Wednesday, March 18, 2009

>Daily Derivatives (ICICI Direct)

• Some long positions, which got accumulated in the past couple of sessions got unwound in yesterday’s session. The Nifty March series witnessed an unwinding of 896400 shares in OI accompanied by a drop in price and widening of the discount. Further, the April series added 1.37 million shares in OI.

• The PCR-OI surged to 1.55 levels on the back of humongous addition of OI in the 2700 Put. An addition of 31909 contracts in the 2700 Put and 10167 contracts in the 2800 Put along with marginal rise in IV of these strikes indicates some buying in these strikes. On the flip side, decent addition of contracts was seen in 2800, 2900 and 3000 Call options, which added 4760, 5793 and 4746 contracts, respectively. An upward shift in IV of these Calls also indicates Call buying in these strikes at lower levels. This could possibly be covering by Call writers. We feel the markets could see good support at 2700 on a closing basis. However, at a higher level near 2800 the markets may exhibit weakness.

• FIIs were net buyers to the tune of Rs 415 crore whereas DIIs were net sellers to the tune of Rs 153 crore.

To see full report: DERIVATIVES 18-03-09

>Daily Market and Technical Outlook (ICICI Direct)

Indian markets are likely to open positive on the back of strong global cues. Asian markets were positive in the morning on positive US data. Also, The Bank of Japan said yesterday it may provide as much as 1 trillion yen ($10 billion) in subordinated loans to banks in order to replenish capital and keep them lending. US stocks rose at least 2.5%, lead by gains in retail, technology and energy stocks. A surprise surge in US housing starts in February boosted investor confidence. Crude rose $2/bbl to reach near $49/bbl as equity markets continued to
move higher.

The Sensex has supports at 8770 and 8700 and resistances at 9030 and 9130. The Nifty has supports at 2730 and 2710 and resistances at 2810 and 2840.

Asian stocks gained, led by financial companies and automakers, after the Bank of Japan said it may provide subordinated loans to help banks replenish capital and US housing starts increased. Nikkei gained 1.4 points to trade at 7,950.5. Hang Seng gained 236.2 points, or 1.8%,
to trade at 13,114.3.

US stocks surged on Tuesday as an unexpected leap in housing starts pushed Home Depot and other retailers higher while bullish comments from a broker on Cisco Systems helped technology shares rebound. The Dow Jones gained 178.73 points, or 2.48%, to 7,395.70.
The S&P 500 rose 24.23 points, or 3.21%, to 778.12. The Nasdaq jumped 58.09 points, or 4.14%, to 1,462.11.

Stocks in news: Unitech, Tata Communications, Maytas Infra

To see full report: OPENING BELL 18-03-09

>Global Vs Domestic banking index (NETWORTH CAPITAL)

Since Oct31st 2007, when the Global Banking and Financial Index made an all time high, the Global Index has fallen by 73.60% in USD terms, while during the same period the domestic banking index has fallen by 71.54% in USD terms.

But ICICI Bank fell as much as 84% in USD terms during the same period.

Since Oct 27th 2008, when Indian markets made an intraday low, Global Banking & Finance Index has fallen by 31.86% in USD terms, while during the same period the domestic banking index has fallen by 20.73% in USD terms. But ICICI Bank has fallen by 19.27%.

Since Jan 01st 2009, the Global Banking and Financial Index has fallen by 34.1% in USD terms, while during the same period the domestic banking index has fallen by 37.90% in USD terms and ICICI bank has fallen by 46.23%.

The slides shows that ICICI bank has been a gross underperformer Vis-a-Vis the world and the current stock price is reflecting news in comparables to Citi, Lloyds, Bank of America and Merrill Lynch, but the fact is ICICI is in much much better shape than its global peers. We believe that the underperformance of ICICI is an opportunity to BUY at current price of Rs. 263 for a return of over 25% in short term.

