Friday, July 10, 2009


Market re-assesses recovery expectations

It remains far too early to implement exit strategies
US employment news fell short of expectations for improvement, but the June employment report does nothing to alter the tone at the Fed. For the market it squeezes out the premature speculation of tightening. Fed officials aired early thoughts on exit strategies in the week off after the FOMC meeting. None were as eloquent as those of San Francisco Fed President Yellen, who sees the economy turning a corner, but with the main risk of inflation being too low and not too high for several years. It remains far too early to implement exit strategies, but signs of any turn in economic activity require careful consideration on timing, mechanics and political factors.

Market expectations falling back in line with ours
The ECB is firmly in wait-and-see mode. It feels it has done some extraordinary things to ease the banking sectors funding problems and inject liquidity into the economy. Now with sentiment beginning to improve and activity tentatively beginning to stabilise (or at least not fall as quickly), the emphasis is on standing back and waiting to see what comes next. In the absence of any more bank failures, its hard to envisage the global economy being hit by any more large shocks. The most likely scenario is probably a long period of underperformance with the economy languishing in the doldrums for some time. It is not at all obvious that the ECB is particularly sensitive to this kind of outturn. At the very least, this suggests the ECB remaining on hold for the foreseeable future with no new innovations in policy at all this year.

To see full report: MARKET MONITOR


Tariff Wars Not as Fierce as Expected; Upgrade to In-Line

Upgrade sector to In-Line: We are raising our estimates of India’s average revenue per minute (ARPM) by 5/7% for F2010/F2011 and becoming more constructive on the sector. We still expect drops of 15% pa in average revenue per unit (ARPU) and 9.9% in ARPM for the industry as a whole in that period.

3G is a F2010 phenomenon: We believe each operator will invest US$1bn for a pan-India footprint; producing US$5 billion income for the government. Higher industry capex is likely to lower return on capital employed. The bright side would be a wider spectrum.

F1Q10 results to be dampened by lower incoming interconnect, despite 9% growth in subscribers: However we expect margins to improve due to higher on-net calls and a balanced incoming to outgoing traffic.

Reiterate Overweight on Bharti: We increase both our EBITDA and net profit estimates by 1% for F2010 and 3% for F2011 and expect 17% CAGR for F2009-11E EPS; MTN overhang is major short-term risk.

Upgrade RCOM to Equal weight: RCOM has underperformed the market by 15% YTD, 40% in 12 months, and we believe most risks are now factored in. We lower our estimate of cost of capital and raise our target price to Rs305/share. RCOM is seeking approval from shareholders to issue equity shares to qualified institutional buyers, to fund part of its 3G capex.

Still Underweight Idea but raise EBITDA estimates by 6% for F2010 and 4% for F2011 on the back of higher margins. Also increase our target price to Rs63. Idea is the costliest Indian telco stock at 17.5x F2011e earnings; hence our Underweight call.



Gas dispute: Big picture perspective


Notwithstanding the recent High Court judgement ruling in favour of RNRL, we believe the gas dispute is not over. Press reports suggest that the government believes that gas is a national asset and it may intervene in the dispute. Also, RIL has stated that it shall appeal in the Supreme Court. In our detailed series on the gas dispute, we discuss longer-term implications for
India's upstream potential in addition to potential consumers. Maintain OP.

Significant impact on value if worst-case materialises: The High Court ruling suggests that RIL should not only supply RNRL gas at US$2.3/mmBtu as opposed to the government approved price of US$4.2/mmBtu, but RIL should also compensate the government for the difference. Our base case assumption factors in the former which has an NPV implication of Rs39/sh for RIL. Nevertheless, if the latter worst case scenario materialises there will be significant impact of additional Rs148/sh on RIL's value. This is despite RIL’s lifting cost being very low. We believe the Rs184/sh fall in share price on the day of the judgement entirely factors in the impact of both.

