Thursday, May 7, 2009

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty May series added 1.01 million shares in OI with drop in price by 34 points. During the day, the Nifty managed to hold the premium of 7-8 points. However, in the last half an hour, the premium surged to 10-12 points on the back of short covering by intraday traders since people were wary of carrying overnight short positions

• The near month options data shows addition of 46644 contracts in Put options compared to 15004 contracts addition in Calls. The maximum addition was seen in the 3200 Put with 17676 contracts followed by 9514 contracts in the 3600 Put. The 3400 and 3500 Puts added 6514 and 5712 contracts, respectively. On the other hand, 5863 contracts got added in the 3900 Call followed by 4115 contracts addition in 4000. Some Call writing was seen in 3900 and 4000 while Put writing was observed in 3200. The 3600 Put also witnessed some Put writing. The 3600 continues to hold as a support for Nifty and one can look for buying opportunity near that level

• The FII activity in F&O was almost negligible

• Heavyweight Reliance has added 5 lakh shares in OI. The stock is expected to trade with positive bias today

To see full report: DERIVATIVES 070509

>Daily Calls (ICICI Direct)

Sensex: We said, "High Wave pattern, indicating a pause on suspected profit-booking." In a volatile trade, Index initially moved higher to 12272, but faced a heavy profit-booking once again. Net close
was lower by 1.4%. Realty and Bank Indexes shaved off about 3%. A/D ratio turned negative at 1:2.

The action formed bear candle with upper shadow. Creation of higher high but lower low, along with the shadow, indicates larger bout of profit-booking compared to previous day. However, it may prove to be temporary affair if candle's low at 11899 gets protected today, though the shadow area remains a challenge on the upper side.

To see full report: CALLS 070509

>Daily Market & Technical Outlook (ICICI Direct)

Key points
■ Market outlook — Open positive on global cues
■ Positive — Re likely to be firm, FII buying
■ Negative — MFs selling consistently

Market outlook

■ Indian markets are likely to open positive following global cues. The most awaited stress results for US banks will be announced later in the evening. The global markets will decide the trend after this announcement. We advise traders not to be too aggressive and carry overnight positions today. It is advisable to book profits once the markets open up and wait for fresh cues tomorrow morning. We expect the markets to be volatile today for the same reason

■ Inflation for the week ended April 25 is expected at 0.65% against 0.57% a week earlier

■ The Sensex has supports at 11900 and 11730 and resistances at 12270 and 12560. The Nifty has supports at 3590 and 3550 and resistances at 3680 and 3730

■ Asian markets are trading positive on expectation of a positive stress result later today

■ US stocks rose on Wednesday after a private sector reading on the labour market signalled unemployment may be receding and leaked bank stress test results suggested most banks are healthier than previously thought. The rally in bank stocks was widespread, with Citigroup jumping more than 16% to $3.9, Bank of America up 17% to $12.7 and JP Morgan gaining 7% to $37.2. The Dow was up 1.2%. The Nasdaq was up 0.3% while the S&P registered 1.7% gains

■ Stocks in news: ONGC, Ranbaxy, M&M, Reliance Capital

■ Recent development: Cement prices are likely to fall by Rs 20/ bag in Mumbai

To see full report: OPENING BELL 070509

>Asia spot gold holds gains, weak USD supports

Sydney - Spot gold held gains above $900 a troy ounce Tuesday after more encouraging economic data releases in the U.S. boosted inflation concerns, and on a softer dollar.

Signs of a bottoming economy in the U.S. with construction spending ticking higher and better-than-expected pending home sales boosted inflation potential, a key driver of gold.

Inflation is likely to take off again once the economy turns a corner due to vast amounts of government-stimulus spending.

Gold traded in a range of USD902.00 to USD905.50 a troy ounce, after rallying nearly 2% Monday. Signs of a recovery in jewelry demand in India also helped.

Next key events for market direction are the U.S. bank stress tests Thursday and U.S. non-farm payroll data Friday.

Some market watchers have, by now, discounted the impact of the publication of the stress tests, with news already out that some of the 19 institutions tested will be required to raise more capital, but any surprises may still yield some follow-through buying or selling for gold.

