Thursday, April 23, 2009

>Nymex crude dn with equities; weak fundamentals

Singapore - Crude oil futures lost ground Thursday in Asia as rising U.S. stockpiles and weakening share markets fanned concerns about the outlook for the economy and for energy demand.

Asian equities were dragged lower by financial stocks, mirroring a late pullback Wednesday on Wall Street, while overnight U.S. government oil data showing further increases in inventories weighed on sentiment.

"The market held up relatively well in our view given the seemingly bearish (Energy Information Administration) stats," said Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates.

"Nonetheless, we viewed the weekly stats as decidedly bearish given a larger-than-expected crude stockbuild. The jump in (refinery) runs boosted production of both gasoline and distillates and contributed to unexpected increases in both key product categories."

On the New York Mercantile Exchange, light sweet crude futures for delivery in June traded at $48.61 a barrel at 0705 GMT, down 24 cents in the Globex electronic session.

Nymex heating oil for May slipped 77 points to 132.22 cents a gallon, while May reformulated gasoline blendstock traded at 138.13 cents, 93 points lower.

Oil prices in recent weeks have found support from firmer equity markets, which many traders interpreted as a sign the worst of the economic recession may be behind, but fundamentals meantime have continued to weaken.

Asia's leading oil consumer nations - China, Japan and South Korea - Wednesday each reported steep on-year drops in their March crude imports despite lower prices, showing demand for fuels remained soft.

The EIA, in its Weekly Petroleum Status Report overnight, also posted sizable increases in crude, gasoline and diesel stockpiles.

Commercially held U.S. crude stocks climbed for the sixth straight week in the week to April 17 to 370.6 million barrels, staying at their highest levels since September 1990.

Gasoline stockpiles - closely watched in the lead-up to the U.S. summer driving season - have also risen about 6% above the five-year average level.

"The data reinforced our bearish view of the complex," Ritterbusch said in a note to clients.

"We suggest maintaining short June (Nymex crude) holdings, keeping stop protection at the $52.60 level in anticipation of an eventual price decline to the $43-$44 area."

At 0705 GMT, oil prices on London's ICE Futures exchange also fell.

Brent crude for June slipped 31 cents to $49.50 a barrel, while May gasoil changed hands at $423.50 a metric ton, losing 75 cents from Wednesday's settlement.


>India imposes anti-dumping tax on some steel Products

New Delhi - India has imposed an anti-dumping import tax on some stainless steel products to curb cheap imports that were hurting the local industry, the government said Thursday.

The punitive taxes are being levied until Oct. 21 on imports from China, Japan, Korea, the European Union, South Africa, Taiwan, Thailand and the U.S., the trade ministry said in a statement.

"This is a clear message to the producers and to the countries" that have been sharply underselling Indian producers, said N.C. Mathur, president of the Indian Stainless Steel Development Association. Stainless steel imports have increased by around 20%-30% annually since 2006, Mathur said.

The level of taxes vary, depending on product and origin, ranging from $12.74 a metric ton to $2,011/ton.

The banned products are used in the automotive, and household appliance sectors as well as for industrial applications.

"The varieties banned are the highest value-added products," Mathur said.

India produces about 1.8 million metric tons of stainless steel annually, two-thirds of which is consumed locally.


>New Stock Market Story (WHARTON)

India's New Stock Market Story and Its 'Next Trillion Dollar Opportunity'.

If there's one thing Raamdeo Agrawal has learned over 22 years as an investor, it's that the stock markets "always come up with a story every four or five years." Soya processing and leasing companies caught the Indian stock markets' imagination in the early 1990s. Then came the Y2K rush and the dot-com boom in the late 1990s, followed by yet another binge on IT software stocks, he recalled.

Agrawal, co-founder of Motilal Oswal Securities, an investment services firm in Mumbai, made money by investing in all those boom phases, even if he didn't initially understand "the difference between hardware and software." At the 13th Wharton India Economic Forum in Philadelphia in March, he participated in a panel discussion on "Rational Exuberance in the Indian Capital Markets."

Agrawal was more bullish about the outlook for the Indian capital markets than his fellow panelists. Seth Freeman, CEO and chief investment officer at EM Capital Management of San Francisco, a hedge fund that invests in India, among other markets, is also a long-term bull on India. But Sandeep Naik, principal at Apax Partners India Advisers, a private equity fund with global headquarters in London, noted he was worried about capital formation trends and India's ability to sustain a targeted GDP growth rate of 7% to 8.5%.