Need for close coordination to exploit massive upstream potential. Our recent Oil Yatra (Tour) "Next Generation opportunity authenticated" India's massive upstream potential. The proposed oil & gas production from just ~4% of RIL’s KG-D6 block and Cairn’s Rajasthan block shall add 0.5% to global and equal 1/4th of Brazil or Gulf of Mexico current production. We estimate that this could add US$20bn to India's GDP, cut India's oil imports by 23% and add US$59bn NPV in government profit share and taxes. Yet this is the tip of the iceberg. Our Yatra finding suggests massive biogenic corridors not only in the rest of KG-D6, but across the east coast. We believe future contracts need to be closely coordinated between the buyers, sellers and the government otherwise misalignments such as the current one may dissuade future exploration and exploitation of India's mammoth upstream potential.

Core consumer sectors at risk: Currently, the power sector consumes 39% and fertilisers consume 32% of the gas produced in India. From the first 40mmscmd, the government has also allocated four-fifths to existing facilities from these two sectors (Figure 27). Moreover, latent demand suggests that the entire proposed 80mmscmd KG-D6 production would be consumed by existing facilities (Figure 21). A 40mmscmd reservation for ADA Group’s and NTPC's proposed new power facilities and an option for RNRL to source 40% additional volumes above 40mmscmd may leave little for existing facilities. We believe GMRI, LANCI, NFCL, CHMB and RCF are at risk.

Earnings and target price revision
No change.

Price catalyst
12-month price target: Rs2,405.00 based on a Sum of Parts methodology.
Catalyst: New oil and gas finds and enhanced clarity on organised retail.

Action and recommendation
We estimate RIL’s profits, under our base case assumptions, to rise 50% in FY10E purely from volume growth, despite an assumed cyclical downturn.

To see full report: RIL


Options Open Interest Activity – Overall
The week ended July 08, 2009 saw the market break its important support level of 4200 & the Nifty is now trading below the same. The total open interest has seen a rise of 28.41% in terms of value and 44.21 % in terms of number of shares (where the Nifty showed a fall of 8.08% vis-à-vis previous week). The stock options saw a rise of 33.22% and 47.93% in terms of value and shares respectively. The Nifty options OI saw a rise of 27.79% and 35.99% in terms of value and shares respectively. The Index options other than Nifty also saw a comparable rise in the OI due to increased participation in Nifty Mid cap 50 index segment. Due to the sharp fall in the market, traders seem to be focusing on trading more in call & put options as compared to futures. This has resulted in increase in option OI & value.

Options Volumes Activity
The total volumes saw a significant increase in the number of contracts (up by 47.43%) and the turnover saw a rise of about 45.04%. The rise in volumes is higher this week as compared to the last week as the traders being cautious after the sharp fall are choosing to stay away from the futures market & taking fresh positions in Index option segment. The Stock Options have seen a rise in volumes in terms of the number of contracts & fall in turnover due to a fall in the stock prices of the all stocks as compared to the last week. Volume in contracts has increased in the stocks option segment by 21.03% on a week on week basis. In Index Options segment volumes saw a significant increase in the number of contracts (up by 48.61%) and the turnover saw a rise of about 48.16%. This shows increased participation in Index options segment.

Nifty Options Strike - wise Volumes Analysis as on July 08, 2009
During the week ended July 08, 2009, maximum volumes were observed in Nifty July Call 4500, as traders are expecting Nifty to face resistance at this level. In Nifty July series, maximum put volumes were observed in Nifty July 4000 Put. From last week, traders had
built up fresh positions in 3800 & 4000 Put in anticipation that Nifty could take support between 3800 – 4000 range in the coming weeks, which got reflected in an increase in volumes in these strike prices. In the August series traders are building up fresh positions at 4000 Put & 4500 Call option.

Trading Ideas
1. Buy Unitech 80 Call Option between Rs. 2.50 – Rs. 3.50 for a Target of Rs. 7 in 3 - 4 days. Stop Loss = Rs.1.75 CMP = Rs.3.10.