"Gold is essentially still in a range, we've seen these USD5-USD10 bursts over the past few weeks. Volumes are generally low," said a Sydney-based trader. Japan's Tocom was closed Tuesday.

"But gold is slowly edging higher. If we can get above USD910/oz, there's scope to move higher," the trader said.

In a note, ScotiaMocatta said gold's technical outlook brightened after bounding from support at USD866/oz last week and breaching the USD900/oz level overnight.

Prices now need to get past resistance at USD918/oz for further upside momentum, Scotia said.

At 0656 GMT, spot gold traded at USD902.35/oz, down 85 cents on the New York close and silver was down 3 cents at USD13.00/oz. Platinum was down USD1.50 at USD1,116.50/oz and palladium was down USD2.50 at USD216.50/oz.

India gold futures little changed; INR to weigh

Singapore - India June MCX contract little changed at INR14,445/10 grams on lack of cues from overseas spot gold, which is trading nearly flat today. "The contract is likely to see some pressure from a strong rupee," says local analyst; tips contract in INR14,336-INR14,571/10 grams range. Domestic demand weak, but May imports likely on par with 30 tons imported last month as traders start stocking for festivals later in year, he adds.

Spot gold firm on weak USD, physical buying
London - Spot gold looks steady, and could push higher on dollar weakness and physical demand, says MKS Finance's head of trading and physical sales Afshin Nabavi. "There's still some light physical buying around and no scrap sales for the time being." Comments gold tested and held above USD900/oz overnight, making $900 a near-term support. Tips gold to hold near current levels and possibly test next resistance at USD909/oz. Spot gold at USD902.40/oz, +5 cents from 0000 GMT.


>ABB Limited (UBS)

1Q CY09: Overall, ll, disappointing

Results below UBSe: Sales decline 9% YoY and PAT 16% YoY
In 1Q CY09, ABB India reported operating income of Rs14.06bn, a decline of 9% YoY (vs. UBSe of 5% growth). EBITDA at Rs1.4bn has declined 15% YoY and margins declined 80bps YoY (raw materials lower but higher overheads). Reported PAT declined 33% YoY to Rs784m. Adjusting for MTM forex losses of Rs200mn, recurring PAT declined 16% YoY to Rs984m (vs. UBSe of flat PAT YoY).

Slowdown in both power and automation divisions
Segmental analysis indicates automation division sales declined 10% YoY (process 20% and products 3%). Compared to this, power division declined 7% YoY (products flat and systems declined 13% YoY). As per company, the slowdown in power divisions is due to lower contribution from rural electrification jobs, where ABB has probably started shifting focus.

Order inflow growth of 83% QoQ (decline 15% YoY) is half decent
The 83% QoQ improvement in order inflows to Rs23.03bn in 1Q CY09, is good though it’s still down 15% YoY. The OB is Rs70bn (up 14% QoQ). Our view is for industrial activity to trough in June quarter, and partial recovery in 2H FY10. For ABB specifically, we believe deflation in its main product line (transformers) and mid to late cycle nature of industrial automation orders could delay growth.

Valuation: Maintain Sell
Our price target of Rs415 is based on 3-stage DCF with 5 years explicit forecast, 15% mid-term growth (2014-18E), WACC of 10% and terminal growth of 5%. At CMP, the stock trades at an expensive 16.6x CY10E EPS with 9% EPS growth over CY08-10E.

To see full report: ABB

>Reliance Petroleum (NOMURA)


Investment Conclusion

Since the announcement of the RIL-RPL merger and a share-swap ratio of 1:16 on 2 March, RPL has been trading at around 1/16th of the RIL share price rather than on the basis of its own

fundamentals, and it is likely to continue to trade at this ratio, in our view. After the significant
outperformance in recent months, we believe RIL's share price has already factored in all the near term earnings upside. We have downgraded RIL to NEUTRAL, with a revised price target of INR1,725/share (from INR1,650/share). At our revised price target of INR1,725/share for RIL, we calculate an implied price target of INR108/share for RPL. Given no potential upside from current levels, we downgrade to NEUTRAL.

