Tuesday, March 24, 2009

>Daily Market & Technical Outlook (ICICI Direct)

Market outlook

Indian markets are likely to open positive, taking cues from global markets. The SGX Nifty was trading 30 points up in the morning. Other Asian markets are also trading positive as the US plan to relieve banks of toxic debt spurred investors to pick up riskier assets. Before this, US markets rallied after the unveiling of the plan to soak up the sick assets that have constricted the world's financial system, triggering a 7% stock market rally on Monday with help from an unexpected surge in existing home sales. The rupee is expected to rise for a fifth straight session on Tuesday as higher Asian stock markets strengthen global investors demand for local stocks

The Sensex has supports at 9260 and 9160 and resistances at 9620 and 9680. The Nifty has supports at 2920 and 2880 and resistances at 2990 and 3000

Asian stocks rose on optimism the US Treasury’s plan to remove banks’ toxic assets will revive economic growth. The Nikkei advanced 170.4 points, or 2.1%, to trade at 8,385.9. The Hang Seng gained 187.2 points, or 1.4%, to trade at 13,634.7

US stocks surged around 7% on Monday after the Obama administration detailed a plan to purge toxic assets from bank balance sheets, fuelling optimism about a revival in bank lending and driving double-digit gains in financial shares. The Dow Jones jumped 497.48 points, or 6.84%, to 7,775.86 while the S&P 500 surged 54.38 points, or 7.08%, to 822.92. The Nasdaq rose 98.50 points, or 6.76%, to 1,555.77

Stocks in news: Shree Cement, M&M, Kalpataru Power, Omaxe, Subhash Projects

To see full report: OPENING BELL 240309

>Daily Calls (ICICI Direct)

Sensex: We said, "bulls struggling at technical resistances, but not yet giving up ... trading above 9K would be +ve signs for bulls, who may attempt to challenge these resistances for the upper Grey channel." Index opened strong above 9K, and taking the cue, bulls jacked it up 5% to cross the Greychannel. A/D improved to 6:1.

The action formed a huge bull candle having a gap-up area below its bottom. The action also closed the previous gap-down area at 9213-79. Trading above candle's high of 9455 can test upper end of the new Green rising channel, which is at around 9600. This could be the short term target/resistance for the Index.

To see full report: CALLS 240309

>Daily Derivates 240309 (ICICI Direct)

• The magnificent surge in turnover accompanied by a rise in Nifty suggests that cash-based buying has happened in the last session. Fresh long positions were added in the April series with continuing short covering in March. Markets are likely to trade with a positive bias in today’s session as well

• The PCR-OI zoomed to 1.78 from 1.59 on account of humongous addition of 48763 contracts in the 2900 Put followed by 11564 contracts addition in the 3000 Call option. Most of the Call writers at 2700, 2800 and 2900 level have covered their positions with maximum unwinding of 27835 contracts in OI witnessed in the 2800 Call. A total of 17346 contracts in OI got unwound in the 2900 Call option. With an addition of 4173 contracts in 3000 Call and rise in IV, we feel some Call buying was seen in this strike price. The 2900 Put IV has moved from 28.35 to 41.21. It could be due to ‘Put Hedge’ strategy adopted by many market participants

• FII data on Index futures depicts formation of long positions to the tune of Rs 465 crore with a rise in OI by 8.09%

To see full report: DERIVATIVES 240309


FY10-FY11E EPS cut but 2 year EPS CAGR still 34%; Buy
FY10E Brent price forecast has been raised by 12% to US$56/bbl. This should have meant 2% upgrade in RIL’s EPS. However, a cut in KG D6 gas production rate now assumed by us has meant 6% cut in RIL’s EPS. FY11E Brent price has been cut by 11% to US$62/bbl. This has meant just 2% cut in RIL’s EPS given its low sensitivity to oil prices. RIL’s PO is also cut by 3% to Rs1,540/share as E&P valuation is cut to factor lower oil price and lower gas output now assumed in FY10E. RIL’s strong earnings growth story due to KG D6 gas and new refinery is intact, in our view, with 2-year EPS CAGR to FY11E still at 34%. We retain Buy on RIL

FY10E EPS cut as KG D6 gas output rate cut to 45mmscmd
RIL has guided that KG D6 gas should ramp up to peak rate of 80mmscmd by March 2010. However, KG D6 average gas production rate in FY10E may be lower than 60mmscmd assumed earlier by us. We have now cut average gas production rate to 45mmscmd. This has meant 6% cut in its FY10E EPS.

