>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

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty May series added 1.61 million shares in OI with rise in price by 5.31% suggesting formation of further long positions. The current May OI stands at 37.71 million shares

• In the May series the total addition of OI in Call was 58716 while the addition in Put was 77651 contracts. The maximum addition of OI was witnessed in the 3600 Put adding 27134 contracts followed by 17027 contracts addition in 3500 Put. On the other hand, nearly 12000 contracts got added in 3700 and 3800 Calls while 11160 and 17213 contracts got added in 3900 and 4000 Calls, respectively. The IVs of all these options has risen by 4-5 basis points since the overall
market IV has increased. The 3600 Put has seen some Put writing. Hence, we feel this level could act as a support for the Nifty in today’s session. One can look for buying opportunities if the market dips near 3600 intraday

• FII Index options witnessed a net buy of Rs 755 crore along with a rise in OI by 2.54%. The Index futures OI increased by 4.26% accompanied by a net buy of Rs 310 crore. We feel FIIs could have adopted the ‘Put Hedge’ strategy in yesterday’s market.

Technical Outlook

• The Nifty closed positive after a huge gap up opening posting 5.18% gain. Metals, IT and banking sector indices gained more than 8% each

• The Nifty formed a strong bull candle breaking above the 52 week moving average and short-term resistance at 3500 levels. We now expect the level of 3,500 to hold as good support in the short-term. Technically, the index appears over bought on the intra-day charts. Hence, we advise caution at higher levels. On the higher side, the Nifty is likely to target 3730-3750 in the short-term

• The Nifty spot has supports at 3630, 3595 and resistances at 3680, 3730

• FIIs were net buyers to the tune of Rs 1417 crore whereas DIIs were net sellers to the tune of Rs 92 crore in the cash segment.


To see full report: DERIVATIVES 050509

>Daily Calls (ICICI Direct)

Sensex: We said, "Trading above day's high of 11430 can encourage further bull effort to break the 3- week resistance." In a clear breakout from 3-week consolidation, Index gapped up above 11430 and soared to 12162. Against 6.4% gain of Sensex, Metal/IT/Bank indices moved nearly 8% higher. A/D ratio improved to 8:1.

The action formed a second strong bull candle, with gap-up area at 11430-11635 below its bottom. Index now moves closer to previous crucial levels of earlier years, all between 12316 and 12671, as marked. Strength continues if trades above 12162. However, profit-booking at higher levels closer to 12300 cannot be ruled out.

To see full report: CALLS 050509