>PAIR STRATEGY (KR CHOKSEY)

RECOMMEND STRATEGY

Pair Strategy : Long BHARTIARTL, Short RCOM

Long BHARTIARTL, Short RCOM on a rupee neutral basis

Currently, the May Futures of BHARTIARTL and RCOM are trading at Rs 921.15 and Rs 330.05 respectively, giving the current price ratio (BHARTIARTL / RCOM) of 2.791.

We recommend profit booking at a price ratio of 3.261.

The expected return at the target is 16.8%, computed on gross exposure.

Over the past 1 month, BHARTIARTL has underperformed RCOM as BHARTIARTL has increased by 35.3% as against an increase of 52.3% in RCOM. Hence, the current price ratio of 2.791 is trading at 3x standard deviations below 20 day mean price ratio.


To see full report: PAIR STRATEGY

>INDIA INFRASTRUCTURE (UBS)

Beneficiary of stable government

■ Expect long-term policy formulation for various sectors
We believe there are upside risks to our US$275bn assumption for spending on infrastructure in the XI Plan, given the stability and continuity of the central government. We highlighted four concerns in our projected spending: 1) the pace of project awards; 2) on-the-ground execution; 3) private sector equity; and 4) the cost of funds. With the election outcome, we expect points (1), (3) and (4) to be addressed as orders revive in sectors where substantial background work has been carried out (power, railways and roads), due to likely capital market revival, softening of interest rates and long-term policy formulation. Furthermore, continuity of the government in Andhra Pradesh could sustain momentum in irrigation orders.

■ Sentiment to improve; earnings momentum to be maintained
We increase our earnings expectations due to: 1) higher order in flow expectations in FY10 versus earlier estimated declines; 2) we think margins are likely to be maintained or there will be lower declines than earlier expected; 3) lower interest regime since the last quarter; and 4) likely revival in capital markets will aid PPP projects benefiting both developers and contractors. Even after these, our order inflow expectations are lower than company guidance (for L&T), and lower than growth rates for others in previous post election periods.

■ Upgrade L&T (UBS Key Call) to Buy; raise PT for other companies
We launch L&T as a Key Call today. We raise our price target for companies in the sector as we: 1) assume higher near-term EPS growth, 2) roll-forward to FY11; 3) lower our risk-free rate from 7% to 6.3%; and 4) better working capital availability. Our top picks are L&T, Reliance Infrastructure, IVRCL and Lanco.


To see full report: INDIA INFRASTRUCTURE

>SHIPPING SECTOR (ICICI DIRECT)

• The Baltic Dry index was down 15.3% MoM, mainly on account of an increase in China’s iron ore inventory

• More than 50% (MoM) drop in day rates in the tanker segment across all vessels categories

• Increase in supply of VLCCs tonnage is putting extreme pressure on VLCC spot market

• The prolonged ore negotiations pulled the market down as rates declined despite an increase in chartering volumes

• The crude tankers fleet is expected to grow by 19.4 million DWT this year. This is more than double the 3.1% growth seen in 2008

• Hundreds of vessels have been laid up worldwide as container lines try to boost rates depressed by US and European consumer paring spending on Asia-made goods

OUTLOOK

Tankers
April was the weakest month YTD for the tanker segment as day rates across all vessel categories declined by more than 50% (MoM). This was mainly on account of a fall in tonnage demand. Despite rising slippage rates and order book cancellations, large quantities of tonnage addition over the next two years are pressurising the freight rates downwards. The tankers market is expected to remain soft due to the subdued economic environment and oversupply of tonnage.

Dry bulk
The Baltic Dry Index declined by 15% MoM. This fall was mainly on account of a rise in iron ore inventory levels in China. The Chinese iron ore inventory increased from 67.44 million tonnes (MT) in March to 69.14 MT in April. We expect the market to remain rangebound as BHP, Rio Tinto and Vale are expected to delay negotiations for as long as possible in the hope that steel demand would pick up. On the other hand, cancellation and delays in deliveries coupled with rise in China’s steel production would have a positive impact on the day rates in the dry bulk segment.

LPG
Day rates in the LPG segment across all vessel categories saw a meagre decline of 1-2% in April. Though we expect low day rates for the next few months on account of weak market conditions and increasing tonnage supply the rates will stabilise in the long-term on account of increase in scrapping activities.

To see full report: CEMENT SECTOR

>INDIA AUTOMOBILE SECTOR (UBS)

Prefer passenger vehicle plays

■ Cars & UVs to benefit from easing liquidity environment
We now expect strong growth in passenger vehicles segment at 14%YoY in FY10 and FY11 driven by declining interest rates and easing finance availability. We expect pre-Euro IV emission norm implementation buying and pre-budget buying to further boost demand in Q4FY10.

■ 2 Wheelers likely to show modest growth
We expect 2–wheeler demand to grow 6%YoY and 8% YoY in FY10 and FY11 respectively. Given that we anticipate no easing in financing constraints for the 2W segment, the demand is likely to be driven by growth in rural areas which are less dependent on financing. We expect scooter growth to continue and expect faster growth in scooters ahead of motorcycles.

■ CV to remain sluggish, LCVs faring better
We expect CV demand to rise 5%YoY driven by growth in LCV segment. While we expect turnaround in industrial activity from Jun-09, we expect M&HCV sales to remain weak as industrial growth in FY10 is likely to remain weak. We expect CVs to grow 15%YoY in FY11 driven by rebound in industrial growth.

■ Maintain Buy on Maruti and M&M
We expect Maruti’s margins to improve along with improving demand. We expect Xylo launch & higher rural exposure to help drive UV growth for M&M. We remain Neutral on Hero Honda as we see limited scope for further margin expansion from current levels. We maintain our Sell on Tata Motors as we expect further dilution due to high leverage and remain concerned about cash burn at JLR.


To see full report: INDIA AUTOMOBILE SECTOR