Tuesday, March 31, 2009

>Daily Market & Technical Outlook (ICICI Direct)

Key points
Market outlook — Open flat to positive on mixed global cues
Positive — Rupee expected to gain
Negative – FIIs, MFs selling

Market outlook
Indian markets are likely to open flat to positive, taking cues from Asian markets. The SGX Nifty was trading 15 points up in the morning. Other Asian markets were also positive in the morning despite the US markets falling around 3% on an average. The Japanese government announced that it was prepared to unveil a new stimulus package, which bucked up the confidence in Asian markets. The rupee is expected to gain from Asian stocks gaining

■ The Sensex has supports at 9510 and 9330 and resistances at 9710 and 9820. The Nifty has supports at 2960 and 2920 and resistances at 3120 and 3160

■ Asian stocks rose as Japan prepared to unveil a new stimulus package and confidence among South Korean manufacturers rose. The Nikkei gained 72.8 points, or 0.9%, to trade at 8,308.8. The Hang Seng advanced 169.1 points, or 1.3%, to trade at 13,625.5

■ US stocks tumbled on Monday as two major US automakers took a step closer to potential bankruptcy and a spate of European bank rescues heightened concerns over the financial system's health, putting the brakes on a recent run-up. The Dow Jones lost 254.16 points, or 3.27%, to 7,522.02. The S&P 500 tumbled 28.41 points, or 3.48%, to 787.53. The Nasdaq fell 43.40 points, or 2.81%, to 1,501.80

■ Stocks in news: DLF, NMDC, Tata Power, Grasim, Kamat Hotels, Cadila Healthcare

To see full report: OPENING BELL 310309

>Daily Calls (ICICI Direct)

Sensex: We said, "Doji can be a potential turning point for the short term, if we see a strong trading below its low at 9913," Index opened gap-down below 9913, and lost nearly 5% for the day. Bankex lost more, down 8.5%. Metals and Realty also lost more than 7%. A/D ratio turned negative, at 1:2.

The action created a bearish Evening Doji Star pattern, confirming Friday's Doji as a short-term turning point as argued. It also broke both Blue and Green channels. Gap-down area at 9902-13 is now a new technical resistance. Though pull-back to Green channel is possible, break of low at 9520 would continue weakness.

To see full report: CALLS 310309

>Daily Derivatives (ICICI Direct)

Derivative Comments

• Nifty April futures shed 2.02 million shares in OI accompanied by a narrowing of discount to 10 pointsindicating closure of long positions in the Nifty. A similar trend was also seen in FII Index futures wherein there was a net sale of Rs 995 crore along with a drop in OI by 3.77%

• The options data suggests maximum addition of OI in the 3200 Call option, which added 14261 contracts with rise in IV from 33.35 to 34.48. The highest volume was registered by the 3100 Call followed by 3000 Put. The OI addition in 3000, 3100 and 3300 Calls was 8411, 4713 and 8488 contracts. All these Call options saw an upward shift in IV. On the other hand, unwinding of contracts was seen in Puts ranging from 3000 to 3200 wherein some short covering was seen in 3100 and 3200 while profit booking by Put buyers was seen in 3000 Put. Maximum addition in Put option was seen in 2600 adding 10673 followed by 2700 adding 7352 contracts. The drops in IVs with rise in volumes indicate Put writing in these Put options. Moreover, an addition of 4865 contracts in the 2900 Put was accompanied by a fall in IV from 39.34 to 38.97. This along with good volumes further suggests that this level could act as a decent support for the Nifty on a closing basis for a couple of sessions.

To see full report: DERIVATIVES 310309


Value, with lots of negatives cooked in; Initiate at Buy

■ Buy. We initiate coverage on the ICICI Bank with a Buy and a target of Rs430. We expect on-going fundamental improvements and adequate NPA coverage to lead to stable RoEs over FY09-11. We believe the subsidiaries have value, and are not reflected in the stock price.

