Sunday, May 24, 2009


Singapore - The Middle East crude oil market will hold firm in the coming week as the trading month for July cargoes draws to a close, with chatter from the Organization of Petroleum Exporting Countries likely to further lend support.

OPEC, which counts six Middle East producers among its 12 members, will meet Thursday to discuss policy at a time when benchmark oil futures have climbed above $60 a barrel despite record inventories and lingering questions over the prospects for a global recovery in demand.

The group, which pumps 40% of the world's crude, isn't expected to hold back more output as a result, although hawkish members including Iran can be counted on to talk up prices.

"They'll probably maintain cuts and tighten compliance (to quotas)," a South Korean refinery official said of OPEC's recent pledge to reduce supply.

Even before OPEC ministers stream into their Vienna gathering, Middle East high-sulfur or "sour" crude has already drawn strong buying interest, a trend that's likely to continue in the near term.

That's because profit margins for fuel oil, the primary product from processing Middle East crude, has strengthened, just as refineries are filling their books for the start of the third quarter - when plants reopen after seasonal maintenance.

Firm Demand Despite Arb

Asia's reference fuel oil crack spread, calculated as the discount of Singapore high-sulfur fuel oil to Dubai crude swaps, was quoted Friday by a broker about minus $5 a barrel for June, easing only modestly from the previous week.

This means Middle East supplies will likely remain in demand, even if favorable arbitrage economics present Asian importers the option of shipping home low-sulfur or "sweet" crude from the Atlantic basin.

The premium of London Brent futures to Dubai swaps, or the exchange-of-futures-for-swaps, was valued by another broker at a narrow $1.05 a barrel for July, less than half the spread that would encourage West-to-East supply.

"(Supply from) Saudi Arabia, Kuwait and the United Arab Emirates will do well," the refinery official predicted.

Meanwhile, a handful of July-loading cargoes, mostly of Abu Dhabi origin, remain uncommitted, but offers in the coming days probably won't be reduced.

These include light sour grades such as Lower Zakum and Umm Shaif, which changed hands in recent days at relatively strong premiums of nearly 20 cents a barrel to official selling prices - a $100,000 markup on every cargo.

Oil majors are expected to absorb unsold cargoes internally rather than reduce their offers significantly, traders say.

On May 28, look out for a new round of monthly term prices, starting with trade calculations for Malaysia's light sweet benchmark Tapis crude, to be priced retroactively for May.

The Oman OSP for July, which comes after the settlement of futures contracts traded on the Dubai Mercantile Exchange, will be finalized May 29.

That's on track to rise to a seven-month high above $56 a barrel.

Crude steadies on dollar, but econ doubts linger

Crude oil futures steadied Friday in Asia on a continued dollar weakness, although sentiment remained under pressure on concerns over the health of the global economy.

Oil traders were reluctant to bid up prices aggressively, with regional share markets declining, after the U.S. Labor Department Thursday reported a record number of jobless claims and amid speculation the country's top credit rating may be in jeopardy.

On the New York Mercantile Exchange, light sweet crude futures for delivery in July traded at $61.52 a barrel at 0707 GMT, up 47 cents in the Globex electronic session.

Nymex reformulated gasoline blendstock for June rose 233 points to 182.30 cents a gallon, while June heating oil traded at 153.63 cents, 69 points higher.

Oil traders are still taking direction from various readings of the economy amid uncertainty over the outlook for global demand.

Overnight, financial markets were hit after Standard & Poor's put the U.K.'s credit rating on negative outlook because of extra obligations taken on by the government to tackle the recession.

While the recent rally in U.S. equities may have encouraged buying by some long-only index funds, it remained unclear if the uptrend in oil prices represented a longer-term return to positive performance.

"Both industrial metals and energy markets look vulnerable to a deterioration in sentiment toward risky assets over the coming weeks as positive correlations with equity markets have strengthened recently," analysts at Barclays Capital, led by Gayle Berry, said in a report.

"In addition, key markets in sub-sectors such as oil and copper look as if they may have moved ahead a little faster than is justified by the current state of market fundamentals."

The U.S. Energy Information Administration Wednesday posted a second weekly drop in the country's crude inventories, although stocks remained at their highest levels since 1990.