To see full report: GLOBAL BANKING INDEX


● ICICI Bank down on several concerns: Several concerns have pulled down ICICI Bank’s share price including international exposure through both Indian and international corporates, NPLs on the retail and corporate portfolios on India operations, and risk on repayment of international bonds.

Concerns justified, but perhaps more than reflected in the price:
We believe these concerns are justified but reflected in the share price. We conduct a stress test analysis to arrive at adjusted book and sum-of-the-parts assuming higher NPLs in India and international operations, and zero value for international subsidiaries. According to our analysis, the BVPS can fall around 15-30% in the stress-case scenario. Note that we assume the book value will take most of this hit, and we do not consider the hit on the profit and loss account.

Value in stock, performance may follow global trends:
ICICI Bank has significant exposure to the international market at 27% of consolidated assets, including exposure to non-Indian companies/banks at 10.6% (2.6% in cash and liquid securities). We believe this will cause the stock price to track global banking performance. We, however, find value at the current level and believe investors should invest with a 12-month view. In the stress-case scenario we estimate value for the bank at around Rs390–425 per share, higher than the current price suggests.

Valuation maintain Buy, price target of Rs515:
ICICI Bank is trading at 7.6x FY09E PE and 0.6x FY09E P/BV and ABVPS. We derive our price target of Rs515 using the residual income model.

To see full report: ICICI BANK

>Metals Update (MOTILAL OSWAL)

Steel prices continue to weaken due to poor demand. Chinese demand has weakened in the last one month, adding to uncertainties. However, Indian steel producers (Tata Steel pg 18 and JSW steel pg 19) have posted strong sales in January and February, and prices have been stable. Prices may fall when cheaper imports arrive in coming months.

Indian spot iron ore prices have plunged further by US$8-10 to US$67/ ton cfr China for the 63.5% grade. Prices are inching further downward to the lows of November 2008.

Benchmark contracts for iron ore and coking coal remain unsettled due to uncertainties. Though, a greater number of non-traditional deals are taking place ahead of settlement, for coking coal.

Prices of pig iron, coke and scrap have come under further pressure.

India has imposed safeguards due to value-added products of Aluminium, which will mainly benefit Hindalco. Novelis has closed its UK mills due to poor demand.

Vedanta Aluminums’ (Sterlite Industries’ associate) massive US$9b and Hindustan Zinc’s US$900m capex is on schedule. US$1.7b ASARCO’s purchase payback is contingent upon copper prices being > US$3750/ ton.

JSPL has been allotted 1.5b tons of coal block for US$8b coal to liquid project to produce 80,000bpd of oil. JSPL remains our top pick.

To see full report: METAL SECTOR


Company Background: Kolkata based Bata India was started in 1931. It is the largest company for the Bata Shoe Organization in terms of sales pairs and the second largest in terms of revenues. With 1250 stores across the country, it also has the widest retail network within the Bata Shoe Organization. Czechoslovakia (now Czeck Republic) based Bata was started in 1894. It has a worldwide reach, with operations across 5 continents.


• Indian Branded footwear market is estimated to be around Rs.10000 Crore. Bata commands nearly 10% of the market.
• The growth drivers are growing Indian population and higher per capita income.
• Bata has wide range of footwear solutions‐Shoes, Slippers, Socks, Shoe Polish etc.
• Its product range starts from Rs.5 and goes as high as Rs.4000. Thus it addresses a wide segment of the population.
• Company has pan India wide distribution network of 1250 stores. Its customers are from diverse categories. Bata products are for newly born infant to school going kids, College student to office going professionals, Businessmen to Farmers, Young Girls to Old Ladies.
• Company is increasing the number of outlets at regular period.
• Some of the popular footwear brands from Bata stable include‐ Hush Puppies, School Mate, Bubble Gummers, Sandak, Marie Clarie, Haute Couture, Evalite, Ambassador, North Star, Power, Weinbrenner etc.
• Company has good backward integration, besides own manufacturing plants, it has own leather
processing tannery. Further, Czeck based parents provide good product designing support.
• It has started selling goods from other makers also, like school bags, children apparels, sports goods etc.
• Company has improved its financial position over the years. Interest costs have been falling.

