Friday, May 8, 2009

>Daily Derivatives (ICICI Direct)

Derivative Comments

• The Nifty May series witnessed an unwinding of 8.88lakh shares in OI with rise in futures price by 1.41% depicting some short covering in the Nifty. The premium slipped into a discount since participants were hesitant to carry overnight position on account of‘Stress Test Result’ in the US

• The options data shows humongous addition of OI in the 3800 Call amounting to 18267 contracts with rise in volume and drop in IV from 49 to 47.56. This has now made the 3800 Call the largest Call option base with3.94 million shares in OI. Additions in the range of 2500-4000 contracts were seen in Call options ranging from 3900 to 4200. On the other hand, the 3600 Put added 10700 contracts followed by nearly 6500 contracts addition in 3500 and 3700 Puts individually. Call writing continues in the 3800 Call suggesting strong resistance for the Nifty at this level. Put writers were seen active in 3600 as well as some in the 3700 strike price. This further suggests the market may find support at 3600 for a couple of sessions to come on a closing basis

• The FII Index options data shows net sale of Rs 327 crore with a rise in OI by 3.93% Nifty Options OI Distribution Nifty OI vs. Futures Price.

To see full report: DERIVATIVES 080509

>Daily Calls (ICICI Direct)

To see report: CALLS 080509

>Daily Market & Technical Outlook (ICICI Direct)

Key points

  • Market outlook — Open flat with a negative bias
  • Positive — FIIs buying consistently
  • Negative — Crude rising again, MF selling

Market outlook

Indian markets are likely to open flat and trade with a negative sentiment. Some profit booking cannot be ruled out later in the day. The announcement on the stress case needs some more clarity and markets may trade range bound for the next few sessions till the fullimpact is calculated. We advise against taking aggressive trading positions till clarity emerges or the market breaks from the trading range of 3500-3750 on the Nifty

The Sensex has supports at 11900 and 11730 and resistances at 12270 and 12550. The Nifty has supports at 3640 and 3600 and resistances at 3730 and 3760

Asian markets were trading flat to negative in the morning session

US stocks slid on Thursday as investors took profits from the technology sector’s recent surge, while analyst downgrades hurt telecoms and a tepid response to a government bond auction raised fears about public finances. However, stock index futures rose after the official government results were released that said leading banks would raise $74.6 billion to build a capital cushion. Officials hope this will restore faith in financial firms and set a course out of the deepest recession in decades. Shares of several major banks, includingCitigroup rose after the bell, with Citi gaining 6.6% to $4.0 after regulators said the bank’s capital need was $5.5 billion. Citi had ended the regular session down 1.3%. There was no major negative surprise from the stress results

Stocks in news: Reliance, Essar Steel, DLF, Religare

Technical Outlook

We said, "profit-booking may prove temporary if candle's low at 11899 gets protected today, though the shadow area remains a challenge on the upper side." The day saw a volatile trade holding 11899, but not crossing the shadow area. The 8% gains in Metals aided Sensex to finish 1.3% higher. A/D ratio turned +ve 5:1.

The action formed a small bull candle retracing 61.8% of Wednesday's bear candle. Failure to trade strongly above the day’s high of 12144 would prove the corrective nature of yesterday's action and test the lower range of the sideways action of the past three days. It will be positive otherwise.

To see full report: OPENING BELL 080509

>Le Grand Fromage (FIRST GLOBAL)

After the fling…the Pregnancy Test

All of us have been really naughty last few weeks. We have done unspeakable things with the unmentionables. And have done these with highly unsafe practices.

So I though it a good idea to do the right thing and administer a pregnancy test to ascertain whether there is indeed a bull embryo somewhere inside this rally.

So how does one perform a pregnancy test on a rally, to figure out whether it is a bear market rally or an incipient bull market?

Well, the medical approach is to pee on the rally, and see if the color or some such thing changes. I have pee-ed on the rally last 20 days and its color hasn’t changed (well, it has changed a bit in the developed world, but not so much in Emerging Markets.)

So the medical approach has to be discarded in favor of a more financial approach.

And here’s what I decided to do:

The Pregnancy Test for the Rally

Let’s first pay our devoirs to the rally. It has killed both the bulls and the bears, in a salute to the resurgence of Communism. It has leveled the playing field, making everybody poor. The bears have been cleaned out, and surprisingly, even the bulls (like the Long-only funds) haven’t fared too well at all, because they were all overweight “quality”, and “quality” has been an absolute dog.

Quality has been an absolute dog…

Now, there is something in this statement that’s making me think: how can “quality” be a dog in what is supposed to be a bull market?

Let’s start with this central theme and commence our Pregnancy Test (medically-inclined folks can still take a pee).

I asked my quantitative guys to run the following back-tests for the period April 2002 to October 2003. This is the period in which we saw the last bear market wend its way slowly to a global equity market trough in March-April 2003, and then the famous bull market began…yes, the same one that led us to this sorry mess.

