Wednesday, March 25, 2009



• With another round of short covering continuing in the Nifty March series, the April futures added 5.71 million shares in OI with the discount almost vanishing. This suggests more long rollovers in Nifty. The rollover in the Nifty till date is 57.74% whereas marketwide rollover is 49.99%

• The options data depicts short covering in 2800, 2900 Call options wherein 2800 Call has seen an unwinding of 15129 contracts whereas the 2900 Call has seen a closure of 19959 contracts. The 2800 Call IV is at 44.57 while that of 2900 has surged from 39 to 44. The 9539 contracts addition in the 3100 Call was accompanied by a rise in IV from 36 to 43. This suggests some Call
buying has happened at this strike price. Unwinding of 15173 contracts in 2800 Put suggests profit booking by Put writers whereas addition of 13831 contracts in 3000 Put along with rise in IV from 36 to 44 indicates some Put buying in the latter half of the session. Moreover, the increasing trend of Put IVs in April series suggests more of Put buying has happened in OTM Puts. We feel the market is likely to take decent support at 2900 on a closing basis in today’s session

• FII index futures added stupendous OI by 13.23% with a net buy of Rs 371 crore

To see full report: DERIVATIVES 250309


Sensex: We said, "Trading above candle's high of 9455 can test upper end of Green channel ... This could be the short term target/resistance for the Index." Up nearly 3% initially, Index did touch the target, only to find its short-term resistance as argued. Retracing all the gains, it closed flat. Metals lost 3%. A/D ratio ended -ve.

The action formed an up day, but a bear candle with an upper shadow. This indicates hesitation at technical resistance near upper channel and last month's high. But it doesn't indicate breakdown as yet, until we see a strong selling below its low at 9400. Holding 9400 can, therefore, encourage positive efforts, perhaps initially.

TO see full report: CALLS 250309


■ Indian markets are likely to open flat today, taking cues from global markets. Asian markets were trading mixed in the morning amid caution over whether US government moves to shore up the economy will succeed. Before this, US markets fell on the uncertainty of the US plan of buying toxic assets. Bank stocks, which posted their best day in at least 16 years on Monday, dragged Wall Street lower as investors booked profits amid questions whether the US government's plan to spend up to $1 trillion to buy up toxic bank assets would work. We saw Indian markets ending nearly flat on Tuesday after a volatile session. Crude bounced to settle near $54/bbl as the dollar strengthened. The rupee is expected to start weaker on Wednesday,
following the dollar’s gains against Asian currencies and month-end import payments heighten demand for the US currency

■ The Sensex has supports at 9420 and 9350 and resistances at 9650 and 9770. The Nifty has supports at 2920 and 2900 and resistances at 3000 and 3030

■ Asian stocks declined after Japan’s exports slumped by a record margin, metal prices dropped and Sanyo Electric forecast a loss. The Nikkei fell 61.6 points, or 0.7%, to trade at 8,426.7. The Hang Seng fell 197.8 points, or 1.4%, to trade at 13,712.5

■ US stocks slid on Tuesday as investors paused to reassess the likely success of the government's latest plans to clean up bank’s balance sheets and revive the financial system, a day after initial euphoria over the plan drove huge gains. The Dow Jones was down 115.65 points, or 1.49%, at 7,660.21. The S&P 500 was down 16.59 points, or 2.02%, at 806.33. The Nasdaq was down 37.43 points, or 2.41%, at 1,518.34

■ Stocks in news: Patel Engineering, GAIL, NIIT, Ashok Leyland, Reliance Communication and DLF

Sensex: We said, "Trading above the candle's high of 9455 can test the upper end of the Green channel ... This could be the short term target/resistance for the Index." Up nearly 3% initially, the Index did touch the target, only to find its short-term resistance as argued. Retracing all the gains, it closed flat. Metals lost 3%. The A/D ratio ended negative.

The action formed an up day, but a bear candle with an upper shadow. This indicates hesitance at technical resistance near the upper channel and last month's high. However, it does not indicate a breakdown as yet, until we see a strong selling below its low at 9400. Holding 9400 can, therefore, encourage positive efforts, perhaps initially.

To see full report: OPENING BELL 250309

>Reliance Communications (ANAND RATHI)

Net-adds drop in February but still tracking in-line

3.4m net-adds in February. This implies a decline of 32% from the record 5.0m reported in Jan, yet RCOM is on track to meet our 4QFY09 forecast of 11.2m net-adds; the company needs to add 2.8m subs in March, which is achievable in our view. Furthermore, our FY10 forecast of sustainable monthly net-adds for RCOM is 2.1m, coupled with a 14% yoy decline in the ARPU.

