Thursday, May 14, 2009

>Daily Market & Technical Outlook (ICICI Direct)

Key points
■ Market Outlook — Open with a gap down and trade negative

■ Positive — FIIs, MFs buying
■ Negative — Gloomy US retail sales report, crude rising again

Market outlook

■ Indian markets are likely to open with a gap down following global cues. As we said before, we advise against taking any aggressive trading positions since tomorrow is the last trading session before election results are announced on Saturday. We may witness volatility in the coming week once the results are out and we will get a clear direction for the short-term

■ Inflation for week ended May 2 is expected at 0.3% against 0.7% a week earlier

■ The Sensex has supports at 11860 and 11620 and resistances at 12090 and 12260. The Nifty has supports at 3560 and 3530 and resistances at 3640 and 3740

■ Asian stocks were trading weak in the early session with most of major indices losing 2-3%

■ US stocks tumbled on Wednesday as a gloomy retail sales report revived recent anxiety about the economy’s struggle and caused a broad sell-off that accelerated late in the session

■ Stocks in news: Cipla, TV18, TCS, Wipro, Suzlon

To see full report: OPENING BELL 140509


Sensex: We said, "Intra-day technical position now turns over-bought ... Watch if dips remain nominal and Index can, then, move above day's high of 12195 and previous high of 12272." Index traded volatile, failed to cross 12272, and finally closed near lows, down 1%. Metals lost 2%. A/D ratio turned marginally negative.

The action formed a bear candle, which attempted to hold 50% retracement level to Tuesday's Piercing Line bull. Today, failure to hold its low, at 11934, can weaken the Index to threaten the Green support line at 11900, and test Tuesday's bouncing point at 11621. If gaps down, watch if supportive action, holding above 11621, is seen.

To see fumm report: CALLS 140509

>Nymex crude up on dollar slide; stockpile focus

Singapore - Crude oil futures pushed higher Wednesday in Asia as the dollar declined, while sentiment was also supported ahead of weekly U.S. government oil data.

While U.S. crude stockpiles have risen steadily to multiyear highs, a separate report from the American Petroleum Institute industry group late Tuesday showed an unexpectedly steep drawdown last week, alongside declines in product inventories, putting traders on the defensive.

"This week's API report was the most bullish report seen in a very long time. That makes today's (Energy Information Administration) report critical," said Peter Beutel, president at trading advisory firm Cameron Hanover.

On the New York Mercantile Exchange, light sweet crude futures for delivery in June traded at $59.78 a barrel at 0655 GMT, up 93 cents or 1.6% in the Globex electronic session.

Nymex heating oil for June climbed 196 points to 152.66 cents a gallon, while June reformulated gasoline blendstock traded at 169.33 cents, 254 points higher.

Nymex crude overnight spiked above the psychologically important $60-a-barrel mark for the first time since Nov. 11, as traders bet the approach of summer would lift gasoline consumption and tighten the market.

While U.S. crude stockpiles have climbed nine straight weeks to their highest since 1990, the country's gasoline stocks are comparable with year-ago levels, suggesting demand - while still weak - is still matching supply.

The dollar's decline Wednesday against the euro and the yen also shored up buying interest in dollar-denominated commodities, including oil and gold.

The EIA, a unit of the Department of Energy, is expected to report across-the-board builds in U.S. crude and product stockpiles.

Commercially held crude inventories are expected to have climbed 1.3 million barrels in the week to May 8, according to the average prediction from 15 analysts polled by Dow Jones Newswires.

Gasoline stockpiles were probably unchanged on week while distillates, including heating oil and diesel, may have risen 1.3 million barrels, the survey showed.

The average refinery run rate was seen 0.1 percentage point up from 85.3% of capacity previously.

The EIA's Weekly Petroleum Status Report is due at 1430 GMT.

The API, apart from the crude stockdraw, also reported gasoline stocks declining 2 million barrels, as well as a 1.8 million-barrel drop in distillates.

"While additional price gains are difficult to justify based on pure fundamental analysis, we are still leaving open the possibility of some additional near-term price strength," Jim Ritterbusch at Ritterbusch and Associates said in a note to clients.

"We would caution against selling this market at the present time and we will evaluate a trading stance in light of the market's response to the EIA report."