Senthil Chengalvarayan, president and group editorial director, business media, at Television 18 in India and the discussion's moderator, pointed out that share values in the Indian stock markets are trading at between nine and 11 times earnings these days, compared with 22 times a year ago. "When do you see the market turning?" Chengalvarayan asked, noting the coming Indian general elections and the fact that foreign investors have taken a double whammy in seeing both their Indian investments and the rupee lose value. "Foreign investors have pulled out about US$16 billion in the last 17 months from India," and it's
unclear whether that trend will continue, he said.

A Hedging Opportunity

Time was when global investors looked at developing markets like India to hedge some of their investments. "That myth has clearly been shattered," Naik said, referring to the erosion in stock values over the past year. He noted some key factors that contributed to that trend: "huge redemptions" by foreign institutional investors causing a net outflow of US$15 billion last year (compared with a net inflow of US$17.4 billion in 2007); a 25% drop in domestic equity issuance; and a 95% drop in foreign issues by Indian companies.

India needs to build upon its recent successes to sustain its growth story, according to Naik. He listed its accomplishments in recent years: household savings have climbed to between 23% and 24% of GDP and stayed at that level; corporate savings have doubled from 4% to 8%; the government's savings rate has moved from negative territory to reach 3% of GDP; and foreign institutional investments have grown 40% in the past six years to account for 6% of GDP.

To see full report: NEW STOCK MARKET STORY

>Infosys Technologies Ltd (INDIABULLS)

Bleak near-term outlook
Infosys Technologies Limited (Infosys)’s result for FY09 was in line with our estimates. For Q4’09, Infosys reported a decline of 2.6% qoq to Rs. 56.4 bn in its top line largely due to increasing pricing pressure and sluggish volume growth, partially offset by the depreciation in the rupee against the dollar. Besides, revenues in the USD terms went down by ~4.5% qoq. Other than this, weak operational performance and increase in the SG&A expenses led
to fall in the EBITDA margin by 154 bps qoq to 33.6%.

Price erosion is inevitable
Billing rate for the quarter went down 2% and 4.2% qoq for onsite and offshore, respectively, indicating that clients renegotiated their contracts and new deals were signed at lower pricing. In our view, this trend is likely to continue, considering that the large clients from the developed economies are likely to demand price cuts. Thus, we expect billing to decline by 2–3% per quarter for the next 4–5 quarters.

Client engagement to help in the medium term
Infosys is focusing on client engagement and has guided to increase its selling & marketing efforts in the near term. Consequently, we expect SG&A expenses to increase by ~5% in FY10, which will strain the margins in the near term. However, this can benefit the Company in winning large deals in the medium term.

Potential strategic acquisitions to strengthen its positioning
Infosys has a strong balance sheet position along with a huge liquidity advantage in the current weak market scenario as it maintains a cash balance of USD 2.2 bn. In our view, the Company can use cash for strategic acquisitions in the next 12–15 months, which will strengthen its service offerings. Moreover, potential acquisitions in high end services such as consulting and system integration space can help to revive the margins.

To see full report: INFOSYS


Remain Neutral: Factoring in price increases

■ Price increases on the Goldflake brand to add INR0.20 for FY10e EPS but slowdown in hotels reduces gains marginally

■ We still believe that the budget will be the single most important event for ITC; we revise our two scenarios

■ We arrive at a new price target of INR193 (previously INR172) based on SOTP and retain our Neutral rating.

Price increases on Goldflake. ITC has raised the prices of Goldflake Kings from INR4 to
INR4.4 per stick. We had mentioned in our previous report dated 18 February that
Goldflake Regulars is another likely candidate for price increase and we now believe that
the price increase in Kings will be shortly followed by one in Regulars, although the
company has not confirmed this. We believe that the annualised impact of these price
increases on EPS is INR0.88. However, as the budget is due in Q2 FY10, we build in the
impact only for Q1 FY10, which works out to INR0.20.

FMCG, hotels overhang likely to continue. We believe that the situation in the hotel
industry is likely to turn out worse than what we had built in our estimates. We therefore reduce our FY10e hotels EBIT by 8.8%. We forecast FMCG losses in FY09e at INR4.6bn and we believe that this will come down to INR3.6bn for FY10e, which is still sizeable. We believe that these concerns are fairly priced in the stock. Our FY10e EPS changes from INR10.23 to INR10.38.