To see full report: BATA

>Pharmaceuticals Sector (NOMURA)

MNC focus on emerging markets (including India) provides rationale for an acquisition Besides lower product overlap, we note that there is also a strong focus from MNC pharma companies to expand their operations in emerging markets, including India. We observe an increasing trend of big pharma companies identifying emerging markets as a potential key growth driver. Emerging markets offer higher growth rates that are sustainable over a long term compared with the
traditional strongholds – the US and Western Europe, for the innovator companies, in our view. The US and Western Europe have been witnessing single-digit growth rates over the past few years, owing to: 1) increased patent expiries and generic penetration, 2) declining R&D productivity, and 3) increased regulatory hurdles. This is in stark contrast to emerging markets, which have been witnessing double-digit growth rates on back of: 1) rising disposable incomes, and 2) increased access to medical care with growing economies. Further, with more emerging markets complying with intellectual property (IP) protection, the lucrative segment of high-value patented products is now accessible to innovator large pharma companies. In addition to the organic growth efforts, big pharma companies have lately resorted to the inorganic route to establish themselves in emerging markets. As the majority of the emerging markets are branded generic markets, companies would require relatively longer gestation periods to gain traction, in the absence of acquisitions. Some instances of large-pharma M&A include:

GlaxoSmithKline (GSK LN, not rated): GSK took significant steps in 2008 to enhance its emerging markets presence. It entered into a tie-up with Aspen (APN SJ, not rated), Strides (STR IN, not rated), and Onco Therapeutics Ltd (50:50 JV between Strides and Aspen) to gain access to over 1,200 branded generic products portfolio across 95 emerging markets (excluding Sub-Saharan regions and India). GSK has also acquired BMS Pakistan (not listed) and BMS’s matured products portfolio in Egypt.

Sanofi Aventis (SAN FP, not rated): Sanofi Aventis has announced that it is to acquire Zentiva, a prominent generic operator in the Central Eastern European (CEE) markets. The acquisition would make Sanofi Aventis the 11th largest global generic operator.

Daiichi Sankyo (4568 JP, JPY1605, BUY): Daiichi Sankyo acquired Ranbaxy (RBXY IN, INR135, NEUTRAL), the largest Indian generic company, in 2008. Ranbaxy derives over 50% of its sales from emerging markets.


>Kalpataru Power Transmission (KARVY)

New order worth Rs3.73bn from Power Grid: Kalpataru Power Transmission Ltd (KPTL) announced on 4th March 2009, that the company has bagged orders worth Rs 3.73bn from Power Grid Corporation of India Ltd (PGCIL) for supplying power transmission equipment in India. This order is to supply and erect transmission towers for 413 Kms and provide 765 KV S/C transmission lines associated with Sasan Ultra Mega Power Project for Silwar-Satna and Satna-Bina section in Madhya Pradesh. This is followed by a large order worth USD 250 mn (Rs 12 bn) from Ministry of Energy and Water, Kuwait during January 2009. Including the new order from PGCIL, total order book of KPTL (standalone) is ~ Rs 48bn (including L1) with an average execution period of 22 months. The latest project secured from PGCIL is expected to commence from March 2009 and scheduled to be completed within 27 months. Hence, we expect partial revenue to be booked in FY10 and remaining in FY11.

Valuation: Current order book of standalone- KPTL entity is 2.5x it FY09E sales. Hence, we remain positive on the revenue visibility in future. However, margin pressure is likely to remain in medium term. We maintain our revenue and earnings estimates and retain our price target of Rs 284, based on 4.5x FY10 earnings. However, owing to recent price correction, we upgrade our rating from Market performer to BUY.