Upside risk to FY10E EPS from weaker rupee
RIL’s FY10E EPS is based on rupee at Rs46 vis-à-vis US dollar. The rupee is currently far weaker at over Rs51. RIL gains from a weaker rupee. Its FY10E EPS would be 11% higher than base case at Rs143.7/share if rupee averages Rs50.

PO cut by 3% to Rs1,540; E&P valuation cut 5% to Rs814
Cut in oil price assumption and lower gas production in FY10E than earlier assumed has meant cut in RIL’s E&P valuation by 5% to Rs814/share from Rs855/share earlier. This has led to a cut in RIL’s PO by 3% to Rs1,540/share. Our PO is based on exchange rate of Rs46. It would be 10% higher, at Rs1,691/share, if Rs50 is taken as exchange rate to calculate PO.

To see full report: RELIANCE INDUSTRIES


Quick Comment: Jaiprakash has repurchased and extinguished ZCCBs (Zero Coupon Convertible Bonds) with a face value of US$32 million. Given the significant discount that Indian CBs have been trading at, we believe the company paid between 46-53% of the face value of the bonds. Using the middle of the range, we estimate that the buyback cost Jaiprakash around
US$16 million.

Step in the Right Direction: We believe that the buyback was funded through a mix of internal accruals and ECB proceeds (raised in February 2009). Assuming the interest on the ECB (LIBOR + 500 bps), as the financing cost of the transaction, the total cost of the buyback, including the interest on the loan (over the duration of the ZCCB) for Jaiprakash would increase to US$19.5 mn vs. the potential payout of US$47.3 mn on the maturity of the bonds (Exhibit 2). We estimate the savings from this buyback at around US$27.8 mn over the life of the CBs (discounted value of US$22.2 mn).

Too Small to Affect Our View: The buyback translates into 7.9% of the CBs outstanding for the company (Exhibit 1) and only 2% of its F2009E debt. Hence, the buyback in itself is too small to impact the financials for the company. However, we believe that the buyback represents a move in the right direction in terms of creating value for shareholders; in our view, there could be further buybacks from the company.

Remains our Top Reward Play in the Sector: The stock currently trades at extremely depressed valuations with a F2010 P/E of 9.8x (without assigning any value for both the listed and unlisted power and the real estate subsidiaries) and remains the cheapest stock in our coverage.

To see full report: JP ASSOCIATES

>Aditya Birla Nuvo (UBS)

Initiate coverage with a Buy rating; deep value even in stress-case scenario. ABNL is a conglomerate with interests in insurance (Birla Sun Life Insurance), telecom (Idea Cellular), other financial services, business process outsourcing and six key diverse businesses. We believe: 1) its strategy to make each business selffunded could play out over the next 12 months; and 2) even in our stress-case scenario (assuming 35% lower growth in insurance and valuing Idea Cellular (Idea), at the market price (instead of UBS’s price target) we estimate 23% upside potential. Our price target of Rs700.00 implies 78% upside potential.

Direct play on the fast growing insurance and telecom businesses
We forecast a 23% revenue CAGR for Idea in FY09-12. India’s insurance industry has been growing fast; premium collection has recorded a 38% CAGR for the last five years, and we forecast 15-17% long-term growth. Birla Sun Life (BSL) Insurance increased its market share from 3.3% to 5.2% in FY08. We believe the standalone performance is not significant in ABNL’s valuation.

Debt-funded model unsustainable; alternative funding could be a trigger Although we believe ABNL’s debt funded growth model has worked up to now, it needs to seek alternative sources of funding as its gross debt/equity is likely to rise to 1.01x in FY09 versus 0.68x in FY08. Also, promoter, Aditya Birla Group’s warrants worth Rs37.7bn, which expire in August, are unlikely to be converted. We believe securing alternative long-term funding will lead to the stock re-rating.

Valuation: sum-of-the-parts-based price target of Rs700.00
Our price target uses: 1) a DCF methodology to value Idea; 2) 14x NBAP for BSL Insurance; 3) 4% of assets under management for Birla Sunlife’s Asset Management Company (BSL AMC); and 4) EV/EBITDA for its standalone businesses. We assume a 30% holding company discount to value its subsidiaries.

To see full report: ADITYA BIRLA NUVO

>Areva T&D (Anand Rathi)

Raising estimates and target price. We marginally increase our sales and earnings estimates for CY09 and CY10 on the back of higher-than-expected execution and improvement in operating margins going forward. Our new target price of Rs159 is based on
13x CY09e earnings. Maintain Sell.

CY08 results, margins under pressure. Operating margin slipped 200bps to 16.5% in CY08 mainly due to raw material prices which climbed 140bps. Change in product mix and the outsourcing of components resulted in higher material costs. PAT margin declined 220bps to 8.5% due to higher interest expense and restructuring cost. High leverage (debt/equity ~0.6 CY08) and lower ‘other income’ would keep PAT margins under pressure.