Still, some upside support may be possible as traders turned their focus to the gasoline market in the lead-up to the long Memorial Day weekend, which kicks off the peak U.S. summer driving season.

U.S. gasoline stockpiles have slipped below the five-year average level, according to the EIA.

Nymex electronic trading will continue over Monday's U.S. Memorial Day holiday, although the pit session will be closed.

Meantime, oil prices may also find support from continued dollar weakness as investors seek shelter by buying hard assets.

The greenback traded at Y94.18 after falling to Y93.91, while the euro was up at $1.3942, from $1.3910.

"We continue to view this weakening dollar trend as an important force in enticing passive capital into the long side of the crude futures as a longer-term asset play or inflation hedge," Jim Ritterbusch, president at trading advisory firm Ritterbusch and Associates, said in a note to clients.

At 0707 GMT, oil prices on London's ICE Futures exchange also pushed higher.

Brent crude for July rose 53 cents to $60.46 a barrel, while June gasoil changed hands at $486 a metric ton, chalking up $9.25 from Thursday's settlement.



What a week!

New UPA government has heralded good times for India bourses. Nifty gained highest ever in a week and for its elder brother Sensex it was a best since March 1992. Reality and capital goods stocks recorded massive 37% and 28% gains while underperformed the broader indices. Foreign institutional investors poured in 5000 cr. this week chasing stock prices, while domestic funds booked profits worth Rs.1300 cr.

Markets are attracting lot of interests from retail investors and we expect indices to remain buoyant as well. Midcap and small caps are hogging the limelight and as we have been asking our readers to put their money in this space as it will generate much superior returns in the short term.



  • FII ACTIVITY FOR THE WEEK (From 18th May to 22nd May'09)




To see full report: WEEKLY WATCH


Resistance at 4390

Markets on May 22: Rally in the second half of the day

The market rallied in the second half of the trading session on sustained buying that continued right till the end. The Sensex ended 150 points higher, and Nifty closed 27 points up. Mid caps and small caps also ended the day on a firm note. While buying was seen in capital goods and banking stocks, auto and realty stocks ended the day on a weak note. The observation on the daily chart is very unpleasant, as the momentum oscillator KST is at its all-time high; even higher than it was during the top of December 2007. Near 50% retracement level of the entire fall from the top of 6357; we are having such overbought reading in the momentum oscillator, which is not a good sign for the market. So, unless, Nifty moves above the recent high of 4510, bulls should remain cautious. Bulls with 957 advances and 309 declines on the NSE dominated the market breadth.

On the hourly chart, the gap between the momentum oscillator KST and the signal line is shrinking. On its positive crossover, we can see a bounce upto 4390, which is a good resistance level. Our short-term bias is down for the target of 3900 with the reversal pegged at 4510.
However, our mid-term bias is up for the target of 4550 with the reversal placed at 3700.

From the 30 stocks of the Sensex, Larsen & Toubro (up 5%) ICICI Bank (up 5%) and Reliance Industries (up 3%) led the pack of gainers, while Sterlite Industries (down 4%), Mahindra & Mahindra (down 4%) and Tata Motors (down 3%) topped the list of losing stocks.

To see full report: EAGLE EYE 250509


At what horizon will global inflation return?

There is currently inflation in certain countries with supply side problems, and higher inflation in emerging countries than in large OECD countries because of the convergence of price levels, but no overall (global) inflation despite very rapid growth in the money supply.

For global inflation to return, the following conditions must be met:
− for wage inflation (underlying inflation,) the world must get close to full employment, which will be a very long process due to the magnitude of available labour resources, and the high level of investment;

− for commodity inflation, the pick-up in global growth must bring demand for commodities back towards levels that generate pressure on prices, and this could take at least two or three years, barring a surprise linked to speculative positions.

Only protectionism could cause a faster return of inflation.