■ Fundamental improvements underway. The bank has been slowing asset growth and placing greater emphasis on protecting margins, improving productivity and maintaining credit quality. These measures would improvement fundamentals.

■ Subsidiaries have value, not reflected. Key subsidiaries of the bank (in life insurance, general insurance, asset management and the securities business) are leaders in their businesses. In our view, the current price does not reflect the value of the subsidiaries, which we estimate at Rs105.

■ Adequate NPA coverage. At 51%, ICICI’s NPA coverage is not the best, but should hold it in good stead when asset quality is under duress. The coverage ratio is expected to be +50% over FY09-FY11, with net NPAs at ~3.2% in FY10.

■ Valuation. Our fair value of Rs325 (standalone bank) is based on the two-stage DDM (CoE: 15%; beta: 1.3; Rf: 6.5%). We value its subsidiaries at Rs105 a share. At our target price of Rs430, ICICI would trade at 1.1x FY10e ABV. Its target multiple is at a 40% discount to HDFC Bank’s and a 5% premium to the sector.

To see full report: ICICI BANK

>Tata Chemicals Ltd. (MERRILL LYNCH)

Company meeting reinforces confidence

Meeting with management reinforces confidence, Buy
Post our channel checks and meeting with Tata Chemicals management we believe price correction in the stock is overdone given i) stabilizing prices in soda ash, ii) strong expected free cash flow led by urea and iii) improving scenario in DAP. The stock trades at 0.6xFY10E P/BV, 5xFY10E PE and at ~22% of the replacement value. We reiterate Buy on the stock given attractive valuations.

To tie up for gas; De-bottlenecked capacity on stream
Post de-bottlenecking, urea capacity is up 30% and is already functional. The company is in talks with Reliance Industries for gas supply and is likely to get ~US$6/mmbtu delivered cost. Moreover, we expect DAP and IMACID operations to become profitable in Q1 FY10 given strong correction in rock phosphate prices globally.

Soda ash prices are stabilizing
As per the company soda ash prices are stabilizing and demand in North America is stable despite slowdown as flat glass demand gets replaced by container glass. The company has also not scaled back price hikes it got in CY08 in UK and Netherlands. Media reports suggest a likely 31% safeguard duty on cheap soda ash imports from China, which we believe will be a positive for Tata Chemicals.

Attractive valuations; strong free cash flow generation
Based on the replacement value of INR570 per share, the stock is trading at a discount of 78%. It is at 0.6xFY10E P/BV and 5xFY10E PE. With EBITDA/interest ratio at 6xFY10E and strong free cash flow expected ahead, debt servicing concerns are overdone in our view. We reiterate our Buy rating on the stock with a price objective of INR180.

To see full report: TATA CHEMICALS

>Larsen & Toubro (BNP PARIBAS)

Delays likely in infra projects.....

Takeaways from meeting with K Venkatesh, CEO L&T Infrastructure Development Projects Ltd (IDPL) on March 26.

Company estimates opportunity of INR750b in near-term
These opportunities exist across highways (NHAI + state), ports, railways, water, power transmission and hydropower. L&T is considering approximately 50% of this total opportunity; the company is cautious about bidding for Public Private Partnership (PPP) projects due to complex regulations. Government regulations and policies are primarily responsible for delays. Some projects have become commercially unviable due to change in policy/regulation. As a result, achieving financial closure for these projects is challenging.

Highways offer near-term opportunities, but are risky
National Highway Authority of India (NHAI) has reduced concession periods for several projects resulting in lower IRRs, so project finance is difficult to obtain. NHAI has also capped the upside from increase in traffic estimates. State government projects are preferable as there is a single-point regulatory clearance; however, annuities and projects with Viability Gap Funding (VGF) face cash flow mismatch risk. L&T is wary of servicing debt obligations with cash flows from the state governments.