In a surprise move, RPL has declared the commercial commencement of its refinery from 15
March 2009 (vs our expectation of April 2009 to gain maximum advantage of tax benefits under
the SEZ policy).

RPL's refinery processed 3.6mn tonnes of crude during 4Q FY09 at about 97% utilisation.

For more details on our RIL downgrade, please refer to our note " Fully valued - downgrade to NEUTRAL" dated 4 May 2009.

RPL refinery may surrender SEZ benefits and instead opt for tax holidays under 80-IB

In yet another surprise move, Reliance has declared the commercial commencement of RPL’s refinery from 15 March 2009. Our and market expectations were that commercial commencement would be from the new financial year beginning April 2009 to get the maximum advantage of tax benefits under the SEZ policy. The key rationale, in our view, is that the company may now opt out of the SEZ status for the old refinery, and instead opt for the seven-year tax holiday (which would be available for six years and 15 days now to the RPL refinery) available under Section 80-IB. The tax holiday under Section 80-IB is available only if the refinery has commenced commercial production before 31 March 2009, as the government has decided it will not extend this scheme beyond this date for private sector refiners. The company indicated that it has until end-FY10 to decide whether it will retain SEZ status or opt for 80-IB benefits.

To see full report: RPL

>Reliance Infrastructure (CITI)

Buy: EPC – The Key Growth Driver Ahead

FY09 PAT up 5% YoY — R–Infra’s FY09 PAT at Rs11.4bn was up 5% YoY. FY09 PAT growth was muted due to (1) Rs1.7bn of derivatives losses, and (2) Rs3.2bn of contingencies provisions (classified under other expenditure). The company ended FY09 with an EPC backlog of Rs206bn, up 163% YoY.

Rs10.34bn of regulatory assets is a worry — In FY09 the company has created regulatory assets of Rs10.34bn (Rs3.56bn because of a revenue gap and Rs6.78bn because of un-recovered fuel adjustment charges). This has to be recovered through future tariff orders and is a key reason for worry, in our view.

EPC is the key growth driver ahead — At the end of FY08 the management had given a sales guidance for the EPC business of Rs26bn in FY09, Rs67.5bn in FY10 and Rs215bn in FY14. The company had also given an EBITDA margin guidance of 8–10%. The company has managed to more or less meet the same in FY09 with EPC sales of Rs24bn and EBIT margins of 8.2%.

Rs54bn of Rs100bn of cash in debt mutual funds — R-Infra had Rs100bn of gross cash/cash equivalent at the end of FY09. Out of this, Rs54bn is in cash/ debt mutual funds without exposure to equity markets. The company expects that a substantial portion of ICDs/preference shares would mature over the next 2–3 quarters and will then be parked as cash or in debt mutual funds.

Update on buyback — The shareholders of the company had approved a buyback of Rs20bn. To date the company has bought back 11.26mn shares at an average price of ~ Rs823 totaling Rs9.27bn.


>Asia Pacific Banks (MORGAN STANLEY)

Stocks to Buy if Economic Recovery Is Sustainable

We have been negative or lukewarm on prospects for Asian banks and remain so – We believe that nonperforming loans (NPL’s) for Asian banks will continue to rise through the year and that revenue progression will remain under pressure. Given the weak profitability at these banks, we do not think they have enough earnings buffer to compensate for higher credit costs. At the same time, on average, capital levels are thinner than in previous cycles.

Moreover, the recent rise in stock prices has made these stocks expensive, relative to fundamentals, in our view. So, on a fundamental basis, we maintain our negative or lukewarm view across the banking sector in Asia.

However, investors are looking for stocks to buy on
the assumption that the economic recovery is sustainable – The view is that with the recovery having started, revenue momentum for banks will begin picking up and NPL’s will rise but not significantly. This is contrary to our view on banks. However, we may be wrong – hence, in this note we present a list of stocks that, in our view, could do well if economic recovery is sustained.