The objective of the investigation was simple: does the trade change when a bear market metamorphoses into a bull market? That is, do the countries or sectors, that you are long/overweight, short/underweight, need to be changed in your portfolio composition, when a bear market ends and a bull market begins? In other words, do you have to undergo a wholesale reshuffle of your portfolio, in fact, turn it upside down, when a bear market truly ends, and a bull market truly begins?

The thought for this investigation came from listening to the pain of clients: even the smart guys on hedge fund side who went net long on March 9, still hurt badly…they either remained flat for this period, or made a bit of money, or worse still, even dropped a bit of money.

Even the long-only guys hurt badly, for they were weighted in favor of “quality” or defensives…the consumer plays, the utilities, the healthcare/pharmaceuticals, etc. all of these hurt performance big as the performance disparity between them and the “junk” was nearly two times, in most cases.

So we decided to do a bit of snooping around. Nothing very arduous, mind you, for at my age, the mere act of stirring from my analyst armchair is quite enough exercise. But just enough to get a clue as to whether this is indeed an incipient bull market, or merely a tarted-up bear market rally, painted knees and all.

We did this at multiple levels: Emerging Markets country bets, ie, if you were long the best performing emerging markets in the 12 months preceding April 2003, and short the worst ones, in the same period (essentially the last one year of the previous bear market), how would your performance have been in the 3 months, 6 months, 9 months and 12 months after the start of the last bull market, assuming you made no change to your portfolio in that period?

The same question was asked for Europe: if you were long the best performing countries in the bear market and short the worst ones, made no change to your portfolio when the bear market transitioned into the bull market, in April 2003, how did you do?

For the US, we asked the same question, except that we did it on a sectoral basis: what if you were long the best performing sectors of the bear market, made no change to your portfolio in April 2003, then how did you do in the early stages of the bull market.

We asked the same question, as we did for the US, of an Emerging Market called India. The rationale being that India has a vast number of sectors, like the US, and unlike most other EMs, which are dominated a handful of sectors.(The long only funds can simply replace the terms “Long” and “Short” with “Overweight” and “Underweight”. Separately, the base of the analysis was either sectors or countries, and not stocks.The reasoning behind this was that stocks can undergo very fundamental changes in a cycle, through mergers, divestitures, change of strategy, etc, which can make comparisons across periods difficult, and prone to wrong conclusions.)

To see full report: LE GRAND FROMAGE

>Market Analysis Comment (Merrill Lynch)

Breakouts are global

Equity market recovery is global
The breadth of rally from the March lows has improved as more indexes across the globe participate in the market recovery (side bar). Many of these indexes show short to intermediate -term bases. The MSCI Emerging Markets Index, Brazil, China, Korea, India, and Malaysia have breakouts from these bases and represent leadership for this rally. Australia, Hong Kong, Japan, Mexico, Russia, and Singapore are positioning for upside breakouts from these bases. While Europe is showing signs of bottoming, the major equity averages in this region are lagging many of those in the rest of the world.

What about the US?
The US has seen a strong recovery confirmed by market breadth, accumulation (rather than just short covering), and strong intermediate-term momentum readings. The NASDAQ is leading with a breakout from a short to intermediate term base, while the S&P 500 and DJIA remain below their early January highs. Year-to-date, the NASDAQ is up 9.0% while the S&P 500 and DJIA are down
2.9% and 6.4%, respectively. Importantly, the stocks versus bonds ratio broke to the upside now favoring stocks (see page 4). The sectors showing leadership are technology, materials, and consumer discretionary – these sectors also show the strongest bases off the November and March lows.

Levels to watch – potential to higher resistance levels
We maintain that within the rally from the March low, pullbacks or consolidations are likely to remain modest. While the S&P 500 continues to challenge the 880 area as resistance, the index has buy signals on both the daily and weekly point and figure charts. These signals project into higher levels of resistance. The daily signal counts to 935 and the weekly to 1000, which coincides with our 915-965 resistance as well as the lower end of the post-October low range highs in the 1000-1050 area. We maintain that a 50% retracement of the downtrend from May 08 to Mar 09 is highly possible and targets 1050-1055. Key support is now 845- 825, which is above our 715-780 support area.

Up April = positive bias for May
The S&P 500 was up 9.4% in April, which was the fourth best showing for April. Only April 1933 (33.9%), 1939 (15.1%), and 1935 (9.8%) showed higher returns for the month. Since 1928, a positive April for the S&P 500 has preceded an average gain of 0.53% for May (vs. an average loss of -0.02%). This also exceeds the average loss of -0.88% in May that follows a negative April. In summary, an up April has a tendency to neutralize a negative seasonal bias in May. This implies that the market rally can continue.

