>EAGLE EYE ON 12/10/09 (SHAREKHAN)

Price and momentum—poles apart

Markets on Oct 12, 2009: Sharp bounce
Nifty continues to trade in the range of 4900-5150, where 4900 remains crucial on the lower side as that has been held for the third time now. Today, after consolidating in the first half, Nifty had a strong pullback that continued till the end of the session. The momentum indicators continue to be in sell mode giving a negative divergence. Usually these divergences happen at last before a strong correction. The volumes tend to decline in the final upmove and today’s volume was not in tandem with increase in price. So in nutshell, the upside looks to be capped and once the price confirms, the downtrend will resume.

On the daily chart, Nifty is trading above its 20 daily moving average (DMA) and 40DMA at 4966 and 4792 respectively, which are crucial supports in the near term. The momentum indicator (KST) has given negative crossover and is above the zero line. The market breadth was positive with 804 advances and 464 declines on the NSE and 1,642 advances and 1,192 declines on the BSE.

On the hourly chart Nifty is trading above its 20 hourly moving average (HMA) and 40HMA at 4997 and 5011 respectively, which are short-term supports now. The momentum indicator (KST) has given positive crossover and is trading around the zero line.

Nifty and the Sensex closed in green gaining 109 and 384 points respectively. Of the 30 stocks of the Sensex, Reliance Energy (up 5%) and State Bank of India (up 5.16%) were the top gainers, while Gujarat Ambuja (down 1.61%) was hit the worst.

To see full report: EAGLE EYE 14/10/09

>The End of the Earnings Recession (MORGAN STANLEY)

We believe we are now at the tail-end of the earnings recession. Our proprietary top-down EPS
model suggests that earnings troughed in the quarter that just ended. This would make the current earnings recession in EM the second longest in length (11 months) and second biggest in magnitude (–39%).

Earnings should recover because economic activity has clearly rebounded (particularly in China, India, Brazil, Indonesia, Poland, and Israel). Second, currencies have risen significantly against the US$ since 2Q, boosting the US$ value of local earnings streams. Third, for export-oriented stocks there has been a recovery in volume and pricing. Our top-down earnings model currently forecasts EPS to grow by +28% in US$ terms during calendar year 2010. This places the MSCI EM index on a prospective 2010E P/E of 14.4x. Morgan Stanley bottom-up analysts (39%) and consensus (33%) are somewhat more bullish, which requires monitoring.

China and Israel are the only countries to have escaped earnings recession. Regionally earnings have declined by –51% from the peak in Asia, –25% in LatAm, and –29% in EMEA. Whilst we still expect many Asian companies to be in the vanguard of earnings recovery, Latin America in aggregate is actually showing the earliest signs of turning the corner. The region has been largely immune from the currency and interest rate overshooting and banking system instability that were so present in the 1994 and 1997/8 cycles.

By sector the four biggest declines have been: IT (–88%) Industrials (–64%), Materials (–51%) and
Consumer discretionary (–32%). The latter is now turning up and we expect a V-shaped recovery in IT earnings. Materials and Energy (Morgan Stanley analysts are more bullish than consensus) will likely turn the corner soon thereafter.

Asia Pac ex-Japan focus list change. Switch Sinogold to Lihir and Bharti Airtel to Telekom Indonesia.

To see full report: ASIA STRATEGY

>IDEA CELLULAR LIMITED (RR FINANCIAL)

