Monday, May 17, 2010


An exotic derivative is a derivative that cannot be created by putting together option and forward contracts. Instead the pay off of exotics is a complicated function of one or many underlyings.When procter and Gamble lost $ 160 million on derivatives in 1994 the main culprit was an exotic swap.The amounts P & G had to pay on the swap depended on the five year Treasury note yield and the price of the 30 year Treasury bond.Another example of an exotic derivative is a binary option.which pays a fixed amount if some condition is met. For instance, a binary option might pay $ 10 million if before a given future date one of the three largest banks has defaulted on its debt.

Sunday, May 9, 2010


Nifty (May) future discount has decreased from 6.65 points to 4.75 points and 5.30 lakh shares were added in open interest.

Total open interest in the market was Rs116, 470 crore and Rs5, 452 crore were added in open interest.

Nifty call option added 26.50 lakh shares in open interest, whereas put option added 55.80 lakh shares in open interest.


The encouraging US economic data failed to provide a floor to the market. There was massive sell-off around the globe, as the investors were more concern on the worries about the Greece bailout that would spread across the globe. Following this, Asian markets were dragged by a tumble on the Wall Street and were trading on an average of 1.30% down. The Indian markets are expected to open lower owing to the weak global cues. However, the market is expected to be volatile and remain on a negative bias for the day. The earnings of Lupin is later to be announced today, the stock will be eyed.

Daily trend of FII / MF investment in equities
On May 04, 2010, the foreign institutional investors (FIIs) were the net sellers of the Indian stocks to the tune of Rs236.10 crore, whereas the domestic mutual funds, on April 30, 2010, were the net buyers of the stocks to the tune of Rs304.80 crore.


The European shares fell to a two-month closing low on Tuesday, as investors' confidence was rattled by growing concerns that a massive bailout for Greece may be insufficient in preventing a wider euro zone debt crisis.

Investors dumped US stocks on Tuesday in the Wall Street's worst session in three months on the fear that even with a bailout for Greece, Europe's debt crisis could spread to other weak euro zone countries.

In today's trade, the Asian markets were trading on a negative note. At the time of writing this report, SGX Nifty was trading 86 points lower. The Janpanese (Nikkei 225 index) and South Korean (Kospi index) markets are shut today.

Commodity cues
In the commodity space, the crude oil prices loss, with the Nymex light crude oil for the June series down by $3.45 per barrel, whereas in the metals space, the Comex Gold for the June series declined by $14.10 and the Comex Silver for the June series was down by $1 to a troy ounce respectively.

Tuesday, April 27, 2010


Sun Pharmaceutical Industries
Recommendation: Buy
Price target: Rs1, 757
Current market price: Rs1, 604
Price target revised Rs1, 757

• The twin blow of unfavourable decisions for Protonix and Eloxatin would remain as an overhang on the stock in the near term. In order to factor in the loss in the Eloxatin opportunity, we downgrade our earnings estimate by 4.2% for FY2011. Our FY2012 earnings estimate remains largely unchanged given the resumption of Eloxatin sales in FY2012. This brings our earnings per share (EPS) estimate to Rs72 for FY2011 and to Rs84.5 for FY2012. We await more clarity on the Protonix front from the management and the court? S decision.
• However, we continue to believe that Sun Pharma remains one of the best pharmaceutical plays in India with its superior business model, leadership in chronic therapies, strong balance sheet and more limited competition opportunities like Effexor XR. With the impact of Caraco Pharmaceuticals and Taro Pharmaceuticals (Taro) already built in the price, we believe that the stock? S valuations reflect most of the negatives and the risk-reward ratio has become favourable for investors. At the current market price of Rs1, 604, Sun Pharma is valued at 22.4x FY2011E and 19.1x its FY2012E fully diluted earnings. Thus, we maintain our Buy recommendation on the stock with a revised price target of Rs1, 757 (20x its FY2012E and Rs67 for Taro).