Change in estimates and valuation. Our EPS estimate for FY10e changes from
INR10.23 to INR10.38 as a result of increase in cigarettes EBIT by 2.3% and decrease in hotels EBIT by 8.8%. We revise our scenario analysis to take into account these changes, as well as the absence of any tax hikes in Q1 due to the delayed budget this year. Our low tax scenario derives a price target of INR217 and high tax scenario, INR166. We take an average to arrive at our revised target price of INR193 and retain our Neutral rating.

To see full report: ITC

>IMF to boost EM liquidity (DANSKE MARKETS)


Short market overview
− Improved global risk appetite brought down emerging market risk premiums during March and the beginning of April.
− Emerging market FX rates rebounded on the back of the improved risk sentiment and new IMF initiatives.

Macro overview
− Over the last month we saw more signs of stabilisation in the global industrial cycle.
− Regional PMIs improved further in March in emerging markets, suggesting that they bottomed out in January/February.
− Recovery in China gains strength -- what are the implications?

Special focus: IMF to boost EM liquidity
− The IMF reformed its arsenal of credit facilities in order to get more funds out faster and with fewer conditions attached – at least for countries with strong fundamentals.
− Further, at the G20meeting, it was decided to boost IMF’s lending resources to USD 750bn.

To see full report: IMF

>Hero Honda (KR Choksey)

Hero Honda (HH) reported net sales of Rs 3,422.5 crore, up 23% y-o-y & 19% q-o-q. Operating Profits stood at Rs549.1 crore, increased by 33% y-o-y, improved realization along with reduction in commodity prices helped OPM to improve by 127bps. Net profit reported was Rs.402.2 crore, improved by 35% y-o-y and profit margins enhanced by 104 bps y-o-y to 11.8% on account of margin expansion and lower tax.

Higher than expected volumes enhanced the topline: Topline improved by 23% y-o-y to
Rs3,422.5 crore in Q4FY09 on the back of 13% growth in volumes and 9% growth in
realisation. Realisation improved by 7% y-o-y due to price hike in earlier this year and better product mix. HH outperformed the two-wheeler industry with a domestic market share of over 57%. HH witnessed a volume growth of 12% in FY09 whereas the industry grew by 5% y-o-y.

Robust operating performance: HH OPM stood at 16.0%, an improvement of 127 bps y-o-y.
The margin was 64 bps higher than our estimates due to higher than expected benefits from
the softening in raw material prices. Raw material cost as a percentage of sales declined
from 70.2% in Q3 to 68.9% in Q4FY09.

Net Income improved due to tax benefit from the Haridwar plant: Net profit stood at Rs402.2 crore, a growth of 35% y-o-y. The effective tax rate for the quarter was 28% due to tax benefits enjoyed in the Haridwar plant. Thus sharp growth on the Opearting performance and decline in the tax rate led to the expansion in the NPM by 104 bps y-o-y to 11.8%.

HH’s management is positive on maintaining the margins due to softening Raw Material prices and tax benefits enjoyed in the Haridwar plant. Management expects to cross over 3.7 million units to be sold in FY10.

Valuations & Views – We believe that the company performed reasonable well inspite of
the slowdown witnessed in the industry. HH’s with its focus on rural market and tie-ups
with regional NBFC’s for financing will help the company to maintain growth momentum till
medium term. HH is going to continue its focus in the rural markets as lot of money has
been pumped in by the government in the last couple of years. The Bharat Nirman, the
Rural Employment Generation Programme and the 6th Pay Commission money which is now
getting into the hands of the government employees will help HH to improve volumes. Raw
material prices are expected to remain low due to sluggish demand. Thus we expect HH’s
OPM to enhance by 80 bps y-o-y. To maximize the tax benefit at the Haridwar plant HH
plans to produce 1.2 million units from there by FY10. Thus this ramp up in the Haridwar
plant will help in margin expansion and profit growth of 25% y-o-y. At the CMP of Rs 1082,
HH is trading at 16.9x its FY09 EPS of Rs.64.2 and 13.9x its FY10E EPS of Rs. 77.8. We
recommend a Hold on the stock with target price of Rs 1192, giving an upside of 10%.

To see full report: HERO HONDA

>Flash Economics (ECONOMIC RESEARCH)

Financial crisis: The inexorable rationale of cause-and-effect sequences that have caused the crisis and start off from the real economy.