Idea Cellular (Idea), part of the Aditya Birla Group, is one of the leading providers of wireless communication services in India. Currently, the company is operating in 17 of 22 telecom circles in India, is set to become a pan-India player by end-2009. The company is a unique wireless play—strong incumbent in a tough industry environment with superior spectrum profile, as well as a new entrant capitalising on new growth opportunities. Idea’s expansion into new circles is expected to provide a leg up to its subscriber and revenue growth in the near term and offer long-term profit growth opportunities. It is slated to launch operations in five circles over the next two quarters—three category C circles (Assam, NE, J&K), one category B circle (West Bengal), and one Metro circle (Kolkata). On valuation front, Idea’s consolidated EBITDA and net profit to post a healthy CAGR of 20% and 14%, respectively, over FY10-12E. The company is in a comfortable funding position (ex-3G) post stake sale to Axiata and Providence Equity We expect Idea (incl Spice) to post a healthy revenue CAGR of 14% with new circles driving revenue growth; old circles are expected to post a 10% CAGR over FY10-12E. Revenue share of new circles is expected to touch 15% in FY12E.However the Idea Cellular stock has been de-rated by the markets over the last couple of days, and has been trading much below its issue price on the back of worries about declining revenues. Along with the Key risks that include irrational bidding for 3G spectrum and execution risks on new launches, news that hammered the stock was the TRAI’s planning to make per second billing option mandatory. Tariff cuts will intensify the pressures on the sector in the near-term.

Technicals: The counter has been witnessing a steep downtrend. The third part of the down
trend that commenced from the Rs 77 peak is currently in motion and has dragged the stock
towards its long-term support at Rs 62. The stock can form a long-term trough at this level and
move up towards Rs 72-75 again. However, the long-term outlook for this stock will turn
positive only if it moves above Rs 75. Counter bottomed out in the beginning of 2009 at the
level of 43-45 and since then it started to retrace back along with good amount of volumes and
touched the high of 92.

To see full report: IDEA CELLULAR

>War cries getting louder - RELIANCE COMMUNICATIONS (ICICI SECURITIES)

Reliance Communications’ (RCom) announced an aggressive tariff plan that is likely to accentuate the rising pricing pressure in the wireless sector. RCom has launched a plan titled, Simply Reliance, that offers all calls & SMS at a flat rate of Rs0.5. The plan offers voice ARPM at Rs0.36/min versus RCom’s current voice ARPM of Rs0.58/min, a 37.9% decline. While we do not expect industry realisations, post the launch, to actually decline to Rs0.36/min, the plan strengthens our case of aggressive pricing and is likely to be replicated by other incumbents. If the TRAI implements its plans of making per-second tariff plans mandatory, realisations will be impacted further. Our aggressive tariff war scenario factors in ARPMs of Rs0.51/min in FY11E and will impact valuations 5- 13% for telcos. We maintain our cautious view on the sector, but do not downgrade valuations as there is limited scope for realisations to fall below Rs0.5/min in the short-term. We maintain HOLD on BAL (target price Rs436, stress-case Rs415) and on RCom (target price Rs285, stress case Rs265) and reiterate SELL on Idea (target price Rs75, stress case Rs66).

■ RCom launches Simply Reliance – Aggressive but is likely to have riders as management continued with the stance of maintaining realisations above Rs0.5/min, which is unlikely if Simply Reliance is heavily subscribed to by existing subscribers.

■ MoU elasticity unlikely to drive growth. In the past, growth in subscribers translated to high revenue growth as MoUs expanded with falling tariffs. However, recently, elasticity of MoUs has reduced with falling tariffs and we do not expect any significant improvement in MoUs due to the reduction in tariffs.

■ Stress-case scenario suggests 5-13% downgrade in target price. Our aggressive tariff pricing scenario suggests further downside of 5-13% to target price of telecom stocks. Our stress-case scenario factors in Rs0.56/min and Rs0.51/min ARPMs for FY10E and FY11E, which implies a decline of 19.7%, 19.1% and 20.8% over FY09-11E, for BAL, RCom and Idea respectively.

■ Valuations. Telecom stocks have been the worst performers in the recent stock market rally and there are no signs of an uptick. The only hope of positive newsflow is value unlocking in the tower business, the dynamics of which are improving with consolidation in the tower industry. We do not see Simply Reliance as a strong enough trigger to factor in aggressive tariff scenario, as RCom’s earlier plans such as Monsoon Hungama and GSM Customer Experience had limited impact on sectoral financials. We maintain our cautious view on the sector and recommend BAL as our top pick with HOLD. We continue to be negative on Idea. We maintain HOLD on RCom and raise our target price slightly to Rs285/share from Rs276/share owing to inclusion of FY09 balance sheet actuals.

To see full report: RELIANCE COMMUNICATIONS