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1-1.S&P BSESENSX.BSE - 02/03/15 Trend7

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Month Gone By The Benchmark indices ended on a flat/mildly positive note in the month of February 2015. BSE Sensex rose by 0.61% and Nifty

closed up by 1.06% for the month. Outcome of Delhi Assembly elections, Union Budget and Railway Budget 2015-16 and rise in the crude oil prices were the major triggers for the market.

Key Positives during the month In its sixth bi-monthly Monetary Policy review, the Reserve Bank of India kept policy rates unchanged after easing monetary

policy just three weeks ago. However it announced a cut in SLR by 50 bps from 22 percent to 21.5 percent of their NDTL with effect from February 7, 2015.

Acceleration in new orders helped activity in India's services sector expand at a faster rate in January than in the previous month. The HSBC Services Purchasing Managers' Index (PMI) rose to 52.4 points from 51.1 in December.

India's foreign exchange reserves have hit a fresh high, rising by $2.956 bn to $333.169 bn in the week to February 13, helped by a healthy increase in foreign currency assets.

Monthly Strategy Report – March 2015

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The Central Statistics Office (CSO) said that as per new calculation method, India is set to grow 7.4 per cent and cross the $2.1-trillion mark this year against 6.9 per cent in 2013-14. India grew 7.5 per cent in the October-December quarter, overtaking China’s 7.3 per cent growth in the same quarter, to become the fastest growing major economy in the world.

Declining fuel rates dragged down Wholesale Price Index (WPI)-based inflation to -0.39 per cent in January, the second month to witness a fall in prices this financial year.

Key Negatives during the month

India’s manufacturing activities expanded at a three-month-low pace, as orders moderated, showed the widely-tracked HSBC purchasing managers' index (PMI). PMI declined to 52.9 points in January, compared with 54.5 in Dec.

Consumer Price Index (CPI)-based inflation rose to 5.11 per cent in January from 4.28 per cent in December. The base year for the CPI was revised from 2011 to 2012.

Foreign portfolio investors (FPIs) sold shares worth a net Rs 2495.45 crore into the secondary equity market during four trading sessions from 9 February 2015 to 12 February 2015.

Global markets:

Sectoral performance The performance of the sectoral Indices were mixed. The top three major gainers were IT, Capital Goods & Metals which rose by

7.1%, 4.0% and 3.7% respectively. The top three major losers were Oil & Gas, Consumer Durable & PSU, which were down by 4.5%, 2.5% and 1.2% respectively.

Indices Jan-15 Feb-15 % Chg US - Dow Jones 17165 18133 +5.6 US - Nasdaq 4635 4493 -3.1 UK - FTSE 6749 6947 +2.9 Japan - Nikkei 17674 18798 +6.4 Germany - DAX 10694 11402 +6.6 Brazil - Bovespa 46908 51583 +10.0 Singapore - Strait Times 3391 3403 +0.3 Hong Kong – Hang Seng 24507 24823 +1.3 India - Sensex 29183 29362 +0.6 India - Nifty 8809 8902 +1.1 Indonesia - Jakarta Composite 5289 5450 +3.0 Chinese - Shanghai composite 3212 3310 +3.1

World markets ended the month of February 2015 on a positive note. Brazil-Bovespa was the top performer during the month which gained 10%. Except for Nasdaq which ended on a negative note (down by 3.1%), all other indices ended on a positive note. Nifty & Sensex also reported decent gains of 1.1% & 0.6%. Some of the major gainers were DAX, Nikkei, Dow Jones, Jakarta and Shanghai, which gained 6.6%, 6.4%, 5.6%, 3.1% & 3.04% respectively.

Average daily volumes on BSE in February 2015 rose by 12.0% M-o-M. (NSE daily average volumes rose by 7.4% M-o-M). The average daily derivatives volumes on NSE rose by 2% to Rs. 271607.01 cr in February.

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BSE Indices 30-Jan-15 28-Feb-15 % chg Sensex 29,183 29,362 +0.61 Smallcap 11,329 11,266 -0.6 Midcap 10,739 10,811 +0.7 BSE 500 11,346 11,454 +1.0 BSE 200 3,641 3,675 +0.9 BSE 100 8,903 8,994 +1.03 Auto 19,986 19,983 -0.0 Bankex 22,716 22,573 -0.6 Capital Goods 17,096 17,779 +4.0 Consumer Durables 10,655 10,388 -2.5 FMCG 8,275 8,222 -0.6 Healthcare 15,667 15,855 +1.2 IT 11,179 11,969 +7.1 Metal 10,190 10,570 +3.7 Oil & Gas 10,143 9,686 -4.5 Power 2,225 2,269 +2.0 PSU 8,205 8,103 -1.2 Realty 1,811 1,822 +0.6 TECK 6,136 6,424 +4.7

Fund Activity

Particulars Net Buy / Sell Net Buy / Sell Open Interest Open Interest Remarks Feb -15 Jan -15 Feb -15 Jan -15

FII Activity (Rs. in Cr) FII Activity (Rs. in Cr) Equities (Cash) 8892.9 12374.5 FIIs continued to be net buyers in February. Index Futures* -3141.3 6900.9 20765.3 22760.7 FIIs were net sellers with a fall in open interest. Index Options* 1352.6 9109.9 47641.5 48247.6 FIIs were smaller net buyers with a fall in open interest. Stock Futures* -6040.7 -2140.4 58903.1 57404.1 FIIs continued to be sellers with a rise in open interest. Stock Options* -272.1 -111.6 1747.0 1482.1 FIIs were net sellers along with a rise in open interest.

MF Activity (Rs. In Cr) MF Activity (Rs. In Cr) Equities (Cash) 4308.9 819.5 MFs were net buyers in the month of February. *= numbers till Feb 27 FIIs were net buyers of debt papers buying a net amount of Rs.13421 cr of debt papers in Feb, compared to Rs. 23068.2 cr worth debt bought in Jan.