Select opportunities in railways, ports, and transmission
The New Delhi Railway Station redevelopment project (INR90b), Mumbai Metro Line 2 (INR76.5b) and Bangalore high speed rail link (INR45b) are under consideration vs total opportunity of INR331b in railways. In ports, the container terminal contract at Ennore port
(INR13b) and coal import terminal project at Mormugoa port (INR6b) are the only projects that are attractive, with a total opportunity of INR86b. Power transmission offers an INR109b opportunity and the company is considering INR67b of these.

We maintain our REDUCE rating on L&T due to lower order intake and elongation of the execution cycle of existing orders. We maintain our INR536 TP based on our SOTP valuation (INR460 from standalone based on 8.5x FY10E EBITDA + INR76 from subsidiaries).

To see full report: LARSEN & TOUBRO


With no sign of a real recovery in the property market in 2009, DLF’s debt will remain high due to weak project-development cashflow. With stock down 85% from its January-2008 peak, the question is: when to buy? Factoring in lingering risks but also recognising the sizeable value of the firm’s assets, we see Rs104 as an attractive entry point, which implies 41% downside. However, on a 12-month view, we project 26% downsideas the PB multiple adjusts to reflect low ROE.

Safe entry point still 41% away
A Rs104 valuation only gives credit to DLF’s landbank and cashflow from projects under execution; it fully discounts the weak outlook for new-project launches. Using history as a guide, a sustainable upturn in property stocks appears to be another one-to-two years away. In the interim, we expect DLF to derate as the market recognises its severe ROE deterioration. We base our 12-month target price of Rs130 on a blend of NAV and PB multiples.

Residential not as lucrative
DLF’s strategy of leading price cuts in the residential segment has helped revive volumes, but we believe the initial positive response will peter out as buyers look for further price cuts. The double-whammy of narrower margins and elongated working-capital cycles will translate into an 82% fall in housing profits in 2008-10.

Steep fall in non-residential earnings
Representing about 75% of FY08 earnings, non-residential sales will fall 43% in FY09CL and a further 94% in FY10CL, given the severe slowdown in office and retail space. DLF has already stopped the sale of office assets to group company DLF Asset (DAL) given weak demand for leased space in special economic zones (SEZs). Rental income will provide support but, here too,
renegotiation risks exist. Consensus has built in a 32% earnings recovery from 3QFY09 forecasts which we believe is too optimistic.

Extended-balance-sheet stress
DLF’s balance sheet has geared up substantially due to large land payments and capital-intensive developments. Debt has risen 16x since June 2007 to Rs148bn. While the company has no major debt repayments until end-FY11 thanks to its recent refinancing, the squeeze on profit means that operating cashflow largely will be spent meeting annual interest payments of Rs18bn. Potential financial restructuring of DAL will further aggravate the cashflow issue as one of its investors needs to exit.

To see full report: DLF

>India Steel Sector (UBS)

Compelling valuations and fundamentals

Regression analysis used to estimate fair value of companies
We believe Tata Steel and SAIL are undervalued based on valuation multiplier through our regression analysis. According to our regression analysis, there is a linear relationship between: 1) EV/t and EBITDA/t; and 2) EV/IC and ROIC. Based on our analysis, we conclude that Tata Steel and SAIL are undervalued.

Indian stocks offer value
We lower our India capacity estimates to 70mt (73mt earlier) for FY10E and expect utilisation to remain at around 80% in our base estimates for steel demand to FY12E. We expect Indian consumption to be 52.5mt (up 2.9%) in FY10E. We believe Indian steel companies have been beaten down to 0.3-1x P/BV levels and valuations should correct up given our stable steel price outlook and lower material costs. Stocks have priced in worst-case earnings and consensus estimates should increase, in our view.

Steel sector—close to inflexion point
UBS Basic materials strategist, Peter Hickson, expects cyclical opportunity, which could see a potential re-stocking in the space. With steel prices down 12-15% over the past one month in India, we believe there is limited downside from here given further production cutbacks in surplus markets, a moderate pick-up in demand driven by the cyclicality, and infrastructure-led demand growth in India.