Later Wednesday, the Organization of Petroleum Exporting Countries will release its monthly report, potentially offering some hints of its thinking ahead of a policy meeting May 28.

The Middle East-dominated, 12-member group pumps 40% of the world's crude.

At 0655 GMT, oil prices on London's ICE Futures exchange also rose.

Brent crude for June, which expires Thursday, was up 94 cents at $58.88 a barrel, while June gasoil changed hands at $490.75 a metric ton, chalking up $7.50 from Tuesday's settlement.


>JSW Steel (CITI)

Sell: 4Q Loss; Margins Collapse

4Q disappoints — JSTL reported standalone PAT of Rs492m. Adjusting for the FCCB buyback & forex gains, net loss for 4Q was Rs258m vs profit of Rs4.4bn in 4QFY08. EBITDA margin came in at 11% vs 27% in 4QFY08 and 15% in 3QFY09, impacted by 13% yoy decline in realizations and higher costs. Sales volumes rose 5% yoy to 1.06m tonnes. FY09 adj PAT fell 44% yoy to Rs9.3bn.

High opening inventory — 4Q EBITDA/t fell to $67 vs $188 last year and $122 in 3QFY09. Even though JSTL had contracted coking coal at $175/t for most of its 4Q off-take (vs $305/t for FY09), the quarter was impacted by significant high-cost opening inventory. ~8% of coking coal contracted at $305/t in FY09 is yet to be lifted and JSTL is in negotiations to spread it over the next 2-3 yrs.

US platemill to be shut — The US plate/pipe mills are operating at 10-15% utilization and reported a 4Q loss of $61m and a $37m loss for FY09.

Stretched balance sheet — Standalone debt is Rs101bn and cons. debt is Rs146bn (standalone D/E 1.2x; cons D/E 1.8x). While JSTL has breached its standalone debt covenant of 3.25x Debt/EBITDA (3.3x as on 31 March 09), most of its lenders have approved the relaxation of these covenants.

Volume estimates — JSTL has enhanced capacity to 7.8mtpa (+63%) and expects FY10 volumes to rise 78% - which appears to be an onerous target. We expect 51% growth.

Sell — While steel stocks have appreciated substantially, the risk of supply restarts and downside to prices persists. Hence, we prefer less leveraged plays.

To see full report: JSW STEEL


Banks reported a robust yearly growth in Q4FY09, though sequentially situation worsened,

Slowdown in the lending activities from the last two quarters coupled with lower interest rate scenario translated in to a negative growth in Net Interest Income in most of the banks quarterly basis. Moreover, hit of asset quality could be very clearly seen in gross NPA figures. We are Bearish on Banking Sector due to the following major concerns.

  • Adverse effect of downturn in core business in Net Interest Income
  • Hit on asset quality following the economic downturn
  • Inadequate cover for NPAs
  • Stress on demand Deposit
  • Banks still in a diverse track of business

The cautious strategy adopted by most of the banks discouraged lending activites, putting pressure on the interest income and the margins. Lower interest income, while on the other side continued flow of deposits kept the interest expenses on a high end. As a result of which most of the banks registered degrowth in net interest income on sequential basis, consequently drop in the margins.

Banks had hard hit on their asset quality following the ongoing financial slowdown and that is the reason of choosing the safe avenues for the fund deployment by the banks instead of providing credit to the productive sectors. To deal with it, RBI came out with the circular of restructuring without changing its investment grade.

Provision coverage ratio provides the cushion for the corrosion in the asset quality. Presently where all banks prefer capital conversation and risk management over growth, those who have adequately provided for the NPAs are on a safer side. In FY 2008-09 instead of providing more amount for the same, some of the banks lowered their provisions and thus showed positive sum of growth in Net Profit.

To see full report: BANKING SECTOR REVIEW


Maruti: Growth across categories except M800
Maruti reported a 8.9% yoy rise in domestic volumes, driven by growth across all categories except for Maruti 800 which registered a fall 0f 47.4% yoy. A3 category lead the growth with 68.8% yoy jump in volumes drven by strong response to Swift DZire. Our channel checks have indicated at 1.5-2 months waiting period for petrol variants of the model. A2 category, which account for about 73% of volumes, reported 8.6% yoy growth owing to continued success of Swift model and pick up in volumes of A-Star Exports jumped 146% backed by robust volumes for A-Star in the European market.