Top Gainers IT Index edged higher as in February, the USD was strengthening against rupee

which is beneficial for IT companies. IT shares are also gaining tracking better-than-expected numbers in the fourth quarter as well as the accounting year ended December 31 by IT Services Company Cognizant. It gave a robust growth forecast for the next year.

The Capital Goods index surged as investors cheered the economic survey’s projection of India's economic growth at more than 8 percent for the next fiscal. A good railway budget which has provided plan for 5 years had also added support to the environment.

Metal sector gained on the back of successful coal block auction in the Phase 1 by the corporates.

Top Losers Oil & Gas Index fell as it witnessed selling pressure after Delhi Police detained a

RIL staffer in connection with alleged official document theft in the oil ministry. Continued softness in Crude prices also contributed.

Consumer Durable Index fell on account of profit booking by the investors.

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Bond Yields Indian G-Sec bond yields ended higher marginally by 3 bps at 7.72% at the end of February 2015 over January 2015. The G-Sec

market traded mostly on a bearish note amidst absence of any major trigger, weakness in the domestic currency and apprehensions over the upcoming budget announcement.

Commodities In February 2015, the Reuters/Jefferies CRB Index of 19 raw materials ended higher by 2.39% to close at 224.08. The

Reuters/Jeffries CRB Index rose on account of a rise witnessed in commodities like Wheat (up 4.2%), Copper (up 7%), Cocoa (up 9.8%), Cotton (up 9.8%), Corn (up 4.3%), Crude Oil (up 3.7%), Live Cattle (up 0.5%) and Natural Gas (up 0.4%). The other commodities which fell were Coffee (down 17.8%), Sugar (down 11.1%), Lean Hogs (down 6.4%), Gold (down 5.1%), Silver (down 3.5%) and Aluminium (down 2.2%).

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The Baltic Dry Index (BDI) fell 11.18% in the month to close at 540. BDI is a number issued daily by the London-based Baltic Exchange. Not restricted to Baltic Sea countries, the index provides "an assessment of the price of moving the major raw materials by sea. Taking in 23 shipping routes measured on a time charter basis, the index covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron ore and grain. A measure of global shipping costs for commodities fell to a 28-year low as slowing growth in China’s demand for cargoes compounds the effect a fleet glut. The Baltic Dry Index plunged to the lowest since Aug. 22, 1986.

The U.S. dollar index posted a monthly gain after spending much of February in consolidation mode as investors await further signals on the timing of the Federal Reserve’s next interest-rate increase move. The dollar was on a tear over much of 2014 into January, surging on expectations the Fed will move this year to tighten interest rates as other major central banks, notably the European Central Bank and Bank of Japan, pursue ultra loose monetary policy measures.

Commodity 27-Feb 30-Jan % Chg Gold 1213 1279 -5.16% Crude Oil 50 48 +3.67% Aluminium 1806 1846 -2.17 Copper 5840 5460 6.96% Zinc 2068 2112 -2.08% Nickel 14095 14800 -4.76% Tin 17925 19175 -6.52% Lead 1743 1860 -6.29%

Currencies

Copper prices rose supported by rising oil prices, US employment data and reduced anxiety over the Greek economy. The three pieces of macroeconomic news helped alleviate supply-and-demand concerns in the copper market.

Gold prices tumbled as a stronger economy has encouraged companies in US to boost hiring, creating a virtuous cycle of growth as Americans spend newfound incomes on goods and services. This reduced demand for safe haven assets like Gold.

A survey by US oil services firm Baker Hughes Inc showed the number of rigs drilling for oil in the United States fell. The drop, coupled with announcements of deep cuts in capital spending by major oil companies including BP and BG Group, suggests there will be tighter supplies.

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Given below is a table that shows the depreciation (-)/appreciation (+) of the dollar against various currencies for the month of February 2015: USD to: 27-Feb-15 31-Jan-15 % Chg Pakistani rupee 100.61 101.31 -0.69 Hong Kong dollar 7.76 7.75 +0.04 Chinese yuan 6.14 6.17 -0.42 Indian rupee 61.76 61.97 -0.33 Taiwan dollar 31.41 31.68 -0.85 Singapore dollar 1.35 1.35 +0.05 Argentine peso 8.72 8.64 +0.92 Euro 0.88 0.88 +0.05 Thai baht 32.36 32.79 -1.29 Malaysian ringgit 3.59 3.64 -1.37 Indonesian rupiah 12837.0 12722.60 +0.90 Japanese yen 119.01 117.82 +1.01 Brazilian real 2.87 2.64 +8.80 Korean won 1097.69 1100.72 -0.28

Global Market Outlook Interest Rate hike could delay further in US The majority of the participants at the January Federal Open Market Committee meeting leaned towards delaying the interest

rate hike, according to the FOMC’s January meeting minutes released in Feb. The Fed has kept interest rate near zero for six years in order to stimulate the economy. According to the minutes, “several participants” noted that if the Fed were to raise the short-term interest rate too late, the stance of monetary policy would become “accommodative,” leading to “excessively high inflation.” On the other hand, “many participants” observed “a premature increase in rates might damp the apparent solid recovery in real activity and labor market conditions.” Some analysts estimate that the interest rate hike will take place in the third quarter of 2015. The committee also repeated the forward guidance of “can be patient” regarding when to start raising interest rates. The guidance was introduced in December by the FOMC.

Federal Reserve vice chairman Stanley Fischer recently stated that the central bank looked most likely to raise interest rates in

June or September, but developments in the economy could alter the timing. Seven of the Fed's current 17 members have now

The Brazilian real fell to its lowest level against the dollar in more than 10 years, as weak economic growth figures, a countrywide drought and a corruption scandal at state-run oil firm Petrobras continued to weigh on the currency.