(A) Reliance Industries

Recommendation: Hold
Price target: Rs1, 215
Current market price: Rs1, 070

Key points

• Reliance Industries Ltd (RIL)? S Q4FY2010 adjusted net income grew by 29.9% year on year (yoy) to Rs4, 710 crore, which is significantly below our and the street? S estimates. This is due to a lower-than-anticipated margin in the oil & gas business (on account of a higher-than-expected depletion rate for KG D-6 block) and a lower-than-expected gross refining margin (GRM) of USD7.5 per barrel for the refining business. However, at the operating level, the performance was much better and only marginally below the expectations. A large part of the swing in the net profit is due to a sudden jump in the depreciation charge, which went up to Rs3, 392 crore in Q4FY2010 as compared to Rs2, 795 crore in Q3FY2010.
• We have revised our earnings per share (EPS) estimate for FY2011 and FY2012 to incorporate: (1) the revision in our exchange rate assumption to Rs45 for FY2011 and Rs44 for FY2012, 2) a higher depreciation expenses, and 3) a slightly lower KG D-6 gas volume in FY2011. The negative impact of the above assumption is partially offset by higher petrochemical production volume and an increase in our GRM assumption for FY2012 to USD10.9 (we maintain our FY2011 GRM assumption at USD9.5 per barrel). Consequently, our revised EPS estimates now stand at Rs70.9 for FY2011 and Rs81.1 for FY2012.
• With strong demand for petroleum products, we expect the crack spreads for the middle distillates (especially gasoline and gas oil) to improve in the near to medium term. This coupled with a likely increase in the light heavy crude oil price differential at the level of USD2-3 per barrel, will help RIL to enhance its spread over the Singapore GRM. Further, RIL has signed up with Cairn for the supply of 55-60 barrel per day of cheaper Mangala crude and is also consuming KG D-6 gas for its refineries. Hence, we expect the GRM of the refining segment to improve strongly to USD9.5 per barrel in FY2011 and USD10.9 per barrel in FY2012 from USD6.6 per barrel in FY2010. We highlight that the additional supply of petroleum products on account of addition of new capacities would also remain under check due to closure of 1.43 million barrels per day (mbpd) of refining capacity.
• As per our expectation, the petrochemical segment reported a strong earnings before interest and tax (EBIT) in Q4FY2010 with the EBIT margin increasing by 45 basis points on a sequential basis to14.4%. Although the petrochem margin has been strong (supported by delay in new capacity additions), we expect the same to narrow down slightly in the next few quarters due to significant capacity addition in the Middle East. In terms of the domestic market, we see strong demand coming in from agriculture, packaging, infrastructure and automobile sectors.
• The gas production from KG D-6 field averaged 60mmscmd in Q4FY2010 (which is close to the exit rate of Q3FY2010). The company has said that the design capacity of KG D-6 gas production facilities has achieved a flow rate of 80mmscmd. With the production volumes being tested by RIL, the production ramp is largely dependent upon the HVJ pipeline capacity expansion by GAIL (which is expected by October 2010). We have factored in a gas price of USD4.2 per mmbtu and a seven-year income tax holiday in our valuations and estimates.
• Although the company? S Q4FY2010 earnings were significantly below our estimate, we are more focused on the company? S strategy to utilise the huge cash flow (USD10-12 billion over FY2011-12E) that it is expected to generate over the next couple of years. The company? S recent acquisition of a 40% stake in Atlas Energy? S Marcellus Shale gas acreage is a small-ticket acquisition. Hence, we expect strong acquisition related news flow to continue in the near term, which would indicate towards the deployment of cash flow and the long-term growth prospects of the company.
• We maintain our price target of Rs1, 215 and Hold recommendation on the stock, as the company still faces uncertainties on: 1) the tax benefits on the natural gas business under section 80-IB (clarity still awaited), and (2) the gas pricing including the court case with Reliance Natural Resources Ltd (RNRL). At the current market price, the stock trades at a price / earnings ratio of 13.2x FY2012 earnings and an enterprise value (EV) / earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7.3x FY2012.