Why the sharp decline in monthly net-adds? Three reasons in our view: (1) 10% fewer days in Feb vs. in Jan, (2) Reduced attractiveness of the promotional GSM package – initial cost to the subscriber is Rs100-110 vs. Rs25-50 in Jan, also reduction in free talktime value to Rs4/day (for 90 days) vs. Rs5-10 previously and, (3) conscious effort on the part of RCOM to limit the supply/sale of promotional GSM SIM cards, especially in those circles where RCOM is close to qualifying for additional spectrum.

4Q recovery thesis intact. A positive surprise on net-adds (vs. our 11.2m forecast) now appears unlikely, but the key is revenue growth. RCOM has been offering discounted tariffs to boost usage and has indicated that the trends in recharge and ‘paid’ minutes are better than their own expectations. Furthermore, prebooking of bulk of the network operating costs and control in ad expenditure should contribute to healthy EBITDA growth in 4Q.

We find RCOM stock attractive given potential recovery in revenue/EBITDA growth and inexpensive valuations (FY10 P/E of 7.7x). Key risks include irrational competition and 3G auctions.


>Ranbaxy Laboratories Ltd. (RELIANCE MONEY)

UK & Australia Regulators approve Paonta sahib facility
Ranbaxy’s Paonta Sahib plant (that has been under U.S. Food and Drug Administration (USFDA) Import Alert since September 2008) receives approval from United Kingdom (UK- MHRA) and Australian (TGA) regulatory authorites for GMP Compliance. Moreover, the UK - MHRA approval will also apply to all product filings for the entire European Union region. The European approval comes as a consolation for Ranbaxy’s Paonta Sahib facility, as USFDA has recently halted reviewing its all drug applications having link with Paonta Sahib facility on the ground of falsified data and test results. Likewise, the Australian (TGA) approval is mild positive for Ranbaxy. In fact earlier this month, TGA had raised a safety & efficacy concern over Ranbaxy’s Paonta Sahib facility, subsequent to USFDA’s halt of reviewing Ranbaxy’s all drug applications

Though the favourable decision from Europe and Australian regulator has provided some comfort to Ranbaxy, the undergoing USFDA issue with the Paonta Sahib plant and Dewas facility continues to be cause of concern (the impact of which has already been factored in our estimates). And we believe this UK & Australia approval as just a sentiment booster and would not bring any incremental financial benefit. Thus, we maintain our estimates for Ranbaxy, as per which the EPS for CY09E and CY10E stands at Rs 11.8 and Rs 20.6, respectively. With the multiplying impact of USFDA safety issues and outstanding foreign debt exposure (over $500mn) at a time of steadily weakening Rupee/Dolla scenario, the stock faced heavy sell-off leading to sharp correction in prices from over Rs 250 levels to CMP Rs161. But with the FII holding minimising to about 4%, we don’t anticipate any major down side from current level. On the other hand, the strong bout of revenues from the FTF (First-to-File) opportunities of generic Valacyclovir and Tamsulocin during late 2009 and early 2010, provides good earning visibility for Ranbaxy in medium term.

Recommend BUY with retained TP of Rs 189
At the CMP, Ranbaxy is attractively valued at 8x its CY09E earnings (after factoring the NPV value worth Rs 70 for its FTF pipeline). Hence, with about 25% price correction in in Ranbaxy, we upgrade our rating from Hold to Buy with the earlier fixed target price of Rs 189.

To see full report: RANBAXY

>Infrastructure Sector (JM FINANCIAL)

Concerns remain…..

Infrastructure stocks have seen a sharp correction over the last 12 months. Reasons include rising interest rates (highlighted in our report dated 10th July 2008), reducing future order book visibility given slowdown in the capex cycle in a weak economic environment and sharp fall in real estate valuations leading to the decline in subsidiary valuations of the infrastructure companies. Where we believe valuations’ compression of subsidiaries has been accounted for, and interest rate pressures will ease off, visibility of future order book still remains lower than 12 months ago. Additionally, prospects of cancellations/delays in existing projects given the sharp economic slowdown still remain. For the purpose of future outlook, we analysed the annual budget outlays of states and government publications on achieved targets to get a sense of the spending patterns of the Xth five year plan. Our analysis surprised us positively, given that government spending has not seen substantial slippages. However, it must be noted that this was supported by a robust economic environment and reducing state fiscal deficits. Given the current weak macro-economic environment and upward pressures on deficits we have accounted for higher proportion of slippages in the planned infrastructure spending. Accordingly, we found that order flow prospects for FY10E do not appear encouraging…

Xth plan spending patterns encouraging: During the Xth plan we found slippages were not very high v/s planned spending patterns. States executed around 80% of planned spending across the irrigation, power and roads segments. The Centre slipped on irrigation targets substantially, but saw limited slippages in power, given it is driven by spending of companies like NTPC, NHPC and Power Grid.

