Thursday, April 2, 2009

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty April futures added 379300 shares in OI. The cost of carry moved from negative 2.30% to positive 0.47% suggesting covering of shorts in intraday and fresh long build up, which was seen in the latter part of the session. Also, FIIs have covered shorts in index futures to the tune of Rs 338 crore. All these indicate that the positive momentum is likely to continue for a
couple of sessions

• The options data depicts a net addition of 67630 contracts in Put OI compared to 2113 contracts addition among Call options. The 3000 Call was the highest volume gainer with unwinding of 8932 contracts in OI. The 3100, 3200, 3300 and 3400 Calls added 2491, 7027, 7315 and 4785 contracts, respectively. All these options witnessed a drop in IV suggesting some Call writing in OTM Calls. On the flip side, the most active Put was 3000 followed by 2900. Nearly 17,000 contracts addition was seen in both these Puts. Other than this, the 2600 Put added 10,620 contracts followed by 9917 contracts addition in 2800. The IVs of all Put options have also declined. We feel many market participants could have adopted ‘Sell Straddle’ strategy at 3000. The 3000 level holds support for the Nifty and may continue to do so in sessions to come.

To see full report: DERIVATIVES 020409

>Daily Calls (ICICI Direct)

Sensex: We said, "Proceedings can be positive for testing Monday's falling gap. Watch for resistance at the gap however." Index moved positive, as expected, and finished 2% higher, exactly at the gap. Realty, IT, Oil& Gas, and even small-caps outperformed Sensex. A/D ratio remained positive at 4:1.

The action formed a bull candle, holding 3-day lows near 9520. Its high at 9922 covered Monday's falling gap at 9902-13, though it did now close above it. Above 9922, we may expect more positive action challenging 10K-mark again. Failure reach last week's high of 10127 may, however, keep bulls guessing ahead of holidays.

To see full report: CALLS 020409

>Daily Market & Technical Outlook (ICICI Direct)

Key points
■ Market outlook — Open positive on strong global cues
■ Positive — FIIs & MFs buying, rupee expected to gain
■ Negative – February exports slide 21.7%

Market outlook
■ Indian markets are likely to open positive, taking cues from global markets. The SGX Nifty was trading 40 points up in the morning. Other Asian markets were also sharply higher after economic data from the US raised hopes the recession there may be moderating. Rise in pending home sales and a smaller-than-expected fall in factory activity saw industrial and construction stocks rise, pushing US markets up as much as 2%. The rupee is expected to extend gains, helped by gains in regional stock markets but dismal export data may limit the rise

■ The Sensex has supports at 9850 and 9750 and resistances at 10100 and 10170. The Nifty has supports at 3050 and 3020 and resistances at 3120 and 3140

■ Inflation for the week ended March 21 is expected around 0.18% as against 0.27% for the previous week

■ Asian stocks rose as better-than-expected auto sales and economic reports in the US lifted investor’s confidence that the world’s largest economy will stage a recovery. The Nikkei gained 251.6 points, or 3.0%, to trade at 8,603.5. The Hang Seng advanced 486.0 points, or 3.6%, to trade at 14,005.6

■ US stocks climbed on Wednesday as factory and home sales data raised hopes the economic downturn is moderating, sparking a broad advance. The Dow Jones gained 152.68 points, or 2.01%, to 7,761.60. The S&P 500 added 13.21 points, or 1.66%, to 811.08. The Nasdaq climbed 23.01 points, or 1.51%, to 1,551.60

■ Stocks in news: Gati, L&T, HCC, Piramal Healthcare, Wockhardt, Glenmark Pharma, NTPC

To see full report: OPENING BELL 020409


Q4FY09 Earnings Preview: Time for bottom fishing, Re-rating to take place

Sensex sales to increase 4.8% y-o-y and profits to increase ~4.2% y-o-y in Q4FY09 We expect Sensex sales and profits to increase ~4.8% and ~4.2% y-o-y, respectively, in Q4FY09. In Q4FY09, our Universe of Stocks (representing ~58% of overall BSE market cap) is estimated to report a y-o-y growth of ~3.7% in sales and a decline of 8.7% y-o-y in net profit.