The ringgit ended higher against the US dollar on renewed interest following demand from oil exporters for month-end settlements.

Thailand's baht hit a four-month high as foreign investors continued to buy local bonds.

The dollar rose against the yen as higher U.S. Treasury yields and weaker-than-expected Japanese growth encouraged investors to bet on the buck. Also yen weakened against the dollar as a surge in U.S. payrolls fuelled bets the Federal Reserve will raise interest rates sooner.

Outlook going forward

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said they at least want the option of a June tightening on the table, or have pushed in general for an earlier increase amid an expectation that wages and inflation will turn higher. By contrast, there's a dwindling core of officials who say publicly that the economy and labor markets in particular still have a long way to go, only four Fed members have in recent weeks clearly said that rate hikes won't be appropriate until much later in the year or even into 2016.

We feel that the Fed, at its March 17th and 18th policy meeting could remove language saying the central bank will take a "patient" approach to raising rates, taking away the final verbal constraint to a June rate hike. However, we don’t see a rate hike earlier than June. Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said that it would be “very tough” for the Federal Reserve to lift interest rates this year because of the stronger U.S. dollar. U.S. economic growth, outperforming most industrialized counterparts, has helped push the nation’s currency higher than it’s been in more than a decade against currencies of six trade partners. That’s making it cheaper for Americans to buy imported goods and helping to lower inflation that’s already below the Fed’s goal, making it harder to boost rates. Now if the US hikes the interest rate, then dollar would strengthen further, thus making the imports more cheaper. However, the exports would become less competitive. This could impact the export growth of the country significantly.

What does ECB stimulus plan mean for investors? The European Central Bank ushered in a new era by launching an aggressive bond-buying program on January 22, 2015, shifting

pressure to Europe’s political leaders to restore prosperity in one of the global economy’s biggest trouble spots. Investors cheered the ECB’s commitment to flood the eurozone with more than €1 trillion ($1.16 trillion) in newly created money, sparking a rally in stock and bond markets and sending the euro plunging. The ECB will buy a total of €60 billion a month in assets including government bonds, debt securities issued by European institutions and private-sector bonds.

It is said that ECB’s new stimulus could strengthen demand, increase capacity utilization and support money and credit growth. This additional liquidity could also be positive for Indian equity markets. However, it has resulted in depreciating Euro to the lowest levels which would be positive for Eurozone exporters. This can result in higher competitive intensity for Indian exporters thereby posing a risk for their exports.

Though it is uncertain if the ECB’s stimulus program will be effective in boosting euro zone inflation, we anticipate that it will fuel significant financial market volatility this year. In anticipation of the ECB’s announcement last month, the Swiss National Bank unexpectedly removed its currency peg against the euro and cut interest rates by 50 bps to negative 0.75%, sending a shockwave through the financial markets. The following week, the Bank of Canada also unexpectedly cut its benchmark overnight rate by 25 bps to 0.75%, and other central banks have also been cutting their target interest rates. Looking ahead, it is possible that the ECB’s quantitative easing program (and the relative weakness of the euro) could prompt even more central banks to make policy changes, particularly in countries that are experiencing tepid inflation and a strengthening currency against the euro. Actions taken by the ECB could indirectly affect the timing of an interest rate hike in the U.S., as the dollar’s

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strength versus the euro continues to put downward pressure on U.S. inflation expectations. Any unexpected central bank policy moves (including in the U.S.) could create significant volatility in the financial markets.

In addition, the success or failure of the ECB’s plan to purchase government bonds (which will be challenging given that each country issues bond separately) and to revive the European economy is also likely to create volatility. Sluggish growth in the euro zone economy has been a significant headwind for the global economy and contributed to the recent plunge in oil prices. If the ECB is able to put the euro zone economy on a path toward sustainable growth, there is likely to be a meaningful impact on global currencies, corporate earnings (which are also impacted by currency exchange rates), energy prices, and overall global economic growth. Even if the program is successful, the plan will take months to execute and there are likely to be bumps in the road. Overall, we believe the markets are poised to experience significant volatility this year.

Is the recent surprising rate cut in China a positive move? On Feb 28, 2015, China's central bank, the People's Bank of China (PBOC) unexpectedly cut the benchmark one-year lending as

well as the deposit rate rate by a quarter of one percent. This surprise rate cut, which came less than four months after the last reduction—sooner than many economists and analysts expected, underscores the increasingly aggressive measures the leadership is relying on to rev up activity in the world’s second-largest economy. With the cut, the central bank renewed concerns about an array of issues weighing on the economy: a slumping property market, capital flight that is squeezing banks’ ability to lend, and growing risks of falling prices that, in effect, are pushing up borrowing costs for businesses.

The government is expected to prop up economic activity through several more broad cuts in interest rates and greater spending on big-ticket infrastructure projects, but many Chinese officials and economists warn that such moves entail risks. Too much easing, in particular, could add to already high debt levels among companies and local governments and stall plans to deleverage, reduce industrial overcapacity and force greater efficiencies on state companies. For much of last year, the PBOC, under long-serving Governor Zhou Xiaochuan, insisted on targeted efforts rather than broader moves like rate cuts out of concern that broadly easing credit would worsen debt problems. But increasingly, the central bank is acceding to demands from the Chinese leadership to reduce financing costs for businesses and bolster growth, according to officials and advisers to the bank.

A key question now is whether Chinese consumers and companies will take advantage of the latest rate cut or hold fast amid further signs of slowing growth. We feel that the rate cut reflects that China has much bigger problems at their end, not known to many.

Geopolitical problems ebbing with hopes of implementation of cease fire deal in Ukraine and delay in Greek exit The Ukraine cease fire deal and hopes of its implementation and the delay in Greece exit from Eurozone has eased the

geopolitical concerns in the near term.