To see full report: MARKET ANALYSIS

>Indian T&D companies (HSBC)

Number trends: Are things improving in the T&D space?

■ New order inflow is the only silver lining, and is up on a q-o-q basis

■ However, the results continue to be muted, with margins on a declining trend along with RoCE

■ Reiterate UW(V) rating on ABB India with TP of INR335

The big three T&D companies (ABB India (UW (V)), Areva T&D (Not Rated), and Siemens
India (Not Rated)) have declared their March 2009 results, which guide towards some key trends on which we believe investors should focus.

New order inflow: the only silver lining. This quarter indicated a reversal of the q-o-q decline trend in order inflows, with new order inflow up for ABB (+83%) and Areva (+23%). However, order inflow on a y-o-y basis was down overall, though up for Areva (ABB -15%, Areva 15% and Siemens -21% y-o-y); hence, future revenue growth will be a challenge, in our view. The order inflow mix, as expected, was mainly driven by government entities such as Power Grid Corp (PGCIL). We expect it will be a while before private sector orders pick up.

Operating margin will likely continue to disappoint. The benefit of lower commodity prices
has been visible with raw material/sales (RM/sales) declining 191-459bp for most companies (except Areva). This benefit was negated by higher other expenses, impacting the overall margin by 129-288bp. The exception was Siemens, which reported a 400bp margin improvement, due to a base effect (Siemens had a few loss-making projects impacting March 2008 results), as well as writedowns of provisions. We expect higher competition and pricing pressure to keep margins in check for the next 2-3 quarters.

Return ratio matrix to be impacted. However, this growth has not come cheap. It has
affected the operating matrix, with lower operating margins and higher working capital, resulting in lower returns on capital employed (RoCE). Also, higher capex undertaken last year has impacted the overall capital employed.

Reiterate UW(V) rating on ABB India, given the current premium valuation. Key concerns remain competition from its peers like Areva, which is gaining market share. Key upside risks to our rating include an uptick in order inflows from the industrial segment, and a higher level of outsourcing from the company’s global parent.

To see full report: INDIAN T&D COMPANIES


Below expectations: Cash generation will be key; maintain Sell

What surprised us
DLF reported FY2009 net income of Rs46.3 bn, which was down 41% yoy, and 7% below our estimate. EBITDA margin for FY2009 was down to 60% from 69% in FY08. reflecting a fall in DLF Assets Limited (DAL) margins. Profit-before-tax margin for DAL stood at 57% for FY09 compared with 72% in FY08. In 4QFY2009, DLF took a one time charge of Rs3 bn on account of price resets and various customer schemes. DLF has withdrawn from 326mn sq ft of land resources, which includes Dankuni and Bidadi townships. It also deferred construction of some 26mn sq ft in FY2009.

What to do with the stock
We maintain our Sell rating and our 12-month target price of Rs124. DLF stock is up 31% in the past month vs. the Sensex up 15%, while results indicate that the backdrop remains challenging. DLF has indicated that it will focus on affordable housing, which we believe is the right strategy in the current difficult environment. Management has also refinanced debt and is looking to raise Rs55 bn from asset disposals. We believe the stock may remain on the sidelines until management is able to lower obligations to DAL-related debtors (DAL owes about Rs49 bn to DLF as at March 31 2009). Although the response to some middle income housing launches
has been encouraging, margins are lower and commercial lease volumes remain negligible. Risks include a significant pick up in sale/lease volume, cash flow from asset disposals and a favorable resolution on DAL debtors.

To see full report: DLF

>Infogram (ANAGRAM)

Will Momentum last?

Our bellowed Sensex had one of the best months in last ten years. After May of 1999, first time we saw sensex rising for than 17% in a month. Last month is this report we advised our reports to buy stocks as we foresaw good times. How do we judge the weather now? Well, slightly overcast to say in brief. There are many events scheduled over a month which can derail our rally and the advice is to remain indoors or carry an umbrella (strict stop loss) when you dare to venture out!

In the US, there is a market maxim, 'Sell in May and go away'. The idea is to sell in the month of May and enter after Halloween in November. The saying is based on some studies that show that returns during the November-April period are better than the May-October period.

We scanned the data in India from October 1989 onwards to find whether the rule applies to us as well. We found that while the April October returns in the last 19 years were 9.38% on an average. The returns were positive in 12(63%) out of the last 19 years. The returns in the October to April returns were 12,57% in the last 20 years. The returns were positive in 15 (75%) of the last 20 years under study.

The month of May is notoriously bad for equities. In the last 19 years, it has given a negative return of 0.97%. This is the second worst month after October, which has an average loss of 2.81%. In the last 19 years, the month of May has returned losses in 9 out of 19 instances. Besides, the month of May has some other idiosyncrasies as well.