Mahindra & Mahindra: UV volumes remain strong
M&M registered 14.8% yoy growth in total automative volumes during April 2009. The growth was lead by 36% jump UV volumes owing to sales of 3,509 units of its new model XYLO. 3-wheeler volumes fell 11.1% yoy. Volumes of Mahindra Logan continue to fall precpitously and were at 550 units in April'09 as against 1,713 units in April'08. LCV and export volumes declined by 16.5% yoy and 39.3% yoy respectively.

Tata Motors: Domestic volumes rise yoy after 7 months
Tata Motors reported 4.5% yoy rise in its total domestic volumes. On a yoy basis, volumes plunged across all categories except for passenger cars and LCV. While passenger car volumes increased 10.8% yoy, LCV volumes jumped 51.7% yoy. Its M&HCV volumes nosedived by 28.4% yoy, whereas exports and UVs plummeted 45.3% and 39.5% yoy respectively.

Two-Wheelers : Hero Honda continues to rule
Amongst the two wheelers, Hero Honda continued with its dominance with a 29.5% yoy increase in volumes in comparison to 2.9% yoy growth for TVS Motors and 23.8% yoy fall for Bajaj Auto. On a mom basis, Hero Honda reported a 4.9% yoy growth in volumes.

To see full report: AUTOMOBILE SECTOR


Buy: Risk/Reward Still Favorable; Increasing TP to Rs288

Maintain Buy; risk/reward favorable — GAIL has outperformed the Sensex by 17% in the last year, though the market rally in the last month has seen it underperform by 18%, offering an improved risk/reward for investors seeking exposure to the rapidly developing gas sector in India. We maintain our Buy rating while upgrading our risk rating a notch to Low from Medium as KG gas commencement increases visibility for transmission volumes while simultaneously, cyclical businesses become less critical for its growth.

Raising TP to Rs288 — Our new TP of Rs288 (Rs240 earlier) is derived from our Mar-10 DCF value and includes Rs74 value of investments. Our TP also imputes a multiple of 5.5x EV/EBITDA for the existing business and 2.0x P/B for new pipeline investments. The change in TP is driven by: (i) higher transmission vols – we are increasing KG vols in FY10E from 17 to 25 mmscmd (10 through HBJ/DVPL + 15 through others) and in FY11E from 32 to 40 mmscmd (20 + 20), (ii) change in capex assumptions – total Rs300bn capex (Rs240bn on pipelines) over FY10-13E vs. Rs267bn earlier, (iii) 2:1 D/E for new capex (1:1 earlier), and (iv) higher value of investments (Rs74 vs. Rs59).

Possible upside from lower tariff reduction, city gas — Our TP continues to factor in Rs5bn (~30%) of downside to tariffs. GAIL mgmt has expressed confidence on the issue of regulatory risk to pipeline tariffs, stating that it envisaged almost no reduction in HBJ/DVPL tariffs. Our TP could increase to Rs310 if the reduction in tariffs is lower at 20% and to Rs330 with only a 10%
reduction. GAIL has also identified city gas as a key thrust area, which could add value over the medium term, though we currently ascribe no value to it.

To see full report: GAIL


Performance highlights

Global slowdown takes toll, Top-line crashes sequentially: For 4QFY2009, Geometric recorded a 12.9% qoq de-growth in Top-line (growth of 12.3% yoy). This was on account of the intensifying global economic slowdown and particularly in the segments in which the company operates. Geometric is witnessing a ramp down from major customers and this is having an adverse impact on its business. All three segments of the company saw a fall in revenues sequentially, with Software Services falling 11.8% qoq, Engineering Services contracting by 15.7% qoq and Products 10.2% qoq. Revenues in US Dollar terms fell 15.6% qoq and even on a yoy basis, contraction of 11.7% was recorded. Billing rates in Software Services witnessed a fall, another factor that impacted Top-line. The average realised Rupee rate for the quarter rose 3.1% qoq and 27.1% yoy to Rs50.47 v/s Rs48.96 in 3QFY2009 and Rs39.71 in 4QFY2008. The company actually witnessed a yoy growth in Rupee revenues entirely on account of this factor. Thus, the worsening business environment continues to negatively impact Geometric. We believe, with major companies like General Motors and Chrysler in a major crisis (Chrysler recently filed for bankruptcy), the impact particularly on the Engineering Services Business is expected to be severe. On yoy basis, Software Services grew 20.8% and Products 12.3%, while Engineering Services saw a fall of 1.1%. The slowdown is beginning to increasingly envelope Geometric every quarter. Its major automotive clients are in a fairly perilous financial position. With demand slowing down, this sector has suffered. The company saw lower order inflows for the third consecutive quarter (US $4.6mn v/s US $5.4mn in 3QFY2009). Thus, all indications point to a more challenging environment for Geometric.