Top line growth to decline significantly, margins expected to face the heat
In Q4FY09, our universe is expected to see 3.7% growth in sales, significantly lower as compared to 11.0% witnessed in Q3FY09. The decline in growth has been mainly due to fall in realizations owing to the overall fall in prices due to slowdown in demand. We expect the PAT margins to take further hit in this quarter. PAT margins in Q4FY09 are expected to be 14.8% as compared to 15.8% in Q4FY08. However, with indications of easing commodity costs and macro pressures, margins may just pick in coming quarters in selective commodity-intensive sectors like metals, autos, cements and semi-finished goods.

The Macro factors
S&P’s downgrade of outlook for India due to ballooning fiscal deficit of above 11% acted as key trigger for FIIs to pull out as the dollar kept on gaining against rupee. Rising fiscal deficit will lead the government to borrow heavily in the coming quarters. The huge borrowing of ~ Rs 3,29,000 crore (of which Rs 2,40,000 crore will be borrowed in H1FY10) will have a crowding out effect on the economy. Pressure on rupee will ease due to contracting trade deficit and weakening of dollar due to problems in US. Dollar depreciation would lead to rise in commodities which augur well for domestic players which are the lowest cost producers. Ample liquidity will ensure availability of credit at much cheaper cost to the borrowers. We may see deflation till Sept 09 levels at WPI. Upcoming productions from KG D-6 and Cairn facility in Rajasthan have potential to increase GDP by ~1.1%. In near term market will focus on G20 meeting and upcoming general election. Stable government at the center may bring some cheers to the market players.

Attractive Valuations
Recent strong ~25% bounce in the market could be attributed to a mix of positive global cues, pre-election rally and Government stimulus initiatives. Indian markets are trading at attractive valuations and offer substantial opportunities for the long term player. We expect market to be in a range of 9,000-10,500 till the election and it will consolidate at this level for few quarters. We are overweight in Metals, Power & Capital Goods, Telecom sectors and selective financials.

Top Picks from KRC Universe

Reliance Industries, SBI, BHEL, Reliance Infra, IVRCL, Bharat Forge, Sterlite Industries, Mundra Port, Bharti Airtel, Hindustan Zinc.

To see full report: Q4FY09 PREVIEW

>India Week Ahead (MERRILL LYNCH)

Small mercies: Slack season cuts risks

Slack season cuts macro risks…
We breathe a sigh of relief as the economy shifts to a lower gear with the onset of the “slack” summer-monsoon season after March 31. This lays to rest the ghastly prospect of an external shock squeezing liquidity at peak industrial production.

… greater headroom for intervention if equities correct
This strengthens the RBI’s hand in coping with FII outflows if the on-going bear market rally cracks. Intervention – ~US$5bn – has been thus far constrained by reluctance to take chances with liquidity when credit offtake is at a seasonal peak. Besides, Tuesday’s 4Q08 balance of payments should scale down short-term external debt concerns. The RBI has already reported that US$28.1/43.1bn trade credit due was disbursed by November.

Delhi likely to push for bank lending rate cuts, but…
We think Delhi will likely push PSU banks harder for pre-poll prime lending rate (PLR) cuts (100bp BAS-MLe by 1HFY10) with credit offtake seasonally unwinding. Besides, Prime Minister Manmohan Singh, no less, yesterday called on private and foreign banks to follow PSU banks into cutting PLR. Do find our rates roadmap here.

… RBI OMO at best moderating U in yields on fiscal risks
Yet, the prospects of an April gilt rally are fading: read Ashish and me here. The RBI, after all, expectedly front-loaded net FY10 borrowing – ~Rs.1659bn (net of MSS maturity) - in the slack season. True, it has pre-committed itself to a massive 1HFY10 OMO of Rs800bn (~Rs1200bn BAS-MLe FY) to soften the blow. Even so, the fisc is likely to suck out a hefty Rs1500+bn BAS-MLe including states in 1HFY10.