The Unitech 80 Call Option saw a significant build up in OI (up by about 9.83%) on Thursday. The Implied Volatility is about 78%, which is significantly lower than the HV of 93. Thus we feel that the value of this call option is likely to go up in the coming sessions and thus recommend a “buy” between Rs. 2.50 and Rs. 3.50 for a Target of Rs. 7 in 3-4 days. Stop Loss = Rs. 1.75 CMP = Rs.3.10.

To see full report: WEEKLY OPTIONS REPORT




To see full report: ECONOMIC OUTLOOK


To see full report: JYOTHY LABORATORIES


Company background
Mumbai based Crompton Greaves was founded by Col. R.E.B. Crompton as R.E.B.Crompton & Company in 1878. The company merged with F.A Parkinson in the year 1927 to form Crompton Parkinson Ltd., (CPL).. In the year 1947, with the dawn of Indian independence, the company was taken over by Lala Karamchand Thapar, an eminent Indian industrialist.

Presently, Crompton Greaves (CG) is Flagship Company of the US$ 3 bn conglomerate Avantha Group. Its operations consist of 21 divisions spread across in Gujarat, Maharashtra, Goa, Madhya Pradesh and Karnataka supported by marketing and service network through 14 branches in state capitals .

Rs.8800 Crore (US$ 1.8 Billion) company is organized into three business groups:

  • Power Systems
  • Industrial Systems
  • Consumer Products

• There is constant industrialization taking place as the economy is in a long term growth trajectory, resulting in demand for Engineering and Electrical equipments.

• Country is boosting its power generation and transmission capacity, further boosting demand for power products.

• With growing urbanization and rising trend of nuclear smaller families, rising housing demand there is visible growth in consumer products division.

To see full report: CROMPTON GREAVES


China will save itself
Not the world

To see full report: THE ECONOMIC NEWS


Bullish Global Equities

  • History: rolling S&P returns worse since 1930s
  • Cash: investors +20% in cash
  • Positioning: asset allocators close to record low weightings in equities
  • Risk: out of equities into government bonds
  • Global recession: its over
  • Liquidity: fragile recovery (+ CA default risk) means it stays abundant
  • China: the lead indicator is in a secular bull market
  • Risks: “visible fist” of government = lower consumption + worsening credit market
  • Direction of US retail sales in H2 will determine direction of global equities
  • MSCI World (MXWD) target is 300
  • We love EM equities (but Japan, Eurozone, consumer discretionary, financials more contrarian)
  • Fatigued technicals still say summer correction: buy it!

  • Always buy “Humiliation”
  • Equities are the distressed asset
  • Cash levels still very, very high
  • Equities still unpopular
  • Risk now in Treasuries not equities
  • Lower volatility…lower risk in banks
  • Global recession is over
  • Small recovery…big liquidity
  • China roaring; deflation ebbing
  • “Visible Fists” & “Buyer’s Strike”
To see full report: THE BIGGEST PICTURES


Set to ‘report’ profit growth

In 1Q FY10, we see 5% YoY growth in reported Sensex earnings, after two quarters of de-growth; 4QFY09 earnings decline (7%), was, however, 10ppt below our estimate as autos, banks, metals, petchem and telecoms surprised positively.

However, 1Q profits will benefit from a Rs30bn swing in FX related income/expense due to 6% rupee appreciation and change in accounting norm.

Adjusting for this and other exceptionals (including Rs10bn capital gains booked by L&T), profits will actually decline 10%YoY.

For the CLSA Universe as a whole, inventory gains for oil companies will support overall profit growth of 7%YoY; ex oil & gas, profits will fall 1%YoY.

At the company level, we see significant volatility; while 16/74 companies will report >40% growth, 17/74 will see >40% decline.

10/14 sectors will report growth, led by Capital goods (+145%), Oil & gas (+55%), Banks (+28%) and Power (+21%). On the other hand, Property (-66%), Metals (-56%) and autos (-2%) are expected to report YoY decline in profit.