To see full report: FLASH ECONOMICS


In line with expectations: Robust cigarette profit growth in FY09

What surprised us
ITC’s FY2009 results were broadly in line with our forecast, with EPS up 5% yoy to Rs8.64 vs. our expectation of 6% growth, despite a lower-than expected performance in 4Q. Cigarette segment volume was down 3%- 3.5% yoy, in line with our expectation, while its EBIT growth was strong at 15% and margin rose 140 bp yoy. FMCG – Others losses were below Rs5 bn in FY2009, a tad better than we forecast. However, EBIT in Hotels was lower than we forecast, reflecting a high base in 4QFY08 and a significant industry slowdown. Agri Business revenue and EBIT also fell short of our estimates, reflecting lower soya volumes and portfolio rationalization.

What to do with the stock
Maintain Buy on ITC; our 12-mo P/E-based TP of Rs211 implies 15% upside. FY2009 was a year of modest EPS growth as we had forecast, but we expect an acceleration to double-digit earnings growth in FY2010E, led by 1) robust cigarette EBIT growth – ITC delivered 15% pa growth in FY08-09 despite steep tax hikes and an increase in contraband volumes; ITC’s consistent market share gains over the years reflect the strength of its brands and pricing power over peers; 2) we expect FMCG – Others losses to narrow; 3) Hotels should also stabilize in FY10E, while we expect strong growth in the paper business. Risks include adverse cigarette tax hikes, or any prolonged weakness in FMCG – Others and Hotels.

To see full report: ITC


Opportunity lying outside the index

Who says Black swan events always have a negative impact? They can also work well on the positive side, as is the case of the outcome of the Indian general elections. Who could have predicted the clean sweep by the UPA in the elections? However, the UPA is indeed about to form a government at the Centre with the Indian National Congress being the major political party in the coalition with 206 seats.

Much to the consensus relief, the new government formed will not need the support of the Left and the alliances of local regional parties, which would have otherwise impacted the decision making process of the government had they been party to the coalition. This will indeed send huge positive signals to the economy and the capital markets.

So, the big question that remains is where does the market head from here?

In our recent strategy report, we had mentioned that if the election results are favourable then the markets may reach 14500 levels on the upside in the short run. It did that within two trading sessions after May 16 2009. However, on the first day when markets opened, within a few seconds, for the first time ever, the market hit the 15% upper circuit followed by an additional 5% rise. This gave no chance to the investors to buy into the markets. As large caps have rallied substantially, mid caps soon followed suit. Since the substantial appreciation in large caps has created a huge valuation divergence between large caps and mid caps, the ongoing run in the mid caps is simply a case of catching up.

We believe that within the midcap universe only quality midcaps will witness sustainable buying interest. Within this segment, PSU banks, private regional banks, power companies and high leveraged plays will be preferred. In addition, we are of the view that one should view any deep correction in the markets as an opportunity to accumulate quality stocks at reasonable valuations.

However, one thing is for sure. This black swan result has indeed increased the visibility of the India growth story in front of the international investor community. Now, on the back of expectations of better policy reforms, increased focus on fiscal deficit and high probability of PSU divestments and prudent & speedy executions related to the important bills like that of FDI in insurance will result in increased FII participation in India.

Key expectations from the new government:
  • Improvement in fiscal management/public finances via disinvestments
  • Increased focus on infrastructure spending especially power and road/highways.
  • Thrust on agriculture and rural development
  • Financial sector reforms like increasing FDI in retail and insurance sector
  • Increased focus on education and healthcare
  • Providing ample liquidity to corporates and individuals at affordable rates

We believe the above factors will help in bringing fresh capital into the country in terms of FDI, FII flows and ECB flow

Key Beneficiaries
  • Insurance plays like SBI, Kotak Mahindra Bank and Reliance Capital
  • Infrastructure plays like Bhel. L&T, NTPC etc.
  • PSU banking stocks with trigger of government stake dilution for example: OBC, Dena Bank, etc.
  • PSU space will be in limelight on expectations of divestments and new IPOs

To see full report: MARKET STRATEGY


Strong growth momentum continues in Q4 FY09; Fy09 loan growth at 29.5% yoy.

NIM correct by 30 bps qoq, in-line with expectations.

