>Daily derivatives (ICICI Direct)

Derivative Comments

• The Nifty May series added 2.60 lakh shares in OI with rise in price by 0.22%. The OI activity was negligible in Nifty futures

• The options data shows addition of 10036 contracts in the 3600 Put followed by 6236 contracts addition in 3500 Put. Nearly 4600 contracts got added in the 3200 Put. The IVs of all these Puts have risen by 1.5 to 2 basis points and the current Put IVs are above 50. However, the Put volumes have not increased substantially suggesting some Put buying in these Put options. This buying could also be on account of “portfolio hedging”. On the flip side, 10773 contracts got added in the 3800 Call where the IV has moved from 46.18 to 47.66. The 3900 Call added 4204 contracts with stupendous rise in volumes. All these indicate that some Call writing has happened in 3800 and 3900 strike price Calls. With 2.87 million shares in OI, the 3800 Call stands as the largest Call OI base. However, the Put base of 2 million shares in OI in the 3600 Put suggests this level may continue to act as a support for the Nifty on a closing basis

• Some short positions to the tune of Rs 261 crore were formed by FIIs in Index futures

Technical Outlook

• The Nifty closed flat after a volatile session. Profit booking was seen at higher levels as expected. On the sectoral front, the realty index gained more than 8%, followed by metals and banking gaining 2-3% each. The IT and FMCG sector indices faced profit booking

• The Nifty formed a ‘Doji’ after previous two bull candles, which suggests indecision around 3700
levels. The Nifty holding the levels of 3620-3600 would be positive for intra day. However, failure to hold these levels may result in further profit booking. On the higher side, 3730-3750 remains the short-term target

• The Nifty spot has supports at 3620, 3570 and resistances at 3680, 3730

• FIIs were net buyers to the tune of Rs 508 crore whereas DIIs were net sellers to the tune of Rs 129 crore in the cash segment

To see full report: DERIVATIVES 060509

>Daily Calls (ICICI Direct)

Sensex: We said, "Index now moves closer to previous crucial levels of earlier years, all between 12316 and 12671 ... profit-booking at higher levels cannot be ruled out." Index did correct over 170 points on profit-booking before closing flat. Realty Index outperformed with 8.6% gain. A/D ratio cooled down, though it held +ve 3:1.

The action formed a High Wave pattern, indicating a pause on suspected profit-booking. Bulls will be interested if the Index today trades strongly above its head at 12198. Failure to achieve that can see further profit-booking, especially if it breaks High Wave's low of 11985. Larger trend remains positive above the Green line.

To see full report: CALLS 060509

>Daily Market & Technical Outlook (ICICI Direct)

Key points
■ Market outlook — Open flat on mixed & flat global cues
■ Positive — FIIs buying
■ Negative — MFs selling

Market outlook

■ Indian markets are likely to open flat, following the global markets. Asian markets were trading mixed in the morning as profit taking and investor caution overshadowed recent optimism about a global economic recovery. US stocks ended lower as the market awaited the results of stress testing of major banks; while lower oil prices saw energy shares dip. The rupee is expected to retreat from 2-1/2-month highs on Wednesday tracking the dollar's strength versus other currencies but traders are awaiting the domestic share market open for more cues

■ The Sensex has supports at 11990 and 11640 and resistances at 12290 and 12560. The Nifty has supports at 3620 and 3570 and resistances at 3680 and 3730

■ Asian markets are trading mixed, following the US equity markets, as profit taking and investor caution overshadowed recent optimism about a global economic recovery

■ US stocks fell on Tuesday as cautious investors fretted about impending bank stress test results and energy shares succumbed to the pressure of lower oil prices. The Dow Jones dipped 16.09 points, or 0.19%, to 8,410.65 points. The S&P 500 shed 3.44 points, or 0.38%, to 903.80. The Nasdaq dipped 9.44 points, or 0.54%, to 1,754.12

■ Stocks in news: Reliance Infra, Tata Power, Cadila Healthcare, Cipla, Elecon Engineering, L&T

To see full report: OPENING BELL 060509

>RELIANCE INDUSTRIES (NOMURA)

Fully valued - Downgrade to Neutral

Investment Conclusion
Reliance Industries' share price has rallied nearly 51% since its recent lows made in early March. YTD in 2009 it has outperformed the Nifty index by 27%. The key catalysts for such an outperformance, in our view, are the commencement of production from KG-D6 and better-than-expected refining and petchem margins. With the addition of KG-D6 and new refinery in FY10, we expect earnings to increase about 30% in both FY10 and FY11. However, we believe earnings upsides are already factored in the current price after the recent rally. We have moved forward our valuation to FY11 and revised our price target to INR1,725 (from INR1,650). With no potential upside from the current level, we downgrade the stock from BUY to NEUTRAL.