Organized players market share seen rising during Xth plan: In context of the spending targets achieved during the Xth plan, companies under our coverage had the highest market share in power and lowest in roads with a rising trend seen across segments. Interestingly in terms of market share, L&T stands out in power, while IVRCL leads in irrigation.

XIth plan prospects healthy but….: For the XIth plan period Planning Commission forecasted a sharp jump in infrastructure investments. However, based on annualized spending patterns of the states during FY08-FY10E, we realized quite a bit of the spending is backended in nature. Although, this is similar to trends in the Xth plan, during that period it was supported by reducing fiscal deficits of states. Given this trend is unlikely to continue, we have budgeted higher slippages for the XIth plan.

Sector anticipated to continue underperformance: Based on the planned spending and derived market shares of companies, we have charted the anticipated order inflow during FY10E. Given the derived order inflows are muted, our earnings expectations is muted for FY11E. Based on our earnings expectations, we maintain L&T and Punj Lloyd will not give returns despite the share price correction and remain positive on IVRCL.


>Cement Sector (MOTILAL OSWAL)

Prices recover; short-term outlook positive; upgrading FY10 estimates

We interacted with various cement dealers and marketing personnel of cement companies across regions and across brands, to understand the evolving demand-supply scenario, pricing trends and short term outlook.

Prices recover by Rs5-20/bag: Cement prices have increased across all key markets by Rs5-20/bag, except in a few pockets such as Gujarat and south India (excluding Andhra Pradesh). While price increases in central India (Rs15-20/bag), east (Rs7-10/bag), north (Rs10-15/bag) and Andhra Pradesh (Rs8-10/bag) markets are driven by strong demand, price increase in the west is despite muted demand.

Demand boosted by individual housing, pre-election infrastructure spend: Cement demand over the last 3 months is driven by individual housing and pre-election spend on infrastructure by both the state and Central governments. However, demand from organized real estate, ITES and organized retail has fallen.

Short-term demand outlook positive, but medium-term outlook remains uncertain: All the dealers/marketers we interacted with are confident that the momentum in demand will continue at least until June 2009, driven by ongoing infrastructure projects, individual housing and completion of ongoing real-estate projects. But demand outlook beyond June 2009 is uncertain; this would depend on a revival in organized real estate and initiatives by the new government.

Upgrading earnings, led by improvement in realizations: For companies under our coverage, we are upgradinig our earinings estimates by 12-26%, driven by improvement in cement prices across key markets as well as cost savings in energy, freight and other expenditure. We are also rebasing our cement price assumptions to Rs10/bag decline in FY10 from current levels (v/s Rs10/bag decline over FY09E average).

Valuations attractive: Asset valuations for all the companies are below the replacement cost of US$100/ton. Cement stocks have outperformed the benchmark, driven by positive news flow in form of higher demand growth, stronger pricing and positive government actions. However, post 1QFY10, impending excess supply situation would put pressure on volumes and profitability. Among large cap stocks, Grasim remains our top pick, and we prefer Birla Corp and Shree Cement among mid-caps.

To see full report: CEMENT SECTOR

>Asia Insights (HSBC)

Bounce - or bottom?

■ History shows that bear markets end when monetary policy is eased aggressively and the banking system is sorted

■ The former has now happened; the latter may soon

■ There seems more upside than downside risk for stocks

“A week is a long time in politics”, former British Prime Minister Harold Wilson famously said. It can be a long time in stock markets too. It was only Monday last week that the S&P500 hit a new cycle low, 57% off its October 2007 peak. In the seven trading days since, it has risen 17%. Asia ex Japan didn’t quite make a new low last week (though Japan, India and Singapore did) but it has bounced 12% in the past seven days too.

Of course, strong rallies are a typical characteristic of bear markets. We have already had four of 10% or more in Asia during the current episode (Chart 1). But could this bounce be something bigger and continue for some time? Remember that during the 1997-98 Asian Financial Crisis, there was one rally of 50% (Chart 2). Or, even, could last week prove to be the bottom for the market?

History can provide some lessons. As Mark Twain said: “History doesn’t repeat itself, but it does rhyme.” Similar episodes in the past – the 1930s in the US, Sweden’s 1992 banking crisis, Japan in the 1990s – give some pointers. Most clearly, when recession is caused by a financial crisis, stocks tend to bottom when the last troubled bank is rescued – even if the economy remains weak for some time after. Second, when stocks do bottom, the rebound can be huge: the Dow rose 371% in the five years after it bottomed in 1932.

With further positive surprises possible (US Treasury Secretary Geithner can hardly disappoint the markets any more with his bank bail-out plan) and quantitative easing beginning, there seems more risk on the upside than on the downside for markets now.