Valuation: Buy on Tata Steel, SAIL; upgrade JSW to Neutral
We upgrade Tata Steel to a Buy, maintain our Buy rating on SAIL, and upgrade JSW to a Neutral rating. We use DCF to derive our price targets for Tata (Rs275), SAIL (Rs125) and JSW (Rs225), but given weak sentiment we cross-check on EV/tn and EV/IC regression analysis.

To see full report: INDIA STEEL SECTOR

>India Mobile Sector (UBS)

India adds 13.7m subs in February 2009

Detailed analysis of India mobile subscriber data
In this note, we present a detailed outlook on the Indian mobile subscriber base from an operator-wise and a service area-wise perspective. We have also the analysed Bharti, RCOM and Idea subscriber base, and subscriber market share.

Subscriber growth momentum continues in February 2009
India added 13.7m mobile subs in February vs 15.4m in January. Bharti leads the subscriber market with a share of 25%, followed by RCOM at 19% and Vodafone at 18%. RCOM continued to gain a significant incremental market share of 25% in February (compared with 32% in January), driven by its attractive GSM prepaid plan offering. Bharti, Vodafone and Idea captured incremental market share of 20%, 19% and 11%, respectively, last month.

Reiterate 12-month Buy, Short-term Sell on Bharti; Buy on Idea, RCOM
India is an ultra-competitive mobile market, and we have already factored in an increase in competitive intensity following RCOM's GSM launch (ie, our estimates take into account lower revenue per minute realizations leading to lower margins and returns). We maintain a 12-month Buy rating on Bharti, RCOM and Idea. We introduced Short-term Sell ratings on Bharti, Idea and RCOM on 15 January 2009 as we expected: (1) negative newsflow on pricing moves post RCOM GSM launch; and (2) consensus earnings downgrades. The consensus FY10 net profit estimate has declined 20% for Idea and 24% for RCOM since 15 January. Therefore we dropped our Short-term Sell ratings on these two effective 13 March 2009. Since the FY10 net profit consensus earnings estimate for Bharti has declined by only 4%, we expect more downgrades and hence maintain our Short-term Sell rating.

To see full report: INDIA MOBILE SECTOR

>India Market Strategy (UBS)

Maintain bullish stance on Indian an market.....

Launch of UBS India model portfolio; 12-month Sensex target of 13,500
In this report, we launch the UBS India model portfolio. Our base-case scenario is for the Indian economy and corporate earnings to bottom by H2 FY10 and for a full recovery to occur in FY11. We are positive on the Indian stock market on a 12- month view and set a March 2010 Sensex target of 13,500.

Overweight: Autos; Banks; and Metals
Auto demand is likely to improve based on the low interest rate environment. We believe banks will benefit from an economic recovery, as the focus moves away from NPLs into growth. Globally, UBS believes Basic Materials are poised for a turnaround; hence our positive stance on Metals.

Underweight: Consumer Staples; IT Services; and Oil & Gas
We are Underweight the Consumer sector, as we believe sector outperformance will not continue. We also believe IT Services face strong headwinds and an imminent recovery looks unlikely. We are Underweight the Oil & Gas sector, as ONGC is unlikely to outperform in a recovery and could be affected by government intervention.

Top Buys: ICICI Bank; BHEL; Maruti; Reliance Infra; ITC; Tata; ABNL
ICICI Bank is a UBS Key Call; valuations are compelling as it trades at 0.5x adjusted P/BV (standalone). Bharat Heavy Electricals (BHEL) has a strong order book and hence earnings visibility. We believe Maruti is a good way to play the cyclical recovery in passenger car demand. Tata Steel, ITC, Reliance Infra, Infosys and Aditya Birla Nuvo (ABNL) are our other key Overweights.

To see full report: INDIA MARKET STRATEGY