Order backlog 1.5x CY08 sales. The company received orders worth Rs40.1bn in CY08, up 37% over CY07. The order backlog rose 35% to Rs40.9bn at end-Dec ’08 (from Rs30.4bn a year ago). Quarterly the order backlog has declined 4% from Rs42bn at end Sep’09.

Change in estimates. We raise CY09 and CY10 sales estimates by 2.5% and 0.8%, respectively, and PAT estimates by 2.5% and 2.7%.

Valuation. We arrive at a target price of Rs158 (earlier Rs155) for Areva T&D based on 13x CY09e EPS of Rs12.2.

To see full report: AREVA T&D

>Indian Hospitals (CITI)

Steady progress — Both Apollo and Fortis reported strong results for the first three quarters of FY09, with positive trends on occupancy and pricing. Although Apollo’s pharmacy operations remained a drag on overall profitability, the hospitals division continued to excel. Fortis, on the other hand, was buoyed by an impressive turnaround at Escorts, removing a key overhang for the stock.

Expansion plans — Despite tighter availability of capital, Apollo and Fortis maintain aggressive expansion plans. While Fortis intends to add c.4,000 beds by 2012 (organic and inorganic), Apollo plans to add c.3,000 beds over the same period. We see these as additions as exceptions, rather than the rule, for the sector, as smaller players adopt a more cautious stance. Inability to grow, due to scarcity of capital, may also trigger consolidation, which should favour larger players.

Low leverage offers comfort — The sector is largely under leveraged (net D/E of 0.33x in FY10E), especially given it is still in an investment phase. Both Apollo and Fortis appear comfortable on the funding side, at least with respect to the next 1-2 years, in our view. Beyond that, however, efficient execution and ability to generate cash from the existing set of hospitals will be critical.

Risks to growth — While we remain positive on the long term prospects for the sector, the current macro environment, especially falling income levels, could pose some risk to demand and impair the ability to take price hikes. At the same time, capital constraints could hinder expansion plans at the aggregate level, although Apollo and Fortis appear comfortable on this front.

To see full report: INDIAN HOSPITALS

>Weak $, investments to push gold higher; crude buoyant

Mumbai, - Commodity markets have yet again lived up to their reputation for volatility with macroeconomic developments, rather than demand-supply fundamentals, providing a boost in the last few days.

After languishing at relatively low levels, commodity prices, led by crude, have begun to move up. The Fed’s surprise decision to announce quantitative easing - buyback of government debts - has had a profound impact on the dollar which has dramatically weakened, while the equity market has begun to move up.

The inflationary impact of the Fed’s stance is also on top of market’s mind. As a hedge against inflation, hard assets are likely to interest investors.

While it may be premature to announce there is a recovery in risk appetite, the indicators from equity and commodity markets suggest the possibility; but one may have to wait for some time for confirmation. Is the turn of sentiment for real and will it boost demand for commodity exposure?

To be sure, the current move up is clearly dictated not by market fundamentals of demand-supply, but by a host of non-fundamental factors including government policies, expectations of improving liquidity and currency movements. Obviously, different commodities are likely to behave differently in their price performance. Caution is advised.

Last week saw big bounce back in the yellow metal after the Fed announced it would begin buying longer-term US Treasuries. The USD weakened considerably vis-À-vis the euro and was the weakest since early January. The announcement had implications for improved liquidity and inflation. No wonder, investor interest in the precious metal picked up.

Fresh inflows into exchange-traded products emerged. Total inflows for the year are up 389 tonnes, exceeding net inflows for the whole of last year by 67 tonnes. Holdings across the 15 major physical products have now breached the 1,600-tonne level.

On Friday, the metal witnessed a modest pullback. In London, the PM Fix was $954.00 an ounce, marginally down from the previous day’s $956.50/oz.

On the other hand, silver gained on Friday moving up to $13.65/oz (AM Fix), from $13.13/oz the previous day.

In the medium-term, conditions for a rally in gold beyond $1,000/oz are developing. Weakening of the dollar and inflationary expectations are sure to force investors to favour gold as a hedge. However, it is a matter of deep concern that physical demand in major markets (such as India and Turkey withprice-conscious buyers) is suffering because of high prices.

For instance, India’s gold import last month was zero. So, it looks like the market is driven by non-fundamental factors such as currency. A further pick up inequity markets will lure investors away from gold. In the event, the downside risk to gold prices cannot be wished away. According to technical analysts, there is a near-term upside bias.