At the company level, we see a marginal rise in the number of profit increases – to 68% of coverage universe, from 61% in 4Q.

Overall sales growth will continue to slide (-6%YoY, vs -0.2% in 4Q) reflecting weak commodity prices and low sales for property companies.

Ebitda margin for the CLSA Univ. ex-oil & gas will fall 187bps YoY, 38bps QoQ, although domestic cyclicals like autos (+141bps), cement (+242bps) and the consumer sector (+184bps) will report margin expansion.

However, the extent of ebitda margin squeeze (302bps in 4Q) is clearly reducing.

Other income growth is likely to remain steady, but interest costs could see some pick-up, especially in the petchem and autos sectors.

We see a meaningful pick-up in earnings from 3Q, as the domestic recovery gathers momentum and the low base too comes into effect.

A ‘normal’ budget could trigger a market correction, given high expectations. We would see this as entry opportunities in plays on a 2H investment cycle upturn – banks, capital goods - as well as consumer staples.

To see full report: 1QFY10 EARNINGS PREVIEW

>Gold steady in Asia; still looks vulnerable

Singapore - Gold was slightly higher in a quiet Asian session but traders don't see much incentive to get involved in the short term.

The yellow metal is likely to continue to struggle through the seasonally slow July and August period with lack of consensus on the economic outlook reducing investor interest, said Darren Heathcote, head of trading at Investec in Sydney.

"It's a difficult time for gold at the moment," he said. "I think the next few pieces of U.S. data are key to the market making a decision about where we are on economic growth."

Heathcote said positive data would help equities and undermine the dollar, indirectly supporting gold, with forex market movements still far and away the dominant influence on precious metals.

At 0640 GMT spot gold was at $912.80 a troy ounce, up 50 cents but off its intraday high, responding to a slight weakening in the euro against the dollar. Tocom June 2010 gold was at Y2,737 a gram, down Y8. Spot silver was at $12.83/oz, up 1 cent.

Mitsui Global Precious Metals said in a note that silver didn't enjoy anything like gold's Thursday bounce and was technically still biased downward.

"The chart is pointing the market back to $12, which will provide some fantastic opportunities for industrial users," it said.

Platinum was looking stronger, sustaining itself above the $1,100/oz level with supply-side issues coming to the fore in South Africa, and accelerating auto sales data from China both proving supportive.

Spot platinum was at $1,107/oz, up $1, while Tocom June 2010 platinum finally found some support, rising Y11 to Y3,318/gram.

Spot gold eases on stronger dollar, weak oil

London - Spot gold eased Friday in a sluggish session as the metal tracked the dollar and lower crude oil prices.

Traders said volumes were extremely thin and investors and physical consumers were showing little trading interest. Most said they expected further range-trading in the short term.

At 1041 GMT, spot gold was trading at USD909.20 a troy ounce, down 0.25% on the day. Spot silver fell 1.6% to USD12.617/oz.

Spot platinum was down 0.7% at USD1,097/ton, while spot palladium edged 0.2% higher to USD233.50/oz.

"No one's doing any business," said a spot gold trader in London.

Gold has been caught up in the selloff of equities and other risk assets in the past week. Disappointing economic data have underlined concerns that the global economy may take longer to emerge from recession than markets had been pricing in.

"A lack of confidence in the underlying economy, I think that's what's undermined things this week," said Tom Kendall, a precious metals analyst at Mitsubishi Corp. in London.

While gold is often bought as a safe haven, the metal is unlikely to perform well when growth is poor and consumer spending declines unless there is a flight to safety at the same time, analysts said.

That isn't happening at the moment because the market doesn't appear to be worried about insolvencies at large banks and other financial institutions, said the London-based trader.

The threat of inflation, which buoyed gold in recent months, has also receded. "There's no evidence inflation is anywhere," said the London-based trader.