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On Feb 12, Germany, France, Russia and Ukraine agreed to a deal offering a "glimmer of hope" for an end to conflict in eastern Ukraine, but the United States and NATO said further intense fighting on Thursday ran counter to the spirit of the accord. The White House, under pressure from Congress to provide arms to the stretched Ukrainian military, said the deal was "potentially significant" but urged Russia to withdraw soldiers and equipment, and give Ukraine back control over its border.

While the deal cease fire deal has been signed, it has still not been implemented, but there are hopes that the same would be

implemented over the next couple of weeks.

Further, Greece concerns of its exit from Eurozone seem to have eased in the near term. Towards the end of Feb, Greece finally reached a deal with the country’s creditors in the eurozone after a month of intense negotiations. The agreed extension of Greece’s bailout by four months from the end of February is contingent on a positive response to the reforms by its creditors. It looks like Greece’s creditors will accept its new government’s reform proposals and thus give it access to the next slice of bailout funds.

The International Monetary Fund and the European Central Bank, the other two organizations making up the troika of lenders squeezing Greece, have expressed doubts about the viability of the deal reached. In four months, the fears could reignite but it has certainly provided a much needed relief to the investors in the near term. There’ll be plenty of opportunity to come up with new ways of playing the extend-and-pretend game between now and four months.

Japanese stock market at a new high. Will the rally sustain? A steady regimen of structural reforms during long years of deflation, a strong yen, and the global financial crisis have made

Japanese companies strong again. The stock market is now starting to price in their greater earnings potential. The Nikkei index has climbed to a 15 yr high, which is impressive. But the big question now is that whether this rally could sustain going forward. We feel for this rally to sustain, it would require cutting red tape and other government efforts to empower the corporate sector.

Listed companies' profits are expected to reach a record high in the fiscal year ending March 31. Encouraged by solid results for the nine months through December, investors have ploughed money into the stock market. Foreign investors now constitute the biggest bloc of shareholders in Japan Inc., holding 30% of the pie. Their demands for management reforms have not been without effect.

Emboldened by their own improved earnings, Japanese companies have begun venturing in search of new growth. Big names in

autos, electronics and other industries are moving to raise wages. And shareholder giveaways are becoming more generous. The ingredients for a recipe that whets global investors' appetites are coming together.

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While the Nikkei average has climbed back to where it stood in May 2000, it remains more than halfway below its 1989 peak, even as U.S. and European blue chip indexes are testing all-time highs. And it bears mentioning that BOJ money is underpinning Japanese equities to some extent, either indirectly or through the bank's exchange-traded fund purchases. The disparities in strength between Japanese companies and their foreign peers are apparent in their share prices.

While the corporate sector languished, the government borrowed ever more in hopes of stimulating the economy. Japan's public

debt has swelled from 1.4 times its gross domestic product in 2000 to more than double GDP today. The government needs to take deregulation further to open up new fields of growth so that companies can become even more dynamic. By relying on private innovation, not fiscal stimulus, to stir up fresh demand, Japan can have both a bigger economy and healthier public finances

Indian Market Outlook Union Budget 2015-16 was neither populist nor reformist, but a prudent one The recent Union Budget (presented on Feb 28) seems a pale comparison to the Rail Budget (on Feb), although the two are not

strictly comparable. What one was expecting was a similar analysis of key problems faced by the country and ways and means to tackle them by short and medium term targets. The FM fell into the trap of introducing more schemes rather than rationalizing the existing ones and seriously tackling expenditure reforms (though he has kept the food and Fertiliser subsidy flat and cut Petroleum subsidies by 50% - aided by fall in crude prices). Agriculture as a sector seems to have got very little attention in the Budget.

Income tax collections are assumed to rise 17.2%, Excise by 12.2% and Customs by 9%. Service tax collections are to rise by a whopping 24.8% (it could further rise as and when the proposal to levy 2% Swachh Bharat cess is implemented). Nominal GDP is expected to grow @12% in FY16. Overall Plan expenditure has been projected flat to marginally down though capex plan expenditure is expected to rise 34%. Recapitalisation funds for Public sector Banks of Rs.7900 cr seem clearly insufficient. The spending power of the consumer will not improve because of Increase in Income tax surcharge to 12% from 10% (for high tax payers) and on distribution of dividends/buybacks by companies/mutual funds, Increase in Service tax and cess and no relief in direct taxes.

The FM however needs to be commended for steps to attract foreign inflows, deferring the applicability of GAAR by two years

and apply it prospectively to investments made on or after 01.04.2017, allowing foreign investments in Alternate Investment Funds, doing away with the distinction between different types of foreign investments, especially between foreign portfolio investments and foreign direct investments and replace them with composite caps and explicitly clarifying that FIIs operating from within India will not be deemed to be creating “permanent establishment” risk. He also needs to be commended for laying out plans to tackle the black money, introducing Gold monetization scheme, proposing to reduce the rate of Corporate Tax from

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30% to 25% over the next 4 years accompanied by rationalisation and removal of various kinds of tax exemptions and incentives for corporate taxpayers, taking leeway in aiming for fiscal deficit target of 3% in one extra year (i.e. by FY18), etc, allocating more funds for Agri Research/education, Atomic Energy/space, Telecom, Defence, Law & Justice, Road Transport, Rural Development, Science and Technology, Skill Development & Entrepreneurship (first time allocation), etc.

Though one appreciates the limitations on FM in doing many things in one Budget, it remains a typical budget, amidst unrealistic market expectations (partly fueled by the Govt functionaries). If the Govt was looking at kick starting the economy through government capex, the amounts provided are clearly insufficient. Further the slippage in fiscal deficit targets in a year when the expenditure by the Govt is not rising sharply also remains a puzzle.