To see full report: INFOGRAM

>Crude down on profit taking; upside from equities

Singapore - Crude oil futures lost ground Tuesday in Asia on profit taking after a four-day climb, but sentiment appeared supported as firmer regional equity markets reflected growing confidence in the global economy.

While analysts were skeptical if the oil market's strength can be sustained in the face of weak fundamentals, many expect prices could still trend higher with equities rising globally and on the dollar's relative weakness.

"Sentiment is certainly strong - the markets are focusing on the positives," said David Moore, a commodity strategist at Commonwealth Bank of Australia.

On the New York Mercantile Exchange, light sweet crude futures for delivery in June traded at USD53.92 a barrel at 0657 GMT, down 55 cents in the Globex electronic session.

Nymex heating oil for June fell 106 points to 142.39 cents a gallon, while June reformulated gasoline blendstock traded at 158.40 cents, 20 points lower.

Nymex crude settled Monday at a fresh 2009 high as U.S. share markets surged on signs of an economic recovery, after reports of increased construction spending and pending home sales.

"We remain of the opinion that any additional price gains anywhere across the complex will be heavily contingent upon bullish leadership from the financial or currency markets," Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates, said in a note to clients.

"For now, we are letting out some leash on the crude market by allowing for a further up-move toward the USD57 area. But we will be looking to use such an advance as an opportunity to reestablish a short holding."

Looking ahead, weekly U.S. government oil data may lend some direction, possibly presenting further evidence that supply-demand factors remain bearish.

The federal Energy Information Administration is expected to report a 2 million-barrel increase in the country's crude stockpiles in the week to May 1, according to the average prediction from seven analysts polled by Dow Jones Newswires.

Gasoline stockpiles may have built by 500,000 barrels and distillates, including heating oil and diesel, by 1 million barrels, the survey showed.

Before the EIA's Weekly Petroleum Status Report Wednesday, the American Petroleum Institute industry group will put out its own data at 2030 GMT Tuesday.

"Inventories are large and will ultimately pressure the market and serve as a cap on oil prices," Moore said.

At 0657 GMT, oil prices on London's ICE Futures exchange were mixed, with Brent crude for June down 46 cents at USD54.12 a barrel.

May gasoil changed hands at USD453 a metric ton, chalking up USD3.25 from Monday's settlement.

Crude lower on profit taking; equities eyed
London - Crude futures slightly lower on profit-taking, amid broadly unchanged equities in much of Europe and Asia. Equities, particularly in U.S., expected to continue dictating price moves, despite repeated poor demand expectations from forecasters such as IEA and EIA, and brimming U.S. oil stockpiles. "Oil price momentum suggests higher levels - fundamentals suggest lower levels," says Mark Pervan at ANZ. "Momentum has been the better bet recently - albeit backed by rising equity markets. But the equity gains need to be consolidated...If equity participants take profits then the focus will switch to supply - and that's not a pretty picture." ICE June Brent -68c at USD53.90/bbl, Nymex June light, sweet -75c at USD53.72/bbl.


>Jain Irrigation Systems Limited (MERILL LYNCH)

Micro Irrigation growth panning out well

Raising estimates; New PO INR575

Posted a better quality of earnings in Q4 & higher revenue visibility, as such we’ve raised FY10 & FY11 estimates by 1% & 5% factoring in higher margin in MIS business. We reiterate Buy with a PO of INR575 (previously PO INR500) pegged at 17xFY10e and 0.5x PEG. We expect strong performance in domestic MIS to drive 36% EPS CAGR. The stock trades at 15xFY10e and 8xFY10e EV/EBITDA.

Q4 operating earnings growth driven by MIS
While Q4 revenue grew 15%yoy, EBITDA was up 23% yoy driven by 125bps margin expansion. Recurring PAT was down 11% yoy due to higher interest outgo due to new IFC loan and higher taxes. MIS grew 36% yoy with margins 650bps higher than our assumed normalized margin at 26%. Agro processing growth was muted as strong off takes in Q1-Q3 resulted in less Q4 domestic sales..

Expect 36% EPS CAGR; Visibility improves
We expect 36% EPS CAGR driven by 70bps margin improvement over FY09-11. revenue visibility has improved given i) strong order flow and inquiries in pipes, ii) Coke which forms 40% of fruit processing rev has indicated for ~30% higher requirement in FY10, iii) current order book in onion dehydration forms ~60% of our FY10 segmental est. and iv) continuing strong performance in MIS.

MIS growth pans out well; Working capital ratios to improve
Domestic MIS remains the main earning driver for the company. Company’s strategy of growing in new states is succeeding given strong ramp in Tamil Nadu (260% yoy), Madhya Pradesh (80% yoy) and Karnataka (44% yoy). Also, it is consistently deriving better than expected margins given its pricing power and declining raw material prices. As per the company, its working capital ratios have also improved due to lower DSO and inventory days.

To see fuul report: JAIN IRRIGATION