(B) Pantaloon Retail

Result highlights

• Pantaloon Retail? S Q3FY2010 top line grew by 25% year on year (yoy) to Rs2, 057 crore, which is in line with our expectation of Rs2, 050 crore. 71% (Rs1, 440 crore) of the turnover came from the value segment, whereas 29% (Rs628 crore) was chipped in by the lifestyle segment.
• As expected, discount offerings during the quarter (Sabse Saste 4 din) led the gross margin dilute by 90 basis points and 120 basis points on a quarter-on-quarter (qoq) and year-on-year (yoy) basis respectively to 29.1%? which is in line with our projection of 29.3%. The gross margin for the value retail segment stood at 25%, while that for the lifestyle segment came in at 38.9%
• The operating profit went up by 25% yoy to Rs216 crore, close to our projection of Rs215 crore. The value retail and the lifestyle segment registered an operating profit margin of 7.4% and 17.8% respectively.
• The profit after tax (PAT) registering a robust 63% yoy and 10% qoq growth to Rs56 crore came in slightly higher than our expectation of Rs54 crore. The bottom line growth was aided by strong operating performance coupled with lower finance cost during the quarter. The Future value subsidiary reported a profit of Rs23 crore (PAT at 1.6%), while the lifestyle segment earned Rs30 crore as profit during the quarter.
• During the quarter, the company dropped down its value retail business and transferred the same into a wholly-owned subsidiary? Future Value Retail. Hence it has reported results for the stand-alone Pantaloon Retail without incorporating the earnings of Future Value Retail segment. Further, the company proposes to evolve to a consolidated reporting from FY2011 to provide a holistic view of the performance.


(1) Godrej Consumer Products
Recommendation: Hold
Price Target: Rs309
Current Market Price: Rs298

Result highlights

• Godrej Consumer Products Ltd (GCPL)? S Q4FY2010 results are not comparable on a year-on-year (yoy) basis on account of consolidation of Godrej Sara Lee? S 49% stake in Q2FY2010. The bottom line for Q4FY2010 growth exceeds our estimates due to a higher-than-expected Operating profit margin (OPM), however the stand-alone Revenue growth, at just 2.1%, was disappointing.
• The Consolidated net sales for the quarter went up by 48.6% year on year (yoy) to Rs509.2 crore, which is less than our estimates of Rs533.7 crore. The stand-alone (domestic) business registered a disappointing Performance with the growing sales by just 2.1% yoy to Rs282.4 crore. This We Believe is mainly on account of ~ 5% yoy sales declined in the segment of the Soap (which contributes ~ 60% to the stand-alone sales.) On the other hand, the International Operations logged in to the Strong Performance with revenues growing by ~ 19.0% yoy, mainly on account of a robust Performance of Rapidol and Kinky, which saw their revenues Grow by 60.0% yoy ~ and ~ 27% yoy During the quarter respectively. Godrej Sara Lee contributed Rs147.0 crore to the Consolidated revenues During the quarter.
• In spite of high spends Towards advertisement cost and other expenditures, the OPM improved by 176 basis Points to 21.1% (ahead of our estimates of 19.5%) mainly on account a lower yoy Raw Material cost as percentage to sales. The Raw Material cost as percentage to sales stood at 44.5% in Q4FY2010 as Against 50.9% in Q4FY2009. The Operating profit grew by 62.1% yoy to Rs107.2 crore, ahead of our estimates of Rs103.8 crore.
• Thus, Despite a lower-than-expected growth in the top line, the bottom line grew by 54.6% to Rs91.8 crore yoy (ahead of our estimates of Rs85.6 crore), which in is line with a strong board in the OPM.
• We have revised our bottom line and estimates for FY2011 FY2012 downwards by 6.4% and 5.0% respectively, primarily to the factor in lower sales growth trajectory in the Soap segment and the higher Raw Material cost.
• We expect the International Business Along with the Recent acquisitions to register a robust growth in the coming years. In the Domestic Operations though the Performance of the Soap business (that showed signs of stress in Q4FY2010) Needs to be watched out.
• At the Current Market Price, the Stock trades at 23.7x its FY2011E earnings per share (EPS) of Rs12.6 and 20.3x its FY2012E of Rs14.7. In line with our onwards revision in the earnings estimates, our revised price Target er at Rs309 (21x its FY012E EPS). In view of the limited upside from the current level, we are downgrading our Recommendation to Buy from Hold.
• However, We Believe, the investors would do well to hold on to the Stock as the likelihood of Further acquisition announcements (especially in Latin America) would keep the flavor in Stock And could bring in Further upside potential. Also, though currently not quantifiable due to lack of information, the EPS accretive Nature (as indicated by the Management) of the Megassari Deal could bring in a Further to the upside EPS estimates and hence the Stock Price.