The Budget was neither Populist nor Path Breaking, while one may argue that it was prudent. Though this seems like a case of

missed opportunity, all is not lost and reform process can continue throughout the year. From the perspective of the incipient of economic recovery, we see the budget as being a relatively neutral event. Dependence on monsoon and global growth remains for reaching the GDP growth rate of 8-8.5%. However the budget could be received favourably in most quarters of the FII community though they may have different views on select sectors and stocks.

Dec 2014 quarter was a disappointing one for India inc and much below the consensus expectations Net sales of Indian companies expanded at the slowest pace in four quarters in the three months ended 31 December,

illustrating the challenges local companies are facing as the economy takes longer than expected to recover from a growth slump. Lower raw material costs because of a global slump in commodity prices, however, boosted operating profits, providing the only silver lining in the otherwise dismal scenario. Numbers (earnings and sales) have been disappointing, and have turned out to be a lot worse than consensus expectations.

A CARE study of the performance of 2,934 companies showed that net sales declined by -0.2% in Q3FY15 as against 6.5% increase in the previous year while net profits declined significantly by 28.3% over a positive growth of 2.5% last year. The lower growth in sales volumes could be largely attributed to the weakness in the global and domestic demand conditions. Also despite the softening inflation in the past few months the gains from the same remain invisible indicated by the declining profitability. The large sized firms have performed relatively better with positive growth in sales and increased profitability when compared with the smaller ones. The smaller sized firms continue to underperform incurring huge losses and lower sales. Outperforming sectors among in Nifty 50 were power, banks and IT, with companies in these sectors performing comparatively better in a quarter that was muted in terms of corporate earnings. FMCG, pharma, power and steel companies disappointed, especially on the revenue front.

The poor performance in Q3FY15 may lead to a cut in earnings estimates for FY16, which, in turn, could make valuations appear

stretched. A significant recovery is likely only in the second half of 2015-16. According to Bloomberg estimates, the Sensex is

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trading at ~18 times 1-year forward earnings, at 50%+ premium to the MSCI EM (emerging markets) Index which trades at under 12 times. The index also trades at a 15% premium to its five-year average of 16 times.

Going forward, we believe investors will have to reconcile to an earnings recovery that could, early cycle, be anemic and gather

momentum only with a 4-6 quarter lag the market looks expensive, as India’s improved macro position is yet to translate into earnings. We do not dispute the medium-term potential of investment in India but suspect that revenues will continue to be weak for the next few quarters. Incrementally, potential depreciation in INR/USD and stabilization in commodity prices can prevent incremental weakening in earnings.

FII holding hits new high in Q3; inflows could continue on quick reform implementation & pickup in growth Foreign institutional investors' holdings in 30 Sensex companies have reached an all-time high of over 23% of the total market

cap, as per data collated by Bank of America Merrill Lynch. In March 2009, the same stood at 15% of the total market cap and 36% of free float, which rose to 23% and 47% respectively at the end of December. The steep rise was driven by the optimism about Narendra Modi Government unleashing reforms, BofA-ML Global Research said in its report.

Foreign investors continued to pump money in Indian equities with the December quarter witnessing FII flows of more than USD 2 bn. This was the 9th consecutive quarter of positive inflows from FIIs. Financials continue to remain the highest overweight (OW) sector for FIIs at 14.3%.

The FIIs have been very bullish on the Indian equity markets over the last one to two years. While the FII holding is at a new

high, we feel the inflows could continue (though at a gradual and steady pace) if the reform implementation process accelerates and the economic growth starts picking up.

Ratings upgrades could get postponed due to higher fiscal deficit projected As per the credit rating firms, India's new budget is unlikely to have an impact on the country's sovereign credit given the

absence of meaningful fiscal reform. Standard & Poor's has ruled out a rating upgrade for at least a year after Mr. Arun Jaitley set next fiscal year's deficit target at 3.9% of GDP - higher than analyst estimates - and said the deficit is likely to fall to 3% of GDP in 2017/18, one year later than expectations. Standard & Poor's Ratings Services (S&P) said the budget highlighted a commitment to keep the deficit low, but lacked structural reform. S&P and major peers Moody's Investors Service and Fitch Ratings rate Indian credit at the lowest investment grade with a "Stable" outlook. Fitch said the government's medium-term fiscal consolidation strategy was "less aspiring than in the past," terming it negative for India's credit rating. Moody's said the budget was "unlikely to materially change" a rating constrained by "weak fiscal metrics", though it would be supported by the focus on growth.

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S&P stated that India must boost growth, cut its fiscal deficit and fulfill promises of financial and fiscal reforms in order to justify an upgrade in a credit rating. It stated that crucial factors include higher growth in real per capita GDP, stronger fiscal and debt metrics, and a stronger external position or improved monetary policy setting & government's ability to fulfill its promises on key reforms is critical to country's success.

Stability in oil prices, speedy disinvestment could help in achieving fiscal deficit targets After a sharp decline over the last few months (more than 50%) and a minor bounce from the lows ($47.26 per barrel on closing

basis), the oil prices finally seem to have found some stability at around have finally around 60-62 levels. With no major rise in the oil prices expected over the next few months, we feel Y-o-Y subsidy burden for the Government would reduce significantly this fiscal. This would enable it to improve its fiscal situation.

The 2015-16 Union Budget announced a divestment target of Rs 69,500 cr, higher than the previous fiscal's target of Rs 58,425 cr. The government has so far managed to raise only a small fraction of its ambitious divestment target. The break-up envisaged was thus: To raise Rs 36,925 crore from PSU disinvestments, Rs 15,000 crore from residual stake sale in Hindustan Zinc and Balco, and Rs 6500 crore from the stake it held in Axis Bank, Larsen & Toubro and ITC through SUUTI. Positive market sentiments could enable the government to speed up its disinvestment process during the year. Though challenging, if Government is able to achieve its disinvestment target, it could further help in reducing the country’s fiscal deficit and government would be able to achieve its targets set in this Union Budget over the next 3 yrs without more delay. This would be a big positive trigger for the economy & the stock market.