WPI nearing ‘deflation’, CPI peaking, steel prices softer
We expect WPI inflation – 0.1% BAS-MLe Thursday – to sink to deflation. Doubledigit urban CPI inflation should begin to top off Thursday: do read our recent note here. By the way, steel prices are reversing the end-February spike.

Will Delhi announce Pay Commission disbursal?
We think there is a possibility Delhi could announce a disbursal date of the balance 40% of 6th Pay Commission arrears (~US$3bn) after April 1.

To see full report: INDIA WEEK AHEAD


We recently met HDFC Bank's management to discuss and clarify some of the financial issues; key takeaways of meeting are:

Moderation in banking system and the bank credit offtake: The bank's management is of view that the system's credit growth would be in range of 17-18% and the bank's credit book is expected to expand by 21-24% in FY10. During the third quarter FY09, some of the corporates' advances were not renewed but in fourth quarter the bank expects reasonable amount of growth in credit book. On eCBoP's credit front, downsizing of credit book would continue in coming quarter; the management expects delinquency to continue in some of retail and SME accounts. I believe the bank is planning to grow its credit book cautiously in the present turbulent times. We reduce our credit estimates to Rs1,277 bn (23.4% growth Y/Y) from our earlier estimates of Rs1,316 bn (27.3% growth Y/Y) in FY10.

Deposit franchise; centre of strength: The bank's management expects domestic banking system and HDBK to record 15-16% and 20% (Y/Y) growth respectively in FY10. The bank would expand its footprint by opening 200 branches and 350 ATMs; accumulation of CASA deposits holds prominence. Moderation in credit growth would also have positive impact on the bank's CASA deposits ratio. Anticipated decrease in banks' retail term deposit rates would be create reasonable level of difficulties in mobilizing deposits, though continued turbulence in equity and debt markets would not be able to attract much of incremental savings. We are reducing our deposit estimates for FY10 to Rs1,862 bn (20.9% growth Y/Y) from our earlier estimates of Rs1,913 bn (24.1% growth Y/Y).

Margin maintenance; a difficult target: HDBK's management indicated that the bank is hopeful of maintaining net interest margin in a range of 3.9-4.3% in FY10. Delayed re-pricing of entire deposits at lower rates, pressure on CASA deposits on liability-side and faster re-pricing of advances at lower interest rates and declining incremental credit-deposit ratio would put pressure on the bank's margin; we estimate almost 20bps decline in margin to 4.57% in FY10 from 4.75% in FY09 and 4.88%.

To see full report: HDFC BANK

>Offshore Oilfield Services (PINC RESEARCH)

Drilling for value....

Offshore Oilfield Services form an important segment of the oilfield value chain. It includes all activities involved in upstream exploration of hydrocarbons in the offshore environment including drilling, construction and support activities. While offshore capex has peaked after five years of scorching growth, we believe there are pockets of value for domestic players to continue the growth momentum, albeit at a slower pace.

Hydrocarbon capex has peaked, but will not subside: We believe that capex in this space peaked in 2008 after 5 years of scorching growth and upstream players will go slow on incremental capex. However, we also believe that oil exploration should continue at a slower pace, given the fact that oil is a perishable commodity and it has faced numerous feast and famine situations in the past.

Domestic demand to remain robust: With ONGC being a major upstream player in the domestic market with a clear mandate of ensuring energy security, the demand aspect of exploration is ensured for players with a strong domestic presence.

Shallow water players to emerge: Contrary to popular perception, we believe that shallow water players should experience renewed demand despite incremental supply coming in, mainly because with softening oil prices, deep water exploration is fast becoming prohibitive.

Niches waiting to be exploited: With the scorching pace of oil capex in the last five years slackening, there is room to breathe for upstream players and focus on revamping an ageing infrastructure. This will give business to players in offshore construction and maintenance space.