Other income remains elevated; spike in C/I ratio hurts profit growth

Significant reduction in NPA levels; capital adequacy improves

Bank taregts 23-35% loan growth and ~3.5% NIM in FY10

Downgrade to MP with target Rs 700; valuations have become fair post recent rally

To see full report: PNB


Downgrading to Hold after the recent price performance
For the FY 2009, Reliance Capital (RCap) reported a moderate 21.6% yoy growth in the operating income; however, net profit growth was relatively muted at 0.7%, primarily on account of increased general insurance claims and a higher cost of funds in the consumer finance business. We have a positive outlook on the Company based on its diversifying business profile, under-penetration in financial services segments along with aggressive approach towards expanding the business segments. However, we are downgrading the stock from a Buy to Hold after the recent share price performance, although we are raising our fair value to Rs. 897 per share based on our SOTP valuation methodology.

Growth in life insurance premiums decelerating; however, profitably in general insurance looks likely For the FY 2009, Reliance Life’s new business premium increased 27.7% yoy to Rs. 35.1bn against the decline of 6% for the industry. The NBAP margin for the FY 2009 increased to 20.9% compared to 18.8% for the nine months ended December 2009. For FY 2010, we do not expect the insurance business to see a faster growth as ULIPs - which account for a large chunk of the total insurance sales - are presently not a preferred form of investment because of the volatility in the capital market. We have assumed a growth of about 25%-30% in FY 2010.

During the year, GWP decreased 1.6% yoy to Rs. 19.1bn mainly due to economic slowdown and the ongoing focus on improved profitability and not topline revenues. Despite the increase in the claim ratio, the Company’s combined ratio declined from 129% to 114%, primarily on account of several cost-cutting measures initiated by the management.

Maintaining market share but AUM witnessing a slowdown
Average AUM decreased by 11% yoy to Rs. 809bn against the industry’s decline of 7%. Further, the proportion of equity in the total AUM declined, from 35% in FY 2008 to 29% in FY 2009, given that the retail investors are moving away from the market led by market volatility. However, with the sharp rise in capital market post elections, we expect equity proportion to increase. This may positively impact the Company’s bottom line as equity funds command a higher fee income vis-à-vis debt funds. Thus, for FY 2010, we expect the AUM to increase by around 35%-40%.

To see full report: RELIANCE CAPITAL


Key points

A smart play on the pipe sector: With equal capacity for both HSAW and LSAW pipes, MAN Industries (India) Ltd (MIL) offers an exciting play on the Indian pipe industry. The pipe makers around the world are expected to benefit from the expected revival in global E&P capex on the back of the hardening crude oil prices and allaying concerns over the global economic scenario. The global opportunity for pipes is pegged at over $80 billion over the next few years while the domestic opportunity remains strong led by the heavy capex of GAIL, GSPL etc.

Strong order book: With the win of a huge order of Rs1,340 crore from the Persian Gulf, the current order backlog of the company stands at Rs2,000 crore. MIL also has L1 position in orders worth Rs1,100 crore which are likely to be awarded soon. Moreover, the margins were maintained in FY2009 despite a challenging environment and we expect them to sustain going forward as well.

Capacities already expanded; US plans put on hold: In the last couple of years, MIL has substantially raised its capacity to 1 million tonne currently. With its capex already completed, it does not have any meaningful capex lined up for the future. It has also put on hold its plans to set up an HSAW plant in the USA. In fact, the company has decided to buy back its FCCBs and the purchase would be funded out of the unutilised FCCB money and internal accruals.

Realty portfolio adds to the attraction: MIL’s subsidiary, Man Infra, is currently executing two commercial projects in Bandra and Vile Parle, and one residentialcum- commercial project at Nerul. In our valuations, we have not considered the value of the real estate portfolio as the realty business is at a very nascent stage. However, we have valued the realty projects of the group at Rs103.4 crore and if this value is included in our estimates the same could add about
Rs19 to the sum-of-the-parts valuation.

Attractive valuations: The stock is currently trading at about 3.1x FY2011E earnings and at an EV/EBIDTA of 1.2x, which is significantly lower than its historic average (of about 9x). With an expected revival in the industry, the valuation multiples are likely to improve. Further, its valuation gap with the larger pipe makers had widened significantly in recent times but the same is likely to narrow down. Assuming a substantial discount to the average multiple, we have valued MIL taking the average of 5x one-year forward PE multiple and 2x one-year forward EV/EBIDTA multiple. We recommend a Buy on the stock with a price target of Rs66.

