Monday, March 30, 2009

>Alpha Bet Strategy (KOTAK SECURITIES)

Switching it on. We initiate four new trades-(1)long RIL, short GAIL on positive catalysts for one versus none for the other, (2)long REC, short PEC on lowering of valuation differential, (3) long Ultratech cements, short ACC on market share gains, cost leverage and valuations and (4)long IBREL, short DLF on contrasting business developments.

■ Trade 1: Long RIL, Short GAIL-Relative potential triggers in the near team
We recommend a long Reliance Industries(RIL), short GAIL pair trade given relative catalysts for the stocks which will determine the performance on the near term. We see potential triggers for RIL on account of (1)availability of income tax exemption for gas production, (2)availability of gas for internal consumption and (3)disclosure of reserves. We do not see any positive triggers for GAIL in the near term, which will result in muted stock performance.

■ Trade 2: Long Ultratech, short ACC-Growth for a song
We recommend a long Ultratech Cements, short ACC pair trading offering 10% returns on the following-(1) unjustified valuation premium of ACC trading at US$87/ton on FY2010E production relative to US$77/ton for Ultratech; (2)declining market share of ACC versus gains for Ultratech and (3)cost leverage available from switch over to coal-based captive power plants will reflect in better March 2009 quarter performance versus ACC.

■ Trade 3: Long REC, short PFC-Valuation differential to narrow
We recommend a pair trade of long Rural Electrification Corporation(REC) and Short Power Finance Corporation(PFC) based on the 20% valuation gap between the two despite the two superior ROE profile of REC. REC trades at 1X FY2010E PBR versus 1.2X PBR for PFC.

■ Trade 4: Long IBREL, short DLF-Contrasting business developments
We recommend a pair trade of long India Bulls Real Estate(IBREL) and short DLF on account of (1) IBREL trading a higher discount(52%) to the NAV versus DLF(42%); our comfort on NAV of IBREL is higher, (2) leasing concerns of INREL's Mumbai commercial properties will reduce in the near term while business concerns for DLF will persist for atleast three quarters and (3) we expect weak March 2009 quarter performance from DLF.

To see full report: ALPHA BET STRATEGY