Higher SG&A, lower billing rates, one-time costs hammer Margins: In 4QFY2009, Geometric recorded a significant 917bp qoq fall in Margins due to higher SG&A costs, lower rates and one-time employee retrenchment costs. On a yoy basis, Margins fell by 302bp again due to higher SG&A costs. In absolute terms, EBIDTA fell by over 53% qoq and by 12.5% yoy.

Lower Margins, Forex losses lead company into the red: On account of the Margin contraction witnessed and Forex losses to the tune of Rs24.9cr, as well as higher Interest and Depreciation Costs, Geometric recorded a Net Loss of Rs20.5cr in 4QFY2009 (Net Profit of Rs1.8cr in 3QFY2009). Thus, the company has posted a disappointing performance this quarter and will require the global economy to resume its upward trend to help bring better times for the company.

To see full report: GEOMTERIC



GDL reported its 4QFY09 net profit at Rs 125.5 mn (- 21% YoY) below our expectations. Revenues grew at a modest pace of 53% YoY to Rs 1230 mn led by 70% YoY growth in volumes in rail operations and strong realisations of Rs 7600 per TEU as against Rs 6000 per TEU in Q4FY08 in CFS business. Volumes have fallen for the CFS business from 87,977 TEUs in Q4FY08 to 70,004 TEUs (-20% YoY) in the current quarter but strong realisations per TEU have led to revenues from the CFS business increase marginally by 2% YoY. Nascent Rail business continues to be in red which we believe would break even by FY11E. But overall a good performance by the company. We reiterate BUY

Brief highlights for the quarter

■ Revenues grew by 54% YoY in 4QFY09 to Rs 1231 mn mainly led by strong realisations of Rs 7600 per TEU across in CFS business as well as the ramp up in the rail business.

■ Operating margins fell sharply by 200 bps to 28% YoY led by diversification into low margin rail operations.

■ Interest costs and depreciation charges jumped sharply as GDL raised debt for the business (for acquiring rakes) and land acquisition for the new ICD’s during the preceding quarter.

■ The tax rate for the quarter was at 21 % as the company had 80IA benefits for its investments in ICDs and CFSs.

■ As a result, net profit after minority interest fall by 21% YoY to Rs 233 mn in 4QFY09.


CFS business – subdued volumes but high realisations
With GDP and EXIM trade growth slowing, volumes handled at various ports by Gateway’s CFS business have also witnessed significant drop at 70,004 TEUs for the quarter dropping by 10% QoQ (77441 TEUs in Q3FY09). The realizations also dropped significantly to Rs 7595/TEU
as against Rs 8993/TEU in Q3FY09 (but grew YoY from Rs 5932/TEU in Q4FY08). The realization per TEU is as per our expectation. We believe it is primarily on account of much higher ground rent earned on account of stacking of containers at the ports and secondly on account of rationalization of rates by the CFS operators .

Container train business – increase in losses due to lower capacity utilization
As expected, Gateway's container train business losses have increased as compared to previous quarter. The volumes handled by the train business at 19,868 TEUs grew by 23% on a sequential basis. Realizations improved at Rs 31,256/TEU and EBITDA margins registered drop of 600 bps YoY. For FY09, losses in the container train business increased to Rs 248 mn as against loss of Rs 82 million during FY08. We believe the company today operates 15 rakes (13 owned and 2 leased) which we expect they would ramp up to 30 rakes by end of FY11.

