>Daily Derivates 240309 (ICICI Direct)

• The magnificent surge in turnover accompanied by a rise in Nifty suggests that cash-based buying has happened in the last session. Fresh long positions were added in the April series with continuing short covering in March. Markets are likely to trade with a positive bias in today’s session as well

• The PCR-OI zoomed to 1.78 from 1.59 on account of humongous addition of 48763 contracts in the 2900 Put followed by 11564 contracts addition in the 3000 Call option. Most of the Call writers at 2700, 2800 and 2900 level have covered their positions with maximum unwinding of 27835 contracts in OI witnessed in the 2800 Call. A total of 17346 contracts in OI got unwound in the 2900 Call option. With an addition of 4173 contracts in 3000 Call and rise in IV, we feel some Call buying was seen in this strike price. The 2900 Put IV has moved from 28.35 to 41.21. It could be due to ‘Put Hedge’ strategy adopted by many market participants

• FII data on Index futures depicts formation of long positions to the tune of Rs 465 crore with a rise in OI by 8.09%

To see full report: DERIVATIVES 240309

>RELIANCE INDUSTRIES (CITI)

FY10-FY11E EPS cut but 2 year EPS CAGR still 34%; Buy

FY10E Brent price forecast has been raised by 12% to US$56/bbl. This should have meant 2% upgrade in RIL’s EPS. However, a cut in KG D6 gas production rate now assumed by us has meant 6% cut in RIL’s EPS. FY11E Brent price has been cut by 11% to US$62/bbl. This has meant just 2% cut in RIL’s EPS given its low sensitivity to oil prices. RIL’s PO is also cut by 3% to Rs1,540/share as E&P valuation is cut to factor lower oil price and lower gas output now assumed in FY10E. RIL’s strong earnings growth story due to KG D6 gas and new refinery is intact, in our view, with 2-year EPS CAGR to FY11E still at 34%. We retain Buy on RIL

FY10E EPS cut as KG D6 gas output rate cut to 45mmscmd
RIL has guided that KG D6 gas should ramp up to peak rate of 80mmscmd by March 2010. However, KG D6 average gas production rate in FY10E may be lower than 60mmscmd assumed earlier by us. We have now cut average gas production rate to 45mmscmd. This has meant 6% cut in its FY10E EPS.

Upside risk to FY10E EPS from weaker rupee
RIL’s FY10E EPS is based on rupee at Rs46 vis-à-vis US dollar. The rupee is currently far weaker at over Rs51. RIL gains from a weaker rupee. Its FY10E EPS would be 11% higher than base case at Rs143.7/share if rupee averages Rs50.

PO cut by 3% to Rs1,540; E&P valuation cut 5% to Rs814
Cut in oil price assumption and lower gas production in FY10E than earlier assumed has meant cut in RIL’s E&P valuation by 5% to Rs814/share from Rs855/share earlier. This has led to a cut in RIL’s PO by 3% to Rs1,540/share. Our PO is based on exchange rate of Rs46. It would be 10% higher, at Rs1,691/share, if Rs50 is taken as exchange rate to calculate PO.

To see full report: RELIANCE INDUSTRIES

>JAIPRAKASH ASSOCIATES LIMITED (Morgan Stanley)

Quick Comment: Jaiprakash has repurchased and extinguished ZCCBs (Zero Coupon Convertible Bonds) with a face value of US$32 million. Given the significant discount that Indian CBs have been trading at, we believe the company paid between 46-53% of the face value of the bonds. Using the middle of the range, we estimate that the buyback cost Jaiprakash around

US$16 million.

Step in the Right Direction: We believe that the buyback was funded through a mix of internal accruals and ECB proceeds (raised in February 2009). Assuming the interest on the ECB (LIBOR + 500 bps), as the financing cost of the transaction, the total cost of the buyback, including the interest on the loan (over the duration of the ZCCB) for Jaiprakash would increase to US$19.5 mn vs. the potential payout of US$47.3 mn on the maturity of the bonds (Exhibit 2). We estimate the savings from this buyback at around US$27.8 mn over the life of the CBs (discounted value of US$22.2 mn).

Too Small to Affect Our View: The buyback translates into 7.9% of the CBs outstanding for the company (Exhibit 1) and only 2% of its F2009E debt. Hence, the buyback in itself is too small to impact the financials for the company. However, we believe that the buyback represents a move in the right direction in terms of creating value for shareholders; in our view, there could be further buybacks from the company.

Remains our Top Reward Play in the Sector: The stock currently trades at extremely depressed valuations with a F2010 P/E of 9.8x (without assigning any value for both the listed and unlisted power and the real estate subsidiaries) and remains the cheapest stock in our coverage.

To see full report: JP ASSOCIATES

>Aditya Birla Nuvo (UBS)

● Initiate coverage with a Buy rating; deep value even in stress-case scenario. ABNL is a conglomerate with interests in insurance (Birla Sun Life Insurance), telecom (Idea Cellular), other financial services, business process outsourcing and six key diverse businesses. We believe: 1) its strategy to make each business selffunded could play out over the next 12 months; and 2) even in our stress-case scenario (assuming 35% lower growth in insurance and valuing Idea Cellular (Idea), at the market price (instead of UBS’s price target) we estimate 23% upside potential. Our price target of Rs700.00 implies 78% upside potential.

● Direct play on the fast growing insurance and telecom businesses
We forecast a 23% revenue CAGR for Idea in FY09-12. India’s insurance industry has been growing fast; premium collection has recorded a 38% CAGR for the last five years, and we forecast 15-17% long-term growth. Birla Sun Life (BSL) Insurance increased its market share from 3.3% to 5.2% in FY08. We believe the standalone performance is not significant in ABNL’s valuation.

● Debt-funded model unsustainable; alternative funding could be a trigger Although we believe ABNL’s debt funded growth model has worked up to now, it needs to seek alternative sources of funding as its gross debt/equity is likely to rise to 1.01x in FY09 versus 0.68x in FY08. Also, promoter, Aditya Birla Group’s warrants worth Rs37.7bn, which expire in August, are unlikely to be converted. We believe securing alternative long-term funding will lead to the stock re-rating.

● Valuation: sum-of-the-parts-based price target of Rs700.00
Our price target uses: 1) a DCF methodology to value Idea; 2) 14x NBAP for BSL Insurance; 3) 4% of assets under management for Birla Sunlife’s Asset Management Company (BSL AMC); and 4) EV/EBITDA for its standalone businesses. We assume a 30% holding company discount to value its subsidiaries.

To see full report: ADITYA BIRLA NUVO