Oil prices & Inflation to guide RBI’s next move on interest rates The Reserve Bank of India (RBI), in a surprising and beyond-policy-meeting announcement, cut the repo rate by 25 basis points

from 8% to 7.75% on January 15, 2015. Consequently, the reverse repo adjusted to 6.75% and the marginal standing facility to 8.75%. The cash reserve ratio (CRR) was kept unchanged at 4% of net demand and time liabilities (NDTL). However, in its bi-monthly monetary policy meeting on February 3, 2015, it kept the rates unchanged, but cut the Statutory Liquidity Ratio (SLR) by 50 bps, thus ensuring more liquidity into the system. Talking about the path of inflation in 2015-16, Rajan said that the RBI will keenly monitor the revision in CPI, which will rebase the index to 2012 and incorporate a more representative consumption basket along with methodological improvements. He said inflation was likely to be around the target level of 6% by January 2016 but flagged monsoon, oil prices and the unlikely possibility of significant fiscal slippage as upside risks.

Recently, Finance Ministry inks pact with RBI to target CPI inflation at 4%, with a band of plus or minus 2% points by FY17. The central bank will first aim to have consumer inflation fall below 6% by January 2016. This clearly indicates RBI’s increasing focus on containing the inflation, which is encouraging.

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Since inflation is currently within the comfort zone of RBI (CPI stood at 5.11% in Feb 2015), the chances of rate cut in RBI’s next monetary policy meeting (in April) are high. Also oil prices have stabilized at lower levels and are unlikely to rise significantly in the coming months. This would further provide cushion to RBI in deciding on interest rates. However, for longer term, oil prices and inflationary situation would guide RBI’s next move on the interest rates. We expect a cautious approach from RBI going forward, but at the same time don’t rule out 50-75 bps cut interest rates this fiscal.

Though not so cheap, market upside could continue in near term due to good budget, hopes of speedy reform implementation & lack of negatives According to Bloomberg estimates, the Sensex is trading at ~18 times 1-year forward earnings, at 50%+ premium to the MSCI EM

(emerging markets) Index which trades at under 12 times. The index also trades at a 15%+ premium to its five-year average of 16 times. In that sense, we feel that the Indian equity market is not cheap at current levels.

Despite the absence of earnings improvement, the market is continuing to outperform and the valuations improving further, supported by factors like improved macro position (low CAD, declining GFD/GDP and reasonable inflation), supportive global liquidity and ongoing reforms and expectations of further reforms. Further, the FY16 Union Budget delivered despite very high expectations.

We feel that the above macro factors could continue to support the market valuations. The market upside could continue in near term with absence of negatives. Further, high valuations of stocks reflect the market’s confidence in a recovery in revenues and profits in the medium term. The BSE Sensex could trade in the range of 28500-30500 in the month of March, with an upward bias.

While the near term upside is intact, for longer term, the outcome of bills pending in the current budget session of Parliament (which commenced on Feb 23 and would continue till May) is crucial for improving the economic sentiments. It was a rough sailing for the government in the Rajya Sabha in the winter session as it does not have a majority in the House of Elders because of which it could not push through some of the key bills like Insurance Bill and Coal Mining Allocation Bill. The passing of these bills is crucial. If the Government fails to clear the pending or it gets postponed, then the equity markets could react negatively and India’s premium valuations could start reducing.

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Technical Commentary:

Daily timeframe: Nifty witnessed high volatility on the day of the presentation of union budget 2015 and finally closed with the

smart gains of 57 points. We observe a formation of high wave type candle on Feb 28 with long lower shadow, which is suggesting a smart recovery from the lower levels. The symmetrical triangle type pattern (green converging trend lines) has been broken on the upside and Nifty closed above it. This could further have positive impact on the market ahead.

The recent bottom reversal formation around 8669 of 26th Feb could be considered as a recent higher bottom of the new positive sequence (sequence of HT & HB) and currently Nifty is moving up to form a new higher top. The opening upside gap (body gap, not a western gap) of 27th Feb is intact and unchallenged and currently Nifty has placed on the edge of moving above another hurdle of 8915 (previous swing high of 19th Feb).

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Weekly Timeframe: After a sharp bounce back during mid of Feb-15, Nifty shifted into sideways consolidation for the next couple of weeks. Despite showing sharp weakness during this intraweek, Nifty showed smart recovery but was not able to move above the resistance of around 8915 levels.

The bullish sequence of higher tops and bottoms is intact in Nifty as per larger timeframe and we observe a formation of long lower shadows during intraweek dips. This is indicating an emergence of buying interest from the lows, which displays the strength of bulls to hold on the defence.

If Nifty manages to move above 9000 levels by next week, then that is going to be an upside breakout of the sideways

consolidation as per larger timeframe. Such upmove could negate the previous bearish top reversal pattern of shooting star of 30th Jan 15. This expected upside breakout could have a sharp positive impact on the market ahead. Weekly momentum oscillator like 14 period RSI has turned flat around 65 levels, which is signaling the ongoing sideways consolidation of Nifty. If weekly RSI turns up from the current region, it could mean more upmove for the market, as per the theory of momentum oscillator.

Monthly Timeframe: We observe a sustained uptrend in Nifty as per monthly timeframe chart over the last many months. After

shifting into sideways consolidation for 3-4 months (green line) Nifty staged upside breakouts and moved higher. Recently, Nifty staged upside breakout of the similar type of consolidation in last month and witnessed recovery during intra month weakness.

The small body candles has been formed with long lower shadow last month, which is similar to the negative pattern of hanging man. Over the last 8-10 months some of such negative reversal type candles have been formed, but they have not been impactful so far.