Platinum and palladium are similarly being pressured by this week's risk selloff, and may drop further in the short term, said Kendall.

The summer months are normally a period of slack demand and Chinese imports have dropped in recent weeks, putting further pressure on platinum, he said.

"I think we could drop another $50 to $100 before we find a bottom."

India gold futures dn 0.3% on INR strength

Singapore - India August MCX gold contract down 0.3% at INR14,445/10 grams as INR extends gains; overseas spot gold nearly unchanged. Investment in gold has remained sluggish in past few days, says Debjyoti Chatterjee of Admisi Commodities; tips contract in INR14,390-INR14,560 range today; adds, to watch U.S. trade prices for further cues.


>India's sugar output may be hampered, support price .

London - India's sugar output during 2009-10 could be more sluggish than previously expected, and that will support prices in the coming months, the International Sugar Organization said in its monthly report published Friday.

The ISO said it would also mean the country will need to import larger quantities of sugar, reinforcing the groups' forecast for a world deficit.

The ISO forecasts world sugar production to fall short of consumption by between 3 million and 4 million metric tons in 2009-10.

A lower than anticipated recovery in India's sugar output during 2009-10 would further reinforce the ISO's view that the world sugar balance will be in deficit for one more season, the monthly report said. It would also keep the country "firmly in the league of the world's top importers," it said.

"Should poor monsoons materialize, world market prices for sugar will remain supported over the coming months, despite an imminent string of record export volumes emerging from Brazil between now and the end of its Centre-South harvest expected for December," the ISO said.

India's production in 2008-09 fell by 44.5% relative to 2007-08 to 14.7 million tons. Hopes that output rebounds may be dashed by weather predictions of an El Nino pattern forming this year, the ISO said.

"An El Nino weather anomaly in the equatorial Pacific Ocean may lead to a significant weakening of the annual Indian monsoon rains, negatively impacting output growth in the country," the ISO said.


>Crude recovers; psychological support at USD60/bbl

Singapore - Crude oil futures recovered in Asia Thursday as the market found support near the psychologically important $60-a-barrel mark after falling for six straight sessions.

On the New York Mercantile Exchange, light, sweet crude futures for delivery in August traded at USD60.73 a barrel at 0709 GMT, up 59 cents in the Globex electronic session. August Brent crude on London's ICE Futures exchange rose 60 cents to USD61.03 a barrel.

"When you have falls like what you saw recently, there will be a point when people come (to a stop)," said Ben Westmore, a commodities economist with National Australia Bank Ltd.

"If oil drops below $60 a barrel, we may see buyers coming in simply on speculation."

Calculated from Wednesday's settlement, oil has dropped 16% since June 29, under pressure from the growing oversupply of fuels and a string of negative economic indicators.

According to latest data from the U.S. Department of Energy, distillate stocks rose by 3.7 million barrels, nearly double the expected increase of 1.9 million barrels, while gasoline stocks rose by 1.9 million barrels compared with a forecast gain of 900,000 barrels.

The International Monetary Fund's latest report said the world economy is set to contract by 1.4% this year compared with its April forecast of a decline of 1.3%. The IMF expects growth to improve in 2010.

Still, Nymex crude futures may consolidate for now, Dow Jones technical analysis shows, after falling to 6-week low of $60.01 overnight, even amid the persistent bearish economic outlook.

Daily continuation chart has a negative bias with MACD, stochastics in bearish mode, but hourly stochastic has turned bullish in oversold territory, suggesting that an intraday correction, leading to a rebound, is likely.

Unless there is fresh bearish fundamental news, sentiment now seems to favor a technical correction, Westmore said.

Nymex reformulated gasoline blendstock for August - the benchmark gasoline contract - rose 207 points to 165.40 cents a gallon, while August heating oil traded at 155.44 cents, 165 points higher.

ICE gasoil for July changed hands at $492.00 a metric ton, up $3.50 from Wednesday's settlement.