>The Global Economic Crisis (UNCTAD)

The Global Economic Crisis: Systemic Failures and
Multilateral Remedies
(Report by the UNCTAD Secretariat Task Force on Systemic Issues and Economic Cooperation)

Executive summary
The global economic crisis has yet to bottom out. The major industrial economies are in a deep recession, and growth in the developing world is slowing dramatically. The danger of falling into a deflationary trap cannot be dismissed for many important economies. Firefighting remains the order of the day, but it is equally urgent to recognize the root causes for the crisis and to embark on a profound reform of the global economic governance system.

To be sure, the drivers of this crisis are more complex than some simplistic explanations pointing to alleged government failure suggest. Neither “too much liquidity” as the result of “expansionary monetary policy in the United States”, nor a “global savings glut” serves to explain the quasi-breakdown of the financial system. Nor does individual misbehaviour. No doubt, without greed of too many agents trying to squeeze double-digit returns out of an economic system that grows only in the lower single-digit range, the crisis would not have erupted with such force. But good policies should have anticipated that human beings can be greedy and short-sighted. The sudden unwinding of speculative positions in practically all segments of the financial market was triggered by the bursting of the United States housing price bubble, but all these bubbles were unsustainable and had to burst sooner or later. For policymakers who should have known better to now assert that greed ran amok or that regulators were “asleep at the wheel” is simply not credible.

Financial deregulation driven by an ideological belief in the virtues of the market has allowed “innovation” of financial instruments that are completely detached from productive activities in the real sector of the economy. Such instruments favour speculative activities that build on apparently convincing information, which in reality is nothing other than an extrapolation of trends into the future. This way, speculation on excessively high returns can support itself – for a while. Many agents disposing of large amounts of (frequently borrowed) money bet on the same “plausible” outcome (such as steadily rising prices of real estate, oil, stocks or currencies). As expectations are confirmed by the media, so-called analysts and policymakers, betting on ever rising prices appears rather riskfree, not reckless.

Contrary to the mainstream view in the theoretical literature in economics, speculation of this kind is not stabilizing; on the contrary, it destabilizes prices. As the “true” price cannot possibly be known in a world characterized by objective uncertainty, the key condition for stabilizing speculation is not fulfilled. Uniform, but wrong, expectations about long-term price trends must sooner or later hit the wall of reality, because funds have not been invested in the productive capacity of the real economy, where they could have generated increases in real income. When the enthusiasm of financial markets meets the reality of the – relatively slow-growing – real economy, an adjustment of exaggerated expectations of actors in financial markets becomes inevitable.

In this situation, the performance of the real economy is largely determined by the amount of outstanding debt: the more economic agents have been directly involved in speculative activities leveraged with borrowed funds, the greater the pain of deleveraging, i.e. the process of adjusting the level of borrowing to diminished revenues. As debtors try to improve their financial situation by selling assets and cutting expenditures, they drive asset prices further down, cutting deeply into profits of companies and forcing new “debt-deflation” elsewhere. This can lead to deflation of prices of goods and services as it constrains the ability to consume and to invest in the economy as a whole. Thus, the attempts of some actors to service their debts make it more difficult for others to service their debts. The only way out is government intervention to stabilize the system by “government debt inflation”.

To see full report: GLOBAL ECONOMIC CRISIS

>Idea Cellular (MOTILAL OSWAL)

Downgrading FY10E PAT by 28%: We downgrade FY10E PAT for Idea by 28% to reflect margin pressure in incumbent circles from 1) increased competition and 2) recent termination charge cut. We expect near-term weakness in RPM and MOU on lower subscriber quality and increased discounting. While EBITDA loss in new circles (esp. Bihar) could peak out in 4QFY09, six new circle launches lined up for 1QFY10-3QFY10 will continue to drag margins. Our FY10/ FY11 EBITDA estimate is now 5-6% lower than consensus while PAT is 30-40% lower.

Subscriber momentum remains strong but earnings to stabilise only in FY11: Subscriber momentum remains strong for Idea. QTD, Idea (incl. Spice) reported second highest subscriber growth at 9.2%, largely driven by ramp-up in new circles (Mumbai and Bihar). However, aggressive expansion and full consolidation of Spice from FY10 will lead to 15% PAT decline in FY10E (21% decline in FY09E). We expect earnings to stabilise only in FY11 (+6% YoY).