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Month Gone by:

Nifty has started the month of February-15 on a weak note (blue vertical line-from the previous close of 8808 levels) as it

shifted into sharp downtrend up to the early/mid part of month. The important bottom reversal occurred around 8470 levels and that led to a sharp upside bounce back up to 8913 levels during 19th Feb, before showing further weakness.

The decline, which has started from the high of 8913 levels halted at the support of 8670 levels and Nifty formed a higher bottom around that region. Key economic events during later part of Feb month added the high volatility to the market and Nifty finally closed at 8901 levels on the last day of Feb-15 (with the gains of around 91 points).

Historical union budget impact:

Nifty weekly timeframe

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Union budget for 2015 was announced on 28th February and we study previous few union budgets (green vertical lines on Nifty weekly timeframe chart) to draw the conclusion of this budget impact ahead.

Historically Nifty has witnessed volatile and sharp moves during this economic event and the event has witnessed significant trend formations before, during and after the events.

The historical study of market volatility during Union Budget is as follows; 2014 interim Union Budgets of BJP and UPA govts

(11th July-14 and 14th Feb-14 respectively) and that moreover resulted in a significant bottom reversal patterns. In both the occasions Nifty formed higher bottoms and witnessed important intermediate term bottom reversal patterns. A new uptrend was witnessed post budget.

The 2013 Union Budget (UPA) was held on 28th Feb and that has turned out to be a non-significant event, as the market

continued its down trend after a minor pullback rally. The 2012 Union Budget (UPA) was held on 16th March and this budget was also a non-event for the market. Nifty has formed a top, couple of weeks before the budget and the downtrend continued for next few months post budget.

In most of the instances the underlying trend (of pre-budget) has been continued in the market post budget. Hence the current

upmove as per weekly timeframe is likely to continue for some more time.

Summing Up: The detailed study of Nifty from smaller to larger timeframe is showing positive trend and there is no formation of any top

reversal patterns yet in the market.

The upside breakouts of consolidation/pattern or hurdle of around 8950-9000 levels could have a sharp positive impact on Nifty and one may expect Nifty to reach the upside levels of around 9320 (1.618% extension taken from the swing high of 8906 to the swing low of 8470) for next month.

Immediate supports to be watched for a buy on dips for the month of March-15 is around 8650-8700 levels.

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Learning Technical Analysis Importance of Volumes in Technical Analysis: What is Volume? Volume means the number of shares or contracts that trade over a given period of time, usually a day. The higher the volume,

the more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that can usually be found at the bottom of any chart which illustrate how many shares have traded per period and show trends in the same way that prices do.

Why Volume is Important Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement

up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume. Say, for example, that a stock jumps 10% in one trading day after being in a long downtrend. Is this a sign of a trend reversal?

This is where volume helps traders. Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the

previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend.

Volume and Chart Patterns The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price

patterns can be confirmed with volume. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern, the quality of the signal formed by the pattern is weakened.

Volume Precedes Price Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and

chartists to form ideas on upcoming trend reversals.

Volume as a Liquidity Criterion Volume is an excellent indicator of a stock’s liquidity. That’s because a higher number of transactions means that buyers and

sellers are able to agree on a transaction price, and the bid/ask spread is minimized Why is liquidity such a big deal? Low liquidity means that it’s more difficult to enter and exit positions. Since all transactions

require a buyer and a seller, traders who need to buy or liquidate a position get stuck paying market prices for their shares.

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Derivatives Commentary:

The month of Feb 2015 saw the markets witnessing a roller coaster ride. After declining in the early part of the month and touching a low of 8470, the Nifty rallied to close above the 8900 levels at the end of the month. The Nifty gained 1.06% during the month of Feb 2015.

In the F&O space, the FIIs were net sellers in the Index Futures segment of Rs.3141 cr (vs net sellers of Rs.6901crs. in Jan 2015). Along with the decrease in the open interest, it indicates earlier long positions were being wound up by FIIs in index futures segment. In the Index Options segment, the FIIs were net buyers of Rs.1353 crs. (vs net buyers of Rs.9110 cr in Jan 2015), which was accompanied with a lower open interest. In the Stock Futures segment, FIIs were net sellers, while open interest rose over Feb.

The March 2015 series has started on a lighter note compared to the previous series. In terms of value, the March 2015 series has begun with market wide Fut OI at Rs.88,600crs. Vs. Rs.90,400crs. at the beginning of the Feb 2015 series. It was Rs.76,900crs. at the beginning of the Jan 2015 series.

This decrease in OI indicates that traders had turned cautious ahead of the Union Budget as they let a chunk of their bullish bets in Feb series expire.

The decline in rollover costs in the Feb expiry also indicates that traders were less willing to carry forward their long positions to the March series. Nifty Fut rollover costs for March series fell to 45-48 basis points, from 56-57 basis points in Feb series.

Looking at the rollover data, we observe that Nifty rollover figures were higher at 81% Vs. the three month average of 73%. Market wide rollover was higher at 82% Vs the three month average of 81%.

Traders rolled over short positions in Cement, Metal and Banking stocks. Long rollovers were seen in defensive sectors like IT and FMCG.

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Reflecting the increasing volatility expectations, the Nifty IV rose to 19.65% at the start of the March series from 19.16% at the beginning of the Feb series. The Nifty OI PCR slid to 0.85 at the start of the March series from 0.9 at the start of the Feb series. The fall in the OI PCR indicates a greater buildup of calls in the market.

Technically, the Nifty is now in a short term uptrend after breaking out of the resistances of 8900. Index option activity is suggesting a trading range of 8800-9200 in the near term. This is because the maximum Call OI is currently being seen in the 9000-9200 strikes indicating this is the maximum expected upside for the Nifty in the near term. In the put segment, maximum OI is currently being seen in the 8500-8800 puts, suggesting this is the maximum risk on the downside for the near term.