To see full report: KALPATARU

>AIA Engineering Ltd. (HEM SECURITIES)

COMPANY OVERVIEW: AIA Engineering Limited specializes in design, development, manufacture, installation and servicing of high chromium wear, corrosion and abrasion resistant parts used in cement, mining and thermal power generation industries. The company has no competitors in India and has few globally. This ensures a near monopolistic status for the company. Even nearly 70 per cent of the company’s business comes fromreplacement demand which give the company a better picture in terms of future revenue. The company profit margins are on a cost plus basis, due to which profits could decline when input costs fall.

The industry offers high chromium wear, corrosion and abrasion resistant parts used in diversified industry. It is a highly fragmented industry where it is characterized by few small and some large players who normally manufacture according to the customers specifications and requirements. Majority of the products manufactured are required due to replacement of products which gets wear and tears while daily operational activities. The major contributor of revenue to this industry is through replacement sales.

AIA Engineering Limited has a scalable business model, good growth visibility, high operating margin and limited competition. The company has registered a continuous robust growth rate over past few years. As discussed with the management, the Company has a strong order book position of around INR 415 Crores which provides a strong visibility to their revenues. The company is trading at a low PE of around 5.5X. We expect the company to outperform in the future and we reiterate “BUY” on the stock with a target of INR 178.00.

Highlights/Recent Updates
Special Economic Zones (SEZ) project getting delayed Currently the company has a capacity to manufacture 65,000 tonnes per annum (tpa) of high chrome grinding media, liners, vertical mill spares and mining liners. The new plant in SEZ near Ahmedabad is getting delay due to approval where the company had planned to increase the manufacturing capacity to 1,65,000 tonnes per annum (tpa). To meet the increase in demand, the company has now planned to ramp up capacity in their existing plants. By this the company can increase the production to 2,00,000 tonnes per annum (tpa) by March 2011.

Stock Split at 5 for 1
The company has split the share of face value INR 10.00 to INR 2.00. The total outstanding share after the split stands at 9,39,83,940.

To see full report: AIA Engineering Ltd.

>Indian Banks (NOMURA)

We initiate coverage of the Indian banks sector with a NEUTRAL view. We believe the key drivers of bank earnings – loan growth, interest rates (bond yields) and asset quality — have turned negative in 4QFY09 and are likely to deteriorate further in FY10E. We expect earnings growth of Indian banks under our coverage to drop 6% in FY10 after a robust CAGR of 21% over FY05-08. While banks are faced with these challenges, we find some comfort in state-owned banks’ valuations, which are trading at below book values, and fast-growing private banks, which are trading at 1-2x FY10E P/BV. We do not see positive catalysts for these banks in the next three to six months, except for policy rate cuts. Rather, we believe incremental newsflow on banks relating to fiscal measures and specific loan exposures turning bad will be negative for bank stocks.

We initiate coverage of Punjab National Bank (PNB) and Axis Bank with BUY ratings. For State Bank of India (SBI) and Housing Development Finance Corp (HDFC), we recommend a REDUCE. We are NEUTRAL on ICICI Bank, HDFC Bank, Bank of India and Union Bank of India.

Our target RoEs for these stocks are significantly lower than the banks’ current RoEs (except for HDFC Bank), mainly because we have assumed higher credit costs of 1-1.2% of assets against the current low peak cycle credit costs of 0.4-0.6%.

We expect the sector’s loan growth to slow substantially to 12.5% after a robust 28% growth rate seen in FY05-08, as we believe slowing foreign capital inflows will weaken domestic demand.

We expect non-performing loans (NPL) to grow 3x in FY08-11E, with growth in some banks as high as 5-8x. The sharp spike in NPL is likely to be driven by a large proportion of unseasoned loans at 36% of the sector’s total loans.

We see bank margins contracting. Banks are likely to lose pricing power, as we expect credit demand to remain weak, due to slowing corporate investments and pressure on households. In addition, declining credit deposit ratios and loans repricing faster than deposits will exert pressure on margins.

A reversal of the bond rally in 4Q09, contrary to market expectations, is likely to trigger losses on banks’ available for sale (AFS) bonds, and erode gains on their heldto- maturity (HTM) portfolios, in our view.

To see full report: INDIAN BANKS