Tuesday, March 3, 2009



* The sellers are on rampage and equities are testing multi year lows. The surge in VIX indicates more sell-off to come and Indian markets are also looking very weak as economy has also become vulnerable in the wake of global slow down and huge FII outflows. The sharp contractions (16%) in export and rupee at 52 are worrisome. However there was some respite in the reported healthy auto sales numbers for the month of February.

* We advice to postpone buying and to buy out of money index put option for any eventuality of new lows in the month of March series. Crucial level on the Nifty would be 2700 on the upper side.

To see full report: Market Preview 03-03-2009

>Reliance Industries (ANGEL BROKING)


RIL-RPL merger: Swap ratio - Win-win game for the companies

In the Board meeting held today, RIL- RPL Boards have accepted the merger proposal. The Swap ratio has been fixed at 1 Share of RIL for 16 shares of RPL. RIL has also decided to extinguish the treasury shares created following merger of the companies. Appointed date of merger of RPL with RIL is April 1, 2008. Based on the recommended merger ratio, RIL will issue 6.92 crore new equity shares to the existing shareholders of RPL. This will result in 4.4% increase in RIL's equity base from Rs1,574cr to Rs1,643cr. Consequently, the effective promoter holding in RIL will reduce from 55.0% to 52.7% post merger. The merger is likely to create an entity operating two of the world's largest and most complex refineries owning 1.24 million barrels per day (mnbpd) of crude processing capacity, the largest refining capacity at any single location in the world. The merged entity would emerge as the world's 5th largest producer of Polypropylene.

* Synergies from the merger: RIL expects the merger to provide synergies in crude procurement and product placement. However, we believe synergies are likely to be lower as the companies would be sharing facilities. Nonetheless, RIL expects the merger to be Earnings accretive. The merger would do away the holding company discount for RPL. Other benefits such as strong Cash flow and Balance Sheet along with lower cost of capital for RIL also exist. However, RIL has clarified that it would not be eligible to benefit from the Depreciation tax shield of RPL.

* Merger
- An Earnings Accretive move: We believe the RIL-RPL merger is likely to be Earnings accretive for RIL shareholders. FY2010 EPS is likely to be higher by 1.66% due to
the merger.

To see full report: RIL

>Monthly Technical Perspective (EMKAY)


Last month Nifty continued its upside journey and on 13th Feb it made a high of 2969, but thereafter we witnessed selling pressure and Nifty broke the support of 2752 and made alow of 2736 on 18th Feb. However there it took support andwas trading very range bound, but again selling pressure was witnessed and Nifty again fell sharply and took support nearto 2661 levels and made a low of 2677. Thereafter it startedits upside journey and retraced 38.20% of the recent fall 2969 to 2677 and made a high of 2797. Finally Nifty closed at 2763 with a loss of 3.86% on m-o-m basis. We still believe that level of 2661 is an important support level for Nifty and if it closes below this level then we may see further downside and it can test 2502 levels. Higher levels if Nifty starts trading above 2797, then it can test 2825 and 2858 which are 50% and 61.80% retracement level of the recent fall from 2969 to 2677. In the short-term Nifty has resistance at 2969, and if it breaks this level then it will turn bullish for short-term.


After making a high of 9724 on 10th Feb, selling pressure was witnessed in Sensex and it started it southbound. On 24th Feb it broke the mentioned support of 8631 and made a low of 8619. Thereafter it took support and recovered some of its losses and almost retraced 38.20% of the recent fall from 9695 to 8619. Finally Sensex closed at 8891 with a loss of 5.66% on m-o-m basis. Now in the immediate- term if Sensex closes below 8619, then we may see further downside and it can test 8316, however on higher levels if Sensex starts trading above 8998, then it can test 9157, and 9284 which are 50%and 61.80% retracement level of the recent fall from 9695 to 8619. Short-term it has resistance at 9724 levels.


Continuing its northbound journey bank Nifty tested our mentioned target of 4519 and made a high of 4602 on 13th Feb. Thereafter huge selling pressure was witnessed and it started its southbound journey. On 18th Feb it broke the immediate term support of 4049 and made a low of 4039, but there also it did not stop its southbound journey and further fell sharply and tested October low of 3799 and made a low of 3758. Finally it closed at 3892 with a loss of 12.66% on m-o-m basis. On the daily chart this index had formed "Bullish engulfing" pattern, thus now if it starts trading above 3976, then it can test 4080 and 4180, which is 38.20% and 50% retracement level of the recent fall from 4602 to 3758. Downside level of 3758 will play as an important support and if it starts trading below this level then it can test its all time low of 3408.

To see full report: Technical Perspective

>United Spirits Ltd. (MERRILL LYNCH)


Scenario analysis: assessing risks and opportunities......

Cut FY10 EPS by 16% & PO to Rs600(745); reiterate Neutral
Molasses prices continue to rise ahead of our and market expectations. We build in another 10% increase and hence cut our FY10EPS by 16% to Rs38. Secondly, we undertake a scenario analysis for three situations – no sale of treasury stock, sale at mkt price of Rs600 & sale at premium i.e. price of Rs1000. We conclude; assuming FY11 P/E of 15x, the worse & best case stock price is Rs557 & Rs740.Our PO of Rs600 is based on 15xFY11 EPS assuming sale of treasury stock at market price. Treasury stocks accounts for 16% of fully diluted share capital.

Why then a Neutral? Primarily for two reasons
Market has not yet fully factored the continuing pain from rising molasses price – our 4Q FY09 and FY10 profit is 25% and 16% below consensus. State Budget news so far is neutral but Budgets of two key States (24% of vol.) are still awaited.

Scenario #1 (base & worse case): No sale of treasury stock
We get FY10 & FY11 EPS of Rs38 and Rs37.1. In FY10: Higher molasses prices will restrict EBITDA growth to mere 6% but lower interest costs (Libor reset) leads to EPS growth of 23%. In FY11: Lower molasses prices leads to EBITDA growing 18% but higher interest cost (debt refinancing) leads to EPS decline of 2%.

Scenario #2: Treasury stock sale at Rs600
We get FY10 and FY11 EPS of Rs35.8 and Rs39.9. Total cash inflow is $204m vs. repayment of $330m, hence interest cost still rise slightly in FY11. This is 6% dilutive in FY10 but 8% accretive in FY11 versus the base case.

To see full report: United Spirits




Raise PO, but maintain Neutral
We are raising PO by 11% to Rs 585, as we expect valuation multiples to expand on improved earnings visibility. This follows upward revision to domestic bike sales and EPS forecasts by 3/4% over FY10/FY11. Post-revision, we estimate 7.5% EPS CAGR over our forecast period. Maintain Neutral rating on modest growth prospects.

Domestic bike sales raised
Following positive customer response to XCD 135cc motorcycle, we have greater confidence for 4 upcoming launches by Sept. We raise domestic two wheeler sales estimates to 1.36mn units in FY10 (5% growth, earlier 5% decline), and retain 5% growth on higher base in FY11.

Vulnerable to further slowdown in exports
While management maintains positive for exports next year, albeit with slower growth trajectory, we estimate 10% decline in two wheelers and 5% in three wheelers. Recent trends are worrying, with sharp contraction in sales to Latin America (~30% of exports), and there could be downside risk to our forecasts.

To see full report: Bajaj Auto