To see full report: GATEWAY DISTRIPARKS

>Garware Offshore (ICICI Direct)

Fleet expansion to drive growth…
Garware Offshore Services Ltd (GOSL) registered a YoY increase of 115% in revenues to Rs 50.32 crore in Q4FY09 as compared to Rs 23.4 crore in Q4FY08. The rise in revenues was mainly on account of addition of three new vessels (two AHTSVs and one PSV), which are all operating under fixed contracts. The EBITDA margin saw a steep fall of 2062 bps YoY and 394 bps QoQ to 40.36% in Q4FY09. The fall in operating margin was mainly on account of the increase in other expenses to the tune of Rs 20.54 crore in Q4FY09 from Rs 5.35 crore in Q4FY08 (which includes mobilisation expenses of Rs 2.4 crore as two new vessels were inducted during the quarter with dry docking expenses of Rs 1.25 crore). Net profit rose 26.7% to Rs 7.31
crore. However, QoQ it declined by 31.8% from Rs 10.33 crore.

GOSL is trading at a 3.53x FY10E earnings of Rs 28.32. Despite a fall in net profit in Q4FY09, we remain positive on GOSL’s growth prospects as we believe the newly inducted vessels with fixed contracts will drive the growth and should contribute positively to its earnings in the next few quarters. At the same time, concerns remain over scaling down of investments in the oil
exploration segment due to weak crude oil prices and the global liquidity crisis. We value GOSL at 4x FY10 earnings, with a target price of Rs 113.

Contraction in EBITDA margin
GOSL’s EBITDA margin declined by 394 bps from 44.3% in Q3FY09 to 40.36% in Q4FY09. The fall in EBITDA margin was on the back of mobilisation charges for the two new vessels it inducted during the quarter as well as dry docking expenditure of Rs 1.25 crore. For FY09, GOSL reported an operating margin of 48.25% as against 56.75% in FY08. We expect the operating margin to improve to 55.17% and 54.20% for FY10E and FY11E, respectively, on the back of addition of new vessels, which are already deployed under long-term fixed contracts.

We expect the net profit to grow at 48.5% and 18.6% to Rs 63.13 crore and Rs 74.9 crore in FY10E and FY11E, respectively. The NPM is expected to improve to 28% in FY11E from 24% in FY09. This is on account of addition of vessels, resulting in a better operating performance and less-than-proportionate increase in fixed cost.

To see full report: GARWARE OFFSHORE


Company Background
Varun Shipping (VSCL) is the largest Indian player in the LPG carrier segment with a fleet of 11 LPG carriers. The company has a fleet strength of 21 vessels comprising three double hull crude carriers and seven offshore vessels (five high-end modern AHTS and two low-end AHTS) other than the 11 LPG carriers. Currently, VSCL has a presence across three shipping segments, namely LPG, crude oil, and offshore.

Investment Rationale
Major presence in niche and less volatile medium gas carrier (MGC) segment VSCL is the largest medium-size gas carrier (MGC) owner in India having 10 MGC carriers with a capacity of 239,437 dead weight tonnage (dwt). VSCL has a 16% worldwide market share in the MGC fleet. MGC day rates are comparatively less volatile than the large and very large gas carriers as MGCs are used for specific regional routes on which the deployment of larger vessels is technically unfeasible. Moreover, MGCs can alternatively be used for ammonia transportation, which is usually traded in smaller quantities and is suitable to be transported by MGCs. A total of 11% of the world’s total ammonia production is transported by sea. Variability in VSCL’s revenues is likely to be less owing to lower volatility in MGC day rates.

Enhancing presence in lucrative offshore segment
VSCL has enhanced its positioning in the offshore segment by acquiring a fifth high-end anchor handling towing and supply vessel (AHTS). Acquisition of these vessels forms a part of VSCL’s capital expansion programme of US$400 million, initially announced in January 2008.

VSCL currently owns seven AHTS vessels, out of which two old low-end vessels are on charter with ONGC, while two high-end ones are on long-term contract with Reliance Industries. VSCL’s revenues from the offshore segment have risen substantially form Rs 23.91 crore in FY07 to Rs 165.56 crore in FY08.

The revenue mix is changing in favour of the high–margin offshore segment. Revenues from the offshore segment are expected to increase from 22% in FY08 to 29.6% in FY10E, while revenue contribution from the LPG segment is expected to come down from 62.4% in FY08 to 52.1% in FY10E.

To see full report: VARUN SHIPPING