To see full report: MAN INDUSTRIES


Infocom disappoints

Revenue falls sharply: Salora International (SIL) reported sharp 48.2% YoY (25.4% QoQ) decline in revenues. This drop was mainly due to 50.4% YoY decline in its Infocom business in addition to 22.7% YoY drop in its consumer electronics division. FY09 sales fell 35.8%
YoY to Rs7.1bn.

EBITDA margin turns negative: With revenues plummeting to half the value, SIL’s EBITDA margin fell steeply by 627bp YoY and 338bp QoQ to -2.7%. SIL ended FY09 with a margin of 2.1%. Absolute EBITDA at Rs147mn was down 56.4% YoY. For FY09 it incurred a PAT loss of Rs2.8mn Rs242mn profit in FY08

Expect margins to improve: We expect SIL’s margin to improve 40bp in FY10E and FY11E on the back of 7.8% and 18.5% YoY increase in its revenue during the period, respectively. Recovery in its infocom business would primarily drive this growth. We expect its infocom business to register a growth of 9.5% in FY10E and 20.5% in FY11E.

Introducing FY11E, Retain Buy: A recovery in SIL’s infocom business and entry of HP products in its portfolio will provide the necessary growth opportunities during the downturn. At CMP, stock trades at 3.6x FY11E EPS of Rs10.2per share. We reiterate Buy on the stock
with target price of Rs42.

To see full report: SALORA INTERNATIONAL


Indraprastha Medical

Established in 1995, Indraprastha Medical Corporation has established itself well over the past 10 years. The company’s commitment to continuous improvement and focus on clinical outcomes has resulted in a significant improvement in resource utilisation. Increased focus on pathways, faster turnaround of operation theatres, decreasing length of stay and the use of minimally invasive surgeries has significantly contributed to growth in revenues while lowering cost to the patient. With a shortage of hospital beds coupled with growing medical tourism and rising demand for private healthcare services, Indraprastha Medical is well placed to leverage the growth opportunities due to its low debt-equity ratio and strong cash position.

Company Background
Indraprastha Medical is an associate company of Apollo Hospitals, in which the latter holds nearly 18.25% stake. It is a healthcare company, which operates through Indraprastha Apollo Hospital. Indraprastha Apollo, a 695-bed specialty hospital, was commissioned in December 1995 in collaboration with the New Delhi administration. The company offers various healthcares services. It provides diagnostic, medical and surgical facilities through its chain of hospitals. Its services include surgical services, dental, cardiothoracic, neuro, vascular, joint, plastic, cosmetic and general surgeries. It is India's first corporate hospital. It primarily operates in India and is headquartered in New Delhi.

Future plans
To capitalise on the long-term growth opportunity in the healthcare space, the company is expanding itself gradually. The company has recently announced plans to augment its facilities by an additional 175 beds. The project is expected to be complete within a year. It further plans to set up more than 10 satellite clinics in and around Delhi to facilitate easy availability of Apollo-type medical services to a larger cross-section of society. These clinics are slated to take the shape of mini-hospitals with all basic back-up emergency services aimed at providing posttreatment facilities to Apollo Hospitals patients. The hospital is also investing in upgrading technology. The demand for quality healthcare infrastructure and services in India far exceeds the supply. Thus, any addition to capacity would have incremental positive impact on its bottomline.

Sector outlook
In India, the demand for quality healthcare infrastructure and services far exceeds the supply. Rising literacy rates and growing healthcare awareness will further drive the demand for quality healthcare in India. This is further supplemented by the rapid increase in middle and rich segments of the population. According to Technopak Advisors report ‘India Healthcare Trends 2008’, India needs investments of $82 billion in order to fill up the long standing gap in demand and supply. The government can meet only 15% of this demand. Moreover, the public sector healthcare delivery infrastructure and facilities are in a poor state. Thus, the overall outlook for private players in this sector is expected to remain positive. Indraprastha Medical is well placed to leverage the growth opportunities due to its low debt-equity ratio and strong cash position.

To see full report: INDRAPRASTHA MEDICAL