We identify seven stocks: DBS, China Citic, IDFC, Kookmin, Chinatrust, Bank Rakyat, and ICBC Asia. Banks with significant liquidity (large China banks and large Hong Kong banks) are absent from this list, as their net interest margins (NIM’s) have come under pressure, and multiples are already full. For Chinese banks as a whole, the other concern is that profitability is coming under pressure, with revenues declining as a proportion of the balance sheet.

We arrive at these picks by using three screens on a country basis: Core tier 1 ratio, pre-provision profit on loans, and valuations. We look for banks that surpass their country peers on capital and profitability and whose multiples leave some room for upside.

To see full report: ASIA PACIFIC BANKS

>Castrol India Ltd. (DOLAT CAPITAL)

Castrol India Ltd. (CIL) has reported a good set of numbers considering the economic slowdown, which has impacted both the automotive and industrial segment. Despite the volume pressure, CIL recorded a top line growth (YoY) of 2.6% due to product price hikes taken in CY08. The full effect of fall in base oil prices (came down by ~50% from its peak) would be fully reflected from Q2CY09. The strong brand pull would enable CIL to hold on to its market share. Our ground level interaction suggests that the price cuts taken in February 2009 would augur well for CIL. We reiterate our Accumulate recommendation with a price target of Rs 371 to trade at 15x CY09E earnings.

■ The revenue grew by 2.6% on a YoY basis to Rs 5059 mn despite the volume pressure. This is on the back of the three price hikes taken by CIL in CY08. The volume pressure is expected to continue in the coming quarter.

■ The raw material price increased by 4% on a YoY basis. Going forward, we expect this to come down sharply on a YoY basis due to the correction in base oil prices.

■ The PAT margin expanded by 30 bps on a YoY basis. We expect the margin to expand further considering the fall in raw material prices.

Key Developments:

■ CIL has taken a price cut of Rs 10-12 per liter, thereby reducing the lubricant prices by 5~7% across the product portfolio. The same has been done in light of the price correction in base oil prices (~50%). The cut would reduce the price gap with competition and arrest the brand shift from Castrol.

■ Going forward, CIL plans to increase the proportion of synthetic based lubricants (higher margins) in their product portfolio and phase out low margin products.

■ The refurbished CRB products are well accepted in the market.

■ CIL would go slow on Castrol Bike Zone roll outs.

The price cut taken by CIL is marginal as compared to fall in the base oil prices. This strategy would enable margin expansion. The full impact of the fall in raw material cost would be visible from Q2CY09. The improvement in the economic activities and thrust on personal mobility segment would augur well for CIL. At CMP of Rs 318, the stock is trading at 12.9x and 12.0x of CY09E and CY10E earnings respectively. We reiterate our Accumulate recommendation with a price target of Rs 371 to trade at 15x CY09E earnings.

To see full report: CASTROL

>Monthly Technical Perspective (EMKAY)


Nifty gave a positive start for the April month, and continued its northbound journey. On 8th April it tested our first mentioned target of 3240 and further continued its upside journey and thereby break the 200DEMA and tested second mentioned target of 3451 and made a high of 3511 on 16th April. Thereafter on higher level some profit booking was witnessed and Nifty took support near to 3302, which is 38.20% retracement level of the recent rally from 2965 to 3511 and made a low of 3296.Again Nifty started its upside journey and on 27th April it broke its recent high of 3511 and made a new high of 3517. Finally Nifty closed at 3473 with a gain of 15.00% m-o-m basis. As nifty is continuously making higher tops and higher bottom, thus we maintain our immediate upside target of 3743 which is 61.80% retracement level of the recent fall from 4649 to 2252. On the daily chart Nifty had given Flag breakout, thus in short term Nifty can test 4273, which is the target of the flag breakout. However in the short term 3300 will play as a strong support for nifty.