The crisis has been fuelled by many factors: pro-cyclical features of rules, abundance of liquidity created by the accumulation of official reserves in emerging countries, excessive risk-taking by banks, forced sales by certain investors, the decision to let Lehman Brothers fail, etc. However, if we focus on its crucial aspects, we can see that the cause-and effect sequences that led to the crisis are perfectly rational and start off from the real economy:

1. the productive specialisation of the United States and Europe spontaneously resulted in low wages and weak growth due to the trend towards a dichotomy in the labour market;

2. to maintain robust growth, one therefore had to use credit, and this implied keeping expansionary monetary policies. As this credit had to be extended to low-income individuals, it was increasingly based (in the United States in particular) on the value of goods (real estate assets) bought on credit and led to over-indebtedness;

3. to avoid having to raise the regulatory equity corresponding to this abundant credit, banks had to use securitisation (and offshore centres);

4. if the financial assets resulting from securitisation were to have a low cost and enable lending to be profitable while maintaining low interest rates on credits, they had to be disguised as assets of good quality, and this was done in particular by rating agencies; The concern now is, as the first point of our analysis still holds, that another sequence of processes initially aimed at maintaining growth and leading to a crisis of another nature, will normally take shape.

To see full report: FLASH ECONOMICS

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty near month shed another 3.06 million shares in OI whereas the next series added 2.16 million shares in OI. Further long unwinding of positions was seen in the Nifty April series

• The net addition in Call options was 8419 contracts whereas 53262 contracts unwinding were seen in Put options. The 3300 Call added 13073 contracts with a drop in IV from 40.54 to 38.52 with rise in volumes indicating some Call writing at this strike price. The Call writing in this option was feasible because the IV was significantly higher. Some 2114 contract got unwound in the 3400 Call suggesting some profit booking by Call writers. Humongous unwinding amounting to 19690 contracts was seen in 3400 Put followed by decent unwinding in all Puts ranging from 3000 to 3500. The unwinding in the 3400 Put suggests the weakening of support at this level. Although some Put writers have unwound their position at 3300, the base of 3300 Put is currently at 6.36 million shares indicating that this level may continue to act as a support for Nifty on a closing basis in today’s session

• FII Index futures depicted a net sale of Rs 556 crore with a drop in OI by 1.18% suggesting closure of long positions.

To see full report: DERIVATIVES 230409

>Daily Calls (ICICI Direct)

Sensex: We said, "In Neck Line can be bearish ... Watch higher levels if moves positive initially." Index did move positive initially, up 138 points, only to weaken 320 points later. Net close was down 81. Realty Index was the prominent loser, down 4.6%. Cap. Good and Autos also lost over 2%. A/D ratio worsened to 1:3.

The action formed a bear candle with lower high as well as lower low compared to previous day. For the first time, post-8047, bottom of last strong bull candle (formed last Wednesday) was violated. This low, at 10719, was also last week's low. It confirms short-term top at 11367. Negative until Index can move above 11036.

To see full report: CALLS 230409

>Daily Market & Technical Outlook (ICICI Direct)

Market outlook

* Indian markets are likely to open flat to negative, taking cues from global markets. Asian markets were trading mixed in the morning as US markets closed flat after remaining volatile throughout the day. The rupee is expected to edge lower on Thursday, a day after it snapped a four-day losing streak, weighed down by mostly weak Asian currencies and mixed regional stocks

* Inflation for the week ended April 11 is expected at 0.09% as against 0.18% last week

* The Sensex has supports at 10680 and 10600 and resistances at 10920 and 11000. The Nifty has supports at 3290 and 3260 and resistances at 3360 and 3390

* Asian stocks were mixed, as finance companies dropped after Morgan Stanley reported a wider-than-forecast loss and US banks slid on concerns government stress tests will reveal weakness. The Nikkei fell 40.7 points, or 0.5%, to trade at 8,686.6. The Hang Seng rose 36.1 points, or 0.2%, to trade at 14,914.5

* The Dow and S&P fell on Wednesday after Morgan Stanley revived concerns about the banking sector and the wider economy after it posted its second straight quarterly loss and slashed its dividend. The Dow Jones dropped 82.99 points, or 1.04%, to 7,886.57. The S&P 500 slid 6.53 points, or 0.77%, to 843.55. The Nasdaq gained 2.27 points, or 0.14%, to 1,646.12

* Stocks in news: L&T, Amtek Auto, JSW Steel, RIL, Micro Technologies.

To see full report: OPENING BELL