(2) Maruti Suzuki India
Recommendation: Hold
Target Price: Rs1, 473
Current Market Price: Rs1, 335
Price Target revised to Rs1, 473

Result highlights

• Maruti Suzuki India (Maruti)? S Q4FY2010 results were in line with our expectation at the Operating Level, however a lower-than-expected other income pulled down the net profit below our Expectations.
• The total income for the quarter grew by 30.7% year on year (yoy) to Rs8, 280.8 crore on the back of a robust 21.5% year-on-year (yoy) growth in the volumes and a 7.5% yoy growth in the average net realisation.
• The Operating profit margin (OPM) at 11.7% was in line with our expectation of 11.2% and was higher by 614 basis Points on a yoy basis. The margin was on board account of a 277-basis-point declined yoy in the Raw Material cost as a percentage to the total income at 77.4% (the same was however 162 basis Points higher on a quarter-on-quarter [qoq] basis .) Furthermore, a 310-basis-point declined yoy in the other EXPENSES as a percentage to the total income at 9% for the quarter led the Operating profit to Grow by a hefty 175.8% yoy to Rs967.3 crore (Against our expectation of Rs914 .2 crore).
• On account of much lower yields on investments in the quarter as compared to the corresponding quarter of the last year, the other income came in significantly below Expectations at Rs222.7 crore (a growth of 9.2% yoy), which subdued the Performance Operating at the level. Consequently, the visit net profit surged by 170% to Stellar yoy to Rs656.5 crore (as Against our expectation of Rs731 crore).
• For FY2010, the company has also announced a final dividend of Rs6 per share (face value of Rs5 per share).
• Maruti is Likely to face headwinds both on the Sales Volume growth and the profit margin Front going ahead. While the high base of FY2010, aggravating competition and the upturn in interest lost cycle process on Challenge to growth in volumes, the prices are rising biz.commodity Likely to pressurise the profitability.
• Though we maintain our estimates for FY2011, we are reducing our estimates for FY2012 by 4.8%. Our FY2012 estimates stand revised downwards factoring in a higher capital expenditure (capex) of Rs3, 000 crore for FY2012, which will reduce the free Cash on the books, thereby leading to a higher depreciation and lower other income.
• As a consequence of the onwards revision in our earnings estimates for FY2012 and to factor in the above risks to the growth going ahead and the Moderate compounded annual earnings growth fail (CAGR) of% 10.3 percent for FY2010-12E, we have reduced our Target price multiple to 14x (from 16x earlier). We have also rolled over our Price Target to FY2012 earnings.
• At the Current Market Price, the Stock is trading at 14.2x its FY2011E earnings and 12.7x its FY2012 earnings. We maintain our Hold Recommendation on the Stock with a revised Target Price of Rs1, 473. We expect the Stock to underperform in the near term and prefer Rather Mahindra & Mahindra (M & M) in the space Automobile