>ONGC (RELIANCE MONEY)

Price target achieved
During the past 2 weeks the markets are in an uptrend and in the process, prices of extremely beaten down stocks seem to be catching up with their fundamentals. ONGC, since our Buy recommendation on 30th January 2009 after Q3 FY09 results has given a return of 24%. At current levels, we advise our clients to book profits and enter at lower levels.

Our investment argument in ONGC was basically linked to the cheap valuations and attractive dividend yield. At our recommended price of Rs 640, the stock was earlier trading at extremely cheap valuations of 6.2x FY10 EPS estimates, and dividend yield at that point in time was at attractive 5%. In our view, the valuations at that point of time didn't capture various positives like low oil prices leading to lower subsidy burden, depreciating rupee which contributes substantially to bottom-line and extreme pessimism of market which was extrapolating poor net realizations at $34 per barrel in Q3 FY09 in future also. We expect net realization of ONGC to remain at $45-$50 per barrel mark irrespective of oil price movements.

However, at the current market price of Rs 794, the stock is trading at FY10 P/E multiple of 7.5x, which we believe captures most of the positives. Though over the long term in view of the company's ability to generate significant free cash flows and debt free status we continue to like the stock, but believe that at higher levels, market will again start focusing on lack of pricing power above $50 per barrel of oil prices and uncertainty regarding subsidy burden. Keeping in view the uncertain market conditions, we advise our clients to book profits and re-enter at lower levels.

Valuations
The stock is currently trading at FY09 and FY10 P/E multiple of 7.9x and 7.5x respectively. ONGC continues to generate significant amount of free cash flows to support its future investment needs, and the company has a strong balance-sheet with almost a zerodebt position and healthy cash flows. However, in view of lack of support of valuations and uncertain market conditions we advise our clients to book profits and re-enter below Rs 765 levels.

To see full report: ONGC

>ITC - Ltd. (INDIA INFOLINE)

Strong resilience in cigarette volumes
ITC has managed to register stable earnings growth with a marginal decline in volumes despite heavy tax burden and regulatory restrictions on cigarettes. With its strong brand recognition and product portfolio. ITC has always been well-placed to pass on any tax burden to consumers. The pictorial warnings and smoking ban are not likely to have a major impact on the segment due to impmlementation issues,

Major beneficiary from shift in demand to filter cigarettes.
The government has levied additional excise duty on the non-filter cigarettes mainly to bring them on par with filter cigarettes. ITC exited from it post excise hike as it had a very small presence. The demand uptrade from non-filter to filter and premium filter cigarettes (post excise duty hike) is expected to be almost over 75%. ITC being the market leader in the filter cigarettes category will be the major beneficiary from this shift in demand.

Diversified into various lucrative segments
ITC over the years has been investing cash flows from its cigarette business into various lucrative segments like foods, personal care, hotels and paper. With the paperboard division coming out of a major capex cycle and a reduction in losses from FMCG- others divison from FY10E, we expect the non-cigarette businesses to become self-sufficient. The agri division continues to provide a strong support as an excellent raw material sourcing base.

To see full report: ITC

>The Exit Lane From the Road to Ruin

To see report: EXIT LANE

>Varun Shipping (KARVY)

We recently met the management of Varun shipping and come back with conviction that the company's strategies are paying off. The timely exit from drybulk segment in FY08 where freight rates have fallen by 85% since MAY 2008 and entry into promising deepwater support services segment by acquiring high end anchor handling tugs (AHTS) are expected to help the company to grow operating profits in current turbulent time in shipping. Considering 49% discount to current net asset value (NAV) and attractive dividend yield of 12%, we reiterate BUY.

Presence across less volatile segments: The Company has significantly reduced cyclicality associated with the shipping industry with selection of low risk assets and building diversified fleet across three segments viz. the Liquefied Petroleum Gas i.e. LPG, crude and offshore. The company is also cushioned to an extent against a downside in international freight rates, as it derives ~45% of revenues from transportations of LPG where freight rates for LPG carriers are more stable as compared to crude or dry bulk carrying vessels to long term nature of contracts and organized market with 83-99% business from repeat customers. In tanker segment, company has three Aframax carriers where volatility is significantly lower than other tankers like VLCC and Suezmax.

Offshore revenue to contribute ~40% in FY10: The company has six anchor handling tugs (4 high end) operating in offshore support business. We expect the charter rates for support service to remain strong as demand is mainly driven by committed capital expenditure for exploration by oil companies. . We expect the offshore segment to report revenue growth of 64% CAGR from Rs 1.6 bn in FY08 to Rs 4.3 bn in FY11 contributing ~ 40% of total revenue on back of vessel addition.

Attractive dividend yield: Varun has declared the dividends in each of past 24 consecutive years on expanded capital. With current stock price of Rs 44 the stock is trading at attractive dividend yield of 11%. With relatively stable cash flow and support from offshore business, we expect the company to maintain attractive dividend yield going ahead.

To see full report: VARUN SHIPPING