP valuation. A protracted downcycle in steel remains the biggest downside risk factor. (See page 4 for details on valuation and risks).

To see full report: INDIA STEEL

>FMCG Snippet (CLSA)

Price cut to help maintain volumes & prevent consumers from down trading to cheaper brands…

Margins in Soap & detergent segment to remain intact…

The Story....

The recent announcement of a price cut by FMCG giant, Hindustan Unilever Ltd. (HUVR.IN) (HLL.BO), in order to provide a boost to its volumes, was very much in line with our expectations…

“With the inflation in input costs beginning to recede and prices of key FMCG inputs, such as
palm oil, LAB and packaging material climbing down significantly in the past two months, we believe that HUL will pass on the benefits of the softening in commodity prices to consumers, which will result in a surge in the company’s volumes, going forward.”

(From First Global’s, “Hindustan Unilever Ltd. ((HUVR.IN) (HLL.BO): Passing on of benefits of softening of commodity prices to drive volumes; reiterating Moderate Outperform”, dated February 4, 2009).

Since the benefit of lower commodity prices and consequent price cut was predicted and modeled in, our estimates for HUL remain unchanged. The ongoing recession, which has already led to a reduction in discretionary spending, is now making consumers increasingly price-value conscious even in the case of their daily necessities. HUL has chosen to reduce prices in the lower and mid segment over the premium segment, as the former is comparatively more price sensitive. Moreover, the intense competition from local players in
the soap & detergent arena is keeping HUL on its toes on the price front. In several cases, HUL has opted to increase the package weight/volume, thus bringing down per gram costs, instead of directly reducing prices. It has increased the weight of its Wheel Green detergent powder packet by 50 gm, while the weight of its 115 gm Lifebuoy toilet soap has been increased to 120 gm, resulting in a benefit of 8.3%% and 4.2% for consumers respectively. HUL’s bold move appears to have kicked off a price war, with P&G also taking a price cut of 19.35%, to Rs.50, on its 750 gm pack of Tide detergent. We believe that the price cut will help HUL maintain its volumes, which had declined sharply in Q4 FY09, and also prevent consumers from down-trading to cheaper brands, though the company’s margins in the Soap & detergent segment will not get affected materially.

Cutting prices to lure consumers…
At the beginning of Q1 FY10, which is the peak period for soap & detergent sales, HUL has raised the weight of its Stock Keeping Units (SKUs) instead of changing the price point, as raising prices again after cutting prices could negatively impact sales. Also, companies like to stick to ‘round-number’ pricing like Rs.10/-, Rs.25/- etc. Hence, HUL has increased the weight of Wheel Green detergent powder by 50 gm, but has kept its prices unchanged, while the weight of Lifebuoy toilet soap has been increased from 115 gm to 120 gm without changing its existing price of Rs.15 per piece. Thus, HUL has passed on a relief of 8.3% and 4% on Wheel and Lifebuoy respectively to consumers. The strategy behind the price cut is to enable the company ride out the recession and at least maintain its volumes by retaining
consumers through attractive prices.

To see full report: FMCG SNIPPET