To see full report: ASIA INSIGHTS

>Kalpataru Power Transmission (HSBC)

Reiterate OW (V); strongest order book and least geared

The company has the strongest order book of INR68bn, or 2x of FY09e sales, compared to peers

■ FY10e net debt-to-equity of 0.4x is least among peers like Jyoti structures, at 0.6x, and KEC International, at 1x

■ Reiterate our Overweight (V) rating and INR360 target price; new order flow is potential trigger, lower margin is key risk

● Strongest order book: Kalpataru Power in the last month announced orders of INR11.6bn, including orders from PGCIL and a pipeline laying order from Hindusthan Mittal Energy Limited (HMEL). Thus, its consolidated order book has increased to cINR68bn, or 2x FY09e sales (this excludes part of Q4FY09e revenue). Its stand-alone order book is INR51bn, or 2.4x of FY09e stand-alone sales, is the strongest among the transmission tower companies like Jyoti Structures, at 1.9x of FY09e sales, and KEC International, at 1.5x.

● Lowest balance sheet gearing: In a business that is working capital-intensive, Kalpataru Power has the least balance-sheet gearing, of FY10e net debt/equity of 0.4x, compared to peers such as Jyoti structures, at 0.6x, and KEC International, at 1x. Based on FY10e PB, Kalpataru Power stock is trading at the cheapest multiple of 0.7x; among peers, Jyoti Structures is trading at 0.8x and KEC International at 0.9x.

● Risks to earnings: The key downside risks that we see: 1) lower-that-estimated revenue and margin for transmission line business. 2) lower execution by JMC projects and the impact of the slowdown in the real estate sector; we estimate that even if revenue from JMC project is flat in FY10e, the impact on consolidated EPS of Kalpataru will be only c3%. 3) higher interest cost, as a 100bps rise in effective interest rates would lead to c3% fall in stand-alone profits.

● We reiterate our Overweight (V) rating and INR360 target price: We value Kalpataru using PE and PB multiple-based methods. Based on a target PE of 5x and December 2009e EPS, we arrive at a fair value for the stock of INR340. Our target PB multiple is 1x, and based on December 2009 BVPS, we arrive at a fair value of INR380. Our target price of INR360 is the midpoint of our PE and PB multiple-based valuations.


>Crude drifts dn; doubts over fundamentals linger

Singapore - Crude oil futures drifted lower Tuesday in Asia as traders mulled their next move after an overnight equity-led rally, amid lingering doubts if the market can sustain its upside without fresh support from supply-demand factors.

While Asian share markets held steady in the wake of the U.S. Treasury's plan to take troubled assets off the balance sheets of banks - a move aimed at shoring up the financial sector and possibly lead to a broad-based economic recovery - there may be little else to support oil prices in the near term, with global inventories staying bloated due to soft demand, traders said.

"I am not at all bullish," said Ryoma Furumi, a broker at Newedge Japan.

"It seems the dead cat is bouncing too high - we've heard that some monies are coming back into the market. (But only) the U.S. dollar and stocks are driving the market upward."

On the New York Mercantile Exchange, light, sweet crude for delivery in May traded at $53.61 a barrel at 0650 GMT, down 19 cents in the Globex electronic session.

Prices were largely range-bound, with the front-month contract locked in a narrow 42-cent band.

Nymex heating oil futures for April slipped 87 points to 146.20 cents a gallon, while April reformulated gasoline blendstock traded at 148.19 cents, 62 points lower.

Nymex crude Monday rallied 3.3% to a fresh 2009 high as orders poured in, mirroring a surge on Wall Street, where the Dow Jones Industrial Average chalked up nearly 500 points.

The dollar also continued to lose ground, boosting demand for dollar-denominated commodities such as oil, a development that some analysts said may be hard for the market's bears to ignore.

"We have emphasized that underlying fundamentals in the energy complex have not shown any improvement and probably won't for several months. But, any additional weakening in the dollar amidst longer-term inflationary concerns will spur significant speculative buying interest especially if accompanied by further gains in the stock market," Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates, said in a note to clients.

"Within such an environment, it is best to simply go with the flow in the process of pushing sizable supply surpluses and a continued weak demand environment to the backburner, at least temporarily."

Looking ahead, weekly U.S. government oil data due Wednesday may offer some directional cues.

The country's commercially held crude inventories are expected to have risen 1.4 million barrels in the week to March 20, with refinery run rates probably unchanged, according to the average prediction from 10 analysts polled by Dow Jones Newswires.

Gasoline stockpiles were likely to have slipped just 100,000 barrels and distillate stocks flat on-week, the survey showed.

Before the federal Energy Information Administration's report, the American Petroleum Institute industry group will release its own set of data at 4:30 p.m. EDT Tuesday, or 2030 GMT.

At 0650 GMT, oil prices on London's ICE Futures exchange also fell, with May Brent crude losing 32 cents to $53.15 a barrel.

Gasoil for April changed hands at $466 a metric ton, down $1.50 from Monday's settlement.

To see full report: COMMODITY CONTROL