Sensex also gave a positive start for the April month, and continued its northbound journey. On 9th April it tested our first mentioned target of 10945 and further continued its upside journey and tested the 200DEMA, which was placed at 11221 and further made a high of 11367. Thereafter on higher level some profit booking was witnessed and Sensex took support near to10661, which is 38.20% retracement level of the recent rally from 9520 to 11367 and made a low of 10715.Again Sensex started its upside journey and on 27th April it broke its recent high of 11367 and made a new high of 11492. Finally Sensex closed at 11403 with a gain of 17.46% m-o-m basis. As Sensex is continuously making higher tops and higher bottom, thus we maintain our immediate upside target of 12568 which is 61.80% retracement level of the recent fall from 15579 to 7697. On the daily chart Sensex had given Flag breakout, thus in short term Sensex can test 14242, which is the target of the flag breakout. However in the short-term 10715 will play as a strong support for Sensex.

Bank Nifty

Continuing its northbound journey the Bank Nifty broke the mentioned resistance of 4602, and further continued its upside journey and made a high of 5201 on 20th April. However on higher level profit booking was witnessed and took support near to 38.20% of the recent rally from 3871 to 5201 and made a low of 4725. Again buying was witnessed and bank Nifty started its upside journey and broke the recent high of 5201 and further made a high of 5288 on 27th April.
Finally closed at 5130 with a gain of 24.12% m-o-m basis. This index is still looking strong and in the immediate term it can test 5448 and in short term it can test 6164 levels which is 38.20% retracement level of the recent fall from 10774 to 4133. However in the short-term 4725 will play as a strong support.

To see full report: MONTHLY PREVIEW

>Kalindee Rail Nirman Ltd (DOLAT CAPITAL)

Kalindee Rail reported 4QFY09 results below our expectations with 25.8% increase in sales to Rs613.8mn and 40% de-growth in PAT to Rs12.8mn. The margins for the quarter declined by 90bps on account of substantial increase in employees cost and other expenses. With the new government in making, we expect significant delays in Dedicated Freight Corridor (DFC) and other orders flows from railways. Also, delay in execution caused by other sub-contractors has further pushed Kalindee’s revenue booking which has reflected in the numbers and should impact the earnings going forward. As the scenario remains bleak for order inflows for at least the next two quarters, we recommend a Sell on the company with a target price of Rs93 at which it would be trading at a PER of 5xFY10E earnings. Our target price of Rs125 has been achieved and we downgrade the price by another 25.6%.

Result Highlights

Sales for 4QFY09 increased by 25.8% to Rs613.8mn. The operating margin declined by 90 bps yoy to 6.8%. This was mainly on account of 145% increase in staff cost and 125% increase in other expenses (which includes work costs). However, the raw material costs have declined by 20% signifying a positive impact from falling commodity prices.

PAT de-grew by 40% to Rs.12.8mn with a decline in net margins by 230bps to 2.1% despite other income of Rs.2.7mn (nil last quarter). The margins were impacted adversely due to increase in depreciation and interest cost by 33.3% & 195% respectively.

For FY09, the Sales grew by 14.3% to Rs.2812.2mn and PAT de-grew by 19% to Rs.115.3mn. The operating margins remained stable at 9.5%. However, PAT margins declined substantially by 170 bps mainly on account of 173% increase in interest cost.

Key Developments
The company has reported below expectation numbers on topline due to delay by a mid-tier construction company based in north for two orders of Rs1000mn and Rs800mn.

The delay in execution caused by other sub-contractors has further pushed Kalindee’s revenue booking. This has also impacted the earnings negatively as the company has already hired the requisite equipments and machinery for the project but is unable to execute due to delay by links in the value chain. The interest cost and depreciation for such equipments is adding up to a significant amount hitting the margins negatively.

The Company’s current order book stands at Rs.4000mn (1.4x FY09 Sales). We feel that there should be a slowdown in order inflows for at least the next two quarters until a stable government is formed. This would further delay the DFC and RVNL projects.

Though Kalindee is well placed to tap the opportunities in Railways due to its technical expertise, we feel that delay in crucial projects would postpone the revenue booking. Also, a bleak scenario for order book build-up does not augur well for the company. As the scenario remains bleak for order inflows for at least the next two quarters, we recommend a Sell on the company with a target price of Rs93 at which it would be trading at a PER of 5xFY10E earnings. Our target price of Rs125 has been achieved and we downgrade the price by another 25.6%.

To see full report: KALINDEE RAIL NIRMAN