Summary

■ We revise our EPS estimates to INR123 for FY10 (previous INR115) and INR160 for FY11 (previously INR163).

■ As a long-term investment stock, we continue to believe that potential upside is likely from its large E&P portfolio. In our PT, we already factor an exploration upside of INR189/share for discoveries for which firm reserve/resource estimates are yet to be disclosed.

Downgrade to NEUTRAL – will look for better entry point

The share price of Reliance Industries has rallied since the beginning of 2009, up 41% on an absolute basis and outperformed the benchmark Nifty index by 27%. From its recent lows in early March, the stock has sharply risen by nearly 51% (vs. Nifty, which was up 30% over same period).

The key catalysts for this recent outperformance, in our view, are:

■ A much-awaited commencement of oil & gas production from its key KG-D6 block, and

■ A better-than-expected performance in the core refining and petrochemical business, led by a rebound in both the refining and petrochemical margins.

The commencement of gas production and increased visibility on offtake of an initial volume of 40mmscmd are clearly a positive for the company, in our view. The E&P business will soon become its key core business with EBIT share of 47% in FY10E and 58% in FY11E; E&P alone contributes nearly 55% of Reliance Industries’ NAV in our estimates.

Refining and petrochemical margins also rebounded in 4Q09 from their November 2008 lows, due to lower run-rates in the refining and petrochemical plants, and delays in the ramp-up of new capacity. We continue to remain bearish on the refining and petrochemical sectors. We believe that the refining margin will resume its downward trend in 2Q09, while the petrochemical margin will turn downwards in 3Q09, as the impact of the expected large Chinese and Middle-Eastern capacity is finally felt.

To see full report: RELIANCE INDUSTRIES

>India IT Services (GOLDMAN SACHS)

Green shoots could turn to weeds, as growth prospects remain precarious. Still Cautious.

Industry context
We started 2009 with a clear view that the demand backdrop for Indian IT services would
remain weak for the year and that expectations remained too high. This view has essentially
proven out, with continued revenue and EPS reductions through the year. Since the beginning
of 2008 we have now trimmed our CY09 revenue expectations by an average of 28% and EPS by an average of 26%, while our CY10 average revenue reduction has come down 16%, and our EPS estimates have been reduced by 13% on average.

Source of opportunity
Despite reduced expectations, the Indian IT shares on both the local and ADR-listed side have
shown significant outperformance this year. We do not see the recent performance as sustainable given the lack of a turn in earnings, and which we believe remain susceptible to further downward revisions. Importantly, as a lagging model the Indian IT sector is not likely to lead a recovery, especially considering continued weakness in enterprise spending (note IBM, MSFT, SAP, etc.)

Maintain Cautious view on Indian IT
We maintain our Cautious coverage view on three factors: 1. Earnings are not at a trough, and
remain susceptible to reductions. 2. Stretched valuation on reduced growth expectations. 3.
Continued exposure to weak enterprise spending.

Estimate and price target changes
HCL Technologies—for FY09, our revised EPS est. is Rs.17.79. Our revised FY10/FY11 EPS ests. are now Rs.13.67/Rs.16.83. We raised our 12- month price target to Rs.120. Patni—for CY09, our revised USD EPS est. is now $0.95. For CY10/CY11, our revised EPS ests. now stand at $0.90/ $0.93. Our CY09/CY10/CY11 rupee EPS ests. are now Rs.24.8/Rs.23.5/Rs.25.47. Our 12-month price target is now $5.75 on the ADR, and Rs.144 on the local shares. Wipro—for FY10 and FY11, we trimmed our USD EPS ests. by $0.02 and $0.01 to $0.53 and $0.51. On a rupee basis, our FY10/FY11 EPS ests. are now Rs.25.54/Rs.24.09. Our 12-month price target is now $6.50 on the ADR, and to Rs.250 on the local shares.

To see full report: IT SERVICES

>India Real Estate (UBS)

Green Green shoots of recovery

■ From the registration offices: Gurgaon and Mumbai increased MoM New registrations for March 2009 in Mumbai rose 30% MoM (down 33% YoY), possibly the first real MoM increase since October 2008. In FY09, total registrations were 45,580, 30% less than in FY08. March 2009 volumes in Gurgaon grew 19% MoM (the first real increase since July 2008). In FY09,
Gurgaon registered a YoY decline of 5%. In FY08, March witnessed a sequential decline MoM. Hence, we think seasonality is not a factor for the MoM increase in March 2009.