Momentum remains supportive; and with the dollar under pressure, one could look for a break of 965 resistance to test the year highs at 1,005. However, within the precious metals sector, gold looks set to be a laggard as both platinum and palladium are outperforming, analysts asserted adding of the two, platinum looks to have the most potential as the gold/platinum ratio is on the verge of completing an impressive top.

In the medium term, a gold breakout above 931/44 targets a run beyond the high at 1,033 to 1,200.


The complex was generally up strongly over the past week, with aluminium surprisingly out-performing others. The metal posted a growth of 8.3 per cent week-on-week, while copper rose 7.7 per cent and lead moved 7.4 per cent higher.

On Thursday, 3-month copper prices rallied to over $4,000 a tonne, but drifted lower on profit taking.

Most other metals followed suit. The dollar depreciation, recent rally in copper and announcement of Chinese province Guangxi (a major aluminium producer) plans to buy 50,000 tonnes of primary aluminium were all supportive.

On the other hand, there are concerns relating to demand. Euro zone industrial production has been contracting at a rapid rate from the beginning of this year. Overall, support from the physical market does not show any sign of improvement. .It appears the rally has taken base metal prices to levels that look unsustainable given the lack of improvement in the fundamentals.

Some metals are over-valued and a pullback is a distinct possibility. At the same time, given that some base metals have been heavily shorted, short-covering rallies are not ruled out.

In copper, it may be worthwhile to wait for a pullback to a low $3,000 before going long; and in aluminium, selling into (short-covering) rallies is advisable. Lead may be ready for a pullback as the rally is overdone, while nickel may trade range-bound because of weak stainless steel market.

According to technical experts, while allowing for corrective weakness, as overbought momentum unwinds, the upside focus remains. With the speculative community still in the process of unwinding short positions, the upside potential should not be underestimated. Initial targets are seen at 4,366/4,547. Short term support can be found at 3,725/3,671, with a move below needed to warn of a greater correction.


The wave of bullish sentiment that swept the commodity market last week following various measures announced by the Fed helped support prices even as oil was no exception. With WTI trading above $50 a barrel for the first time this year and value of OPEC crude basket having moved above $45 from early January, there is a shift in the sentiment.

Experts assert that straight forward negativity towards the oil market has now given way to somewhat of a nuanced judgment of supply/demand fundamentals. Even dire warnings of negative global GDP growth have not really deterred the market.

Clearly, far from declining, demand is stabilising. Although global demand stays weak, it is not getting worse. Experts forecast year-on-year fall of two million barrels a day in the first half of 2009.

Crude oil inventory overhang is eroding and in recent weeks, stocks are beginning to show signs of tightening.

With non-OPEC output growth slipping and OPEC members respecting the output quotas, supply cutbacks are greater than demand side weakness. A weak dollar is supportive.

For the second quarter (April-June 2009), an average price of $50 a barrel looks eminently possible. Crude could move 10 per cent on either side that is between a low of $45 and a high of $55 in the coming months. For Q3, the average may rise further to around $60 a barrel.



We discussed a few key issues with HDFC management and we are also revising our estimates. We are reducing TP to INR1,600 from INR2,250. We expect HDFC to continue to enjoy a premium over its banking sector peers with its sticky customer base, better asset quality, a sector leading opex ratio and stable spreads. Reiterate BUY.

Loan growth – The company guided towards loan growth in the range of 18-20% for FY10. We are factoring for a loan growth of 16% for FY10 and we believe this growth will be more back end loaded in FY10.

Competition from state owned banks – Some state owned banks have announced a limited period mortgage loans at an interest rate of 8% for the first one year. While there has been wide spread speculation around the possible loss of market share for HDFC due to these competitive offers, we believe these concerns are misplaced for the following reasons –

1) We do not see a meaningful increase in property purchases as yet, an interest rate of 8% notwithstanding.

2) Given this is a limited period offer and the slow processing times of state owned banks, we do not anticipate a significant volume pick up through these offers.

Funding strategy – Management intends to use a flexible funding strategy depending on the prevailing liquidity situation. When liquidity is tight and term borrowing becomes expensive, HDFC has mobilized incrementally greater amounts of retail deposits as seen during October
2008 and vice versa. In easier liquidity conditions, the company enjoys a 50bps advantage for term borrowing vis-à-vis retail deposits. The current blended loan yield is 11% while the blended funding cost is approximately 8.6%.

Valuation - We are revising our TP for HDFC to INR1,600 from INR2,250– core mortgage TP revised to INR1,200 from INR1,700 and embedded value of subsidiaries revised to INR400 from INR550 after factoring in our recent TP reduction for HDFC Bank. At our revised TP, core HDFC trades at 2.3x our FY10E BV.

To see full report: HDFC BANK