More susceptible to negatives; risks to tariffs is on the downside: Idea is highly leveraged to mobile RPM movements given lower margins (PAT margin of 8% v/s 22-25% for Bharti and RCOM) and no significant non-wireless business. We believe that risk to tariffs is on the downside in the current environment due to several simultaneous new launches by Aircel, RCOM, Tata Tele, Vodafone, and Idea itself. We model a 15% RPM decline in FY10E (similar to Bharti) v/s 16-17% decline over FY07-09E.

Execution on track; FY09 marks peak capex (ex-3G): Idea remains a solid long-term growth story given strong market share traction, significant network expansion, healthy balance sheet, and lower time-to-market due to its participation in Indus. FY09 will be peak capex for Idea; capex intensity (ex-3G) is likely to decline from 64% in FY09 to 23% in FY11.

Indus IRU unlikely to impact consolidated financials: IRU with Indus has been implemented effective January 2009 and consequently Idea will start paying rent on ~11,100 towers. As of December 2008, Idea had ~17,800 owned towers with a tenancy ratio of 1.4x. IRU implementation is unlikely to meaningfully impact consolidated financials as Idea will consolidate Indus on JV basis (16% stake). Standalone EBITDA could be impacted by ~Rs4.3b assuming a rental outgo of ~Rs32,000/site/month.

Valuations remain at a premium; Neutral: Idea is trading at 7.1x EV/EBITDA FY10E and 23.7x EPS based on our revised estimates. Valuation premium reflects depressed earnings due to continued investments in new circles (which are currently loss making). However, given competitive pressure on incumbent circles, possibility of consensus downgrades, and low RoIC, stock performance is likely to remain muted. Neutral.

To see full report: IDEA CELLULAR

>Bank Retails (MERRILL LYNCH)

Provisioning norms for NPLs

New floating provision norms to impact reported net NPLs
The Reserve Bank of India (RBI) has come out with a notification highlighting the provisioning norms banks are expected to follow (see inside). The key change is in relation to ‘floating provisions’. We believe banks, going forward, may not be allowed to net-off floating provisions from gross NPLs, while reporting net NPL’s. Hence, it would raise the reported net NPL figure for banks’ having floating provisions. But the provisions still reside in the balance sheet. But banks can use floating provisions as Tier 2 capital, up to cap of 1.25% of risk-weighted assets.

Overall impact of new norms minimal for most banks
Most Indian Banks like HDFC Bank and SBI have minimal / any floating provisions on their balance sheets. Other banks like BOI, BOB have been using floating provisions as Tier 2 capital. However, banks like PNB, UBI, and ICICI Bk have been using these floating provisions to net-off against gross NPLs. We believe these would be most impacted, as discussed below.

UBI and PNB most impacted; ICICI Bk impact minimal
ICICI Bk has been netting-off against gross NPLs, although post change in norms, impact is minimal (see table 1). The biggest impact is on UBI and PNB as it was deducting its floating provision est. at +Rs5.1bn and Rs10bn, resp. Hence, their reported net NPL’s could rise by 2x and 4x for PNB and UBI, resp., although % of loans rise could be only 50bps and 70bps, resp. from reported 3QFY09 levels only on account of this accounting change. Although, impact on BV due to rise in Net NPLs limited to 6-7% for UBI and PNB. However, we strongly contend that this floating prov. does reside in B/S and hence, in our view, this does not materially change the underlying quality of a banks’ balance sheet as you cannot ignore provisions made by the bank.

Tier II capital may rise by 50-60bps
The positive takeaway is that it may shore up Tier II capital by 50-60bps of some of the govt. banks (especially those that have done restructuring). This, apart, from helping improve the overall capital position, may also ease some pressure on the funding costs (Tier II debt costs +9-10%), helping earnings, impact <1%.

To see full report: BANK RETAILS