■ Based on JLL REIS survey—absorption up QoQ Based on the sample survey conducted by JLL REIS, absorption of apartments, ie actual sales of apartments, likely grew during Q109. The national capital region (NCR) recorded sales of 4,491 apartments, up 11% QoQ, during Q109, while sales in Mumbai were flat at 740. We note that sales were highest where price cuts were
around 30%. Where the price cuts have been lower, inventory is taking more time
to clear.

■ Expect further price cut to flush out inventory As discussed in our note, India Real Estate: Inventory Check-II, published on 3 April 2009, inventory levels are still high in most cities, and price cuts are helping, in our view. The sales pick-up has come in earlier than our forecast of Q3/Q409 though we did expect the stocks to re-rate earlier. We still think existing inventory
will be cleared only by Q3/Q409 if price cuts continue.

■ Valuation: Buy ratings on IBREL, UT We maintain our Buy ratings on IBREL and Unitech. We maintain our Sell/shortterm Sell rating on DLF. We believe the key risks remain macro recovery risks, and the availability of credit.

To see full report: INDIA REAL ESTATE

>DLF (CENTRUM)

Pain continues, maintain Sell

■ Results below estimates: Q4 revenues plunged 74% YoY to Rs11.2bn and PAT declined 92.6% to Rs1.6bn owing to fall in DAL sales and one-time revenue write-down of Rs6.8bn owing to price resets in ongoing projects.

■ Lack of visibility on DAL’s leasing activity: DLF delivered 5.1mn sq ft of space to DAL vs. its stated target of 9mn sq ft by 31 March 2009. DLF plans to deliver ~3.5mn sq ft of space in H1FY10 with a further 5mn sq ft of space to be leased over FY10-12.

■ DAL receivables still at Rs49bn, no immediate recourse in sight: With net inflow of Rs5.4bn from DAL in Q4, DAL receivables stand at Rs49bn. With no clarity on PE fund infusion and DAL-DLF merger, committee of independent directors has been appointed to explore various options.

■ Debt obligations for FY10 met, but FY11 remains a concern: DLF has met its repayment obligations of Rs35bn for FY09-10 through debt repayment of Rs7.2bn and obtaining fresh longterm loan of Rs25bn. However, Rs25bn of debt maturing in FY11 is a concern.

■ Land bank reduces to 425mn sq ft resulting in land payments reducing significantly: Land bank reduces by 327mn sq ft on account of pullout from Bidadi and Dankuni projects (269mn sq ft) and re-sizing of other township and hotel projects (58mn sq ft). As a result, outstanding land payments reduce from Rs57bn to 2.5bn.

■ Maintain Sell, revise target price to Rs143: Our target price of Rs143per share is at 25% discount to NAV and has increased by Rs23 per share from Rs120 previously after factoring in the net impact of reduced outstanding land payments from Rs57.1bn to Rs2.5bn and reduction in land bank.

To see full report: DLF

>Arshiya International Ltd (INDIA CAPITAL MARKET)

Revenues declined to Rs 940 mn (28% yoy, 18% qoq) in Q4FY09 impacted by decreasing freight rates in logistics segment. Arshiya’s end to end logistics declined by 20% yoy due to global economic slowdown. In FY09, Arshiya net added 62 new clients in India & Middle East for its logistics division. In Q4FY09, EBIDTA margins improved by 260 bps to 15.8% due to improvement in supply chain services and more demand of Cyberlog IT solutions.

Arshiya International has commenced rail operations with two rakes for Vedanta Aluminium Ltd & Mitsubishi. Arshiya will provide customized solution to its clients through its dedicated rakes on a long term contract basis. The 3rdrake is expected to commence by Q1FY2010.

Management has guided that the company will deploy 30 rakes of Phase I project by Q1FY2011 in domestic segment with the capex of Rs 6.26 bn. The D/E of this project will be 1.8 : 1. For FY09 Arshiya’s revenues increased by 25% to Rs 5 bn, while EBDITA grew by 47% to Rs 762 mn. EBIDTA margins expanded to 15.2% (+230 bps) due to change in revenue mix. In FY09,

Arshiya’s volume handling increased by 35% to Rs 42000 TEUs. Arshiya has entered into long term contracts for its rail container business. The 3rd rake is expected to start in current quarter for domestic segment.

FTWZs – delayed by three months
Arshiya has received formal approval from Board of Approval (BoA) of SEZs for JNPT FTWZ, while it is still waiting for the final approval. We expect the delay in BoA approval will defer the development work at FTWZ which is now expected to start its commercial operations by Q4FY2010. The company has earmarked the capex of Rs 5.3 bn for this project. Arshiya has tied up its capex with lead bankers for JNPT FTWZ project. Arshiya has received formal approval for FTWZ in Khurja, Delhi. The company will incur the capex of Rs 4.4 bn and are in the process for debt arranging with bankers.

Arshiya has acquired the land for Central FTWZ (Nagpur) which is anticipated to be at an investment of Rs 2 bn. Management has indicated that FTWZ at Sohar in Oman is dropped due to regulatory issues on leasing of land.

Outlook & Valuations
We expect business outlook for all logistic companies to remain weak through H1FY2010, due to global economic slowdown. Though we are positive on the delivery expertise of the company and its expansion plan, external environment presents significant scope for downward revision of its expected numbers. Moreover the delay in FTWZ approval will further shift the revenue to a future date. Though the business environment is bleak, we are positive on the company’s future plan and expertise. We recommend a ‘HOLD’ till our next update.

To see full report: ARSHIYA INTERNATIONAL

>ONGC (DEUTSCHE BANK)

Downgrade to Hold on rich valuations post recent rally

No positive catalysts; subsidy concerns may revive
We downgrade ONGC from Buy to Hold as the stock offers a 6% total return to our INR787/sh TP. The stock has risen 28%YTD (Sensex up 14%) and now implies US$70/bbl Brent assuming subsidy sharing. The stock will likely be capped by concerns about the subsidy burden in H1FY10, following the Q4FY09 reprieve and the lack of visible catalysts.

Lacklustre volumes, policy concerns dampen FY09-11 earnings outlook
The adhoc government subsidy policy and ONGC’s inconsistent track record in volume growth remain a concern. Our higher subsidy assumptions are based on i) the recent rise in global fuel prices and ii) cuts in domestic fuel prices on petrol, diesel and LPG – a setback for ONGC’s earnings outlook for the next two years.

Our Hold rating reflects a neutral risk/reward
The positives are Deutsche Bank’s rising oil deck from CY10E and likely positive newsflow on EoR/new initiatives and new acreage/reserves. Key negatives: i) an uncertain growth outlook; ii) revival of subsidy worries as India is electing a new government; and iii) rich valuations and a contracting oil demand outlook.

Volatile oil price/newsflow poses 10-15% rise/fall to the stock
We retain our DCF-based TP for ONGC at INR787/sh (over FY10-15E, nil terminal growth) using Deutsche Bank’s India WACC assumption of 13% and EV/2P reserves for OVL. Upside risks: new oil finds, gas price deregulation and subsidy reform. Downside risks: a sharp collapse in oil demand/prices, policy concerns, execution/political risk in domestic/overseas projects, and lack of transparency in its overseas arm OVL. (See pp. 5-6 for more on valuations and risks.)

To see full report: ONGC

>Reliance Capital (BNP PARIBAS)

Obstacle course for growth and margin

Initiate with REDUCE – valuation ahead of fundamentals We initiate coverage on Reliance Capital (RCFT) with a REDUCE rating and a TP of INR400. While the long-term outlook for RCFT is attractive, we expect significant growth and margin pressure in the near to medium
term. We expect all of its core businesses (insurance, asset management, general insurance, broking and consumer finance) to slow down. We believe the recent rally in the stock price is out of line with fundamentals and investors can find more attractive alternatives, given the overhang in the market.

Multiple pressures on growth and margins
RCFT’s core business growth is tied to the outlook for equity and capital markets in India – in the form of unit-linked life insurance products, returns on its proprietary investment book, income from asset management and broking. We expect relatively muted equity markets in FY10 to impact RCFT’s revenue growth. We expect RCFT (which has more than 95% of its life products in ULIPs) to clock life premium growth of 11% for FY10 compared to 40% y-y growth in FY09. We estimate RCFT’s consolidated net revenue will decline by 4% y-y for FY10. We expect a sustainable NBAP margin for life insurance of 15% compared to management guidance of 18-19%. Based on our channel checks and analysis, we believe RCFT’s insurance business growth was based on aggressive pricing, which is more evident in the general insurance business. In addition to margin pressures, RCFT’s core businesses are still in a capital consumption mode and will impact ROE over FY10-11. RCFT is a high beta play and in addition to improvement in core businesses, we’ll turn more positive on signs of a sustained market rally.

Valuation
We value RCFT at INR400 using a sum-of-the-parts approach. On a per share basis, we value life insurance at INR145 (8x FY10E NBAP), asset management at INR130 (3.5% to FY10E AUM), the standalone book along with consumer finance business at INR100 (0.8x FY10E ABV) and Reliance Money at INR25 (8.0x FY10E EPS). Our TP implies 15.5x and 1.3x price to FY10E consolidated EPS and ABV respectively.

To see full report: RELIANCE CAPITAL