Learning Derivatives Analysis Delta Hedge or delta neutral strategy: A delta hedge is a simple type of hedge that is widely used by derivative dealers to reduce or eliminate a portfolio’s exposure to

an underlier. The dealer calculates the portfolio’s delta with respect to the underlier and then adds an offsetting position in the underlier to make the portfolio’s delta zero. The offsetting position may take various forms, but a spot, forward or futures position in the underlier is typical. All that is really required is that the position’s delta offset that of the original portfolio.

Delta hedging means trading something somewhere such that the portfolio’s overall delta is zero (or neutral). This would be desirable if we did not want any exposure to changes in the price of the underlying security. So if we own a put option, typically we might expect its value to rise and fall with falls and rises (respectively) in the price of the underlying product. To eliminate these fluctuations, we need to delta hedge. Specifically, when owning a put option, to delta hedge we need to buy a quantity of the underyling product. As the underlying product price rises, our put falls in value, therefore owning some of the underyling product is a hedge against this risk. Even more specifically, the delta tells us how much of the underlying product to buy; for a put with a 20% delta, this represents the hedge ratio and suggests that for every put contract we own, we need to buy one fifth of a lot of the underlying. If we own 100 lots of 20% delta puts, we need to buy 20 lots of the underlying to delta hedge the puts.

Mathematically represented as:

This can be read as the partial derivative of the options value with respect to changes in the underlying stock’s price Delta (∂V- δ = ∂S) must be between 0 and 1 for call options and -1 to 0 for put options. This previous statement can be thought

of quite intuitively as: a call option gives you the right to buy a stock at a predetermined price (called the strike price) therefore, as the price of the stock moves up the value of the option moves up and as the value of the stock moves down the value of the option moves down. In other words, for call options the value of the option will move in the same direction as the value of the stock. Now, intuitively thinking about a put option which gives one the right to sell a stock at a predetermined price, as the price of the stock goes up the value of the option goes down

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For example, a dealer might sell a call option on ICICI Bank, resulting in a negative ICICI BANK delta. To mitigate this exposure, he then purchases enough ICICI BANK futures to offset the short option’s negative delta. Together, the short option and long futures have a combined ICICI BANK delta of zero.

There are 2 forms of delta neutral hedging, known as Static Delta Hedging and Dynamic Delta Hedging. Static Delta Hedging means setting a position to zero delta and then leave it to unwind on its own. Dynamic Delta Hedging is to continuously resetting the delta of a position to zero.

Risks The underlying stock move strongly in one direction. In other-words the stock does not fluctuate around a given price, but

instead trends up or down. Delta neutral strategies tend to work best if the stock moves equally up and down in a Markov like process.

The volatility suddenly changes (or really the ’Implied Volatility’ changes)- Delta neutral strategies are not typically protecting against this type of change. However, the volatility can be a much more significant term in the value of an option than delta.

Counter party risk. You will be buying an option from a counter party. If, at expiry, the option is ’in the money’ you will need to exercise the option. This will require the counter party which sold you the option to be solvent and able to service their obligations.

How to make profit from Delta Neutral Strategy: 1. By the bid ask spread of the option. This is a technique only option trading market makers can execute, which is simply

buying at the bid price and simultaneously selling at the ask price, creating a net delta zero transaction and profiting from the bid/ask spread with no directional risk at all. This is also known as "Scalping".

2. By time decay. When a position is delta neutral, having 0 delta value, it is not affected by small movements made by the underlying stock, but it is still affected by time decay as the premium value of the options involved continue to decay. An option trading position can be set up to take advantage of this time decay and one such example is the Short Straddle which profits if the underlying stock remains stagnant or moves up and down insignificantly.

3. By Volatility. By executing a delta neutral position, one can profit from a change in volatility with no directional risk when the underlying stock moves insignificantly. This option trading strategy is extremely useful when implied volatility is expected to change drastically soon.

4. By creating volatile option trading strategies. Even though delta neutral positions are not affected by small changes in the underlying stock, it can still profit from large, significant moves. One example of such an option trading strategy is the Long Straddle which we mentioned above. This is because a typical delta neutral position is still Gamma positive, which increases position delta in the direction of the move, allowing the position to profit in either direction.

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Gainers & Losers – February 2015

Price Price % chg 30-Jan-15 28-Feb-15

WOCKPHARMA 1207.9 1583.7 31.1

SIEMENS 1042.2 1337.2 28.3

JINDALSTEL 158.7 195.8 23.4

BHARATFORG 1034.5 1254.4 21.3

HEXAWARE 225.7 270.6 19.9

JUBLFOOD 1390.1 1647.9 18.5

UPL 368.4 415.8 12.9

HCLTECH 1791.8 2020.7 12.8

ADANIENT 627.3 697.5 11.2

UNITECH 18.7 20.7 10.7

Price Price % chg 30-Jan-15 28-Feb-15

APOLLOTYRE 242.6 175.0 -27.8

CESC 731.3 594.0 -18.8

UNIONBANK 209.2 171.5 -18.0

RCOM 79.6 68.5 -13.9

IOB 56.9 49.1 -13.7

JUSTDIAL 1555.4 1346.5 -13.4

PTC 99.9 87.0 -13.0

PNB 189.7 165.6 -12.7

BANKINDIA 266.3 234.3 -12.0

AUROPHARMA 1230.6 1083.5 -12.0

Price Price % chg 30-Jan-15 28-Feb-15

ROLTA 110.0 191.0 73.7

IL&FSENGG 59.8 100.7 68.4

SUZLON 16.2 27.3 68.2

PIPAVAVDOC 49.2 74.6 51.6

TATAELXSI 763.9 1113.0 45.7

HINDOILEXP 32.9 47.8 45.5

INFINITE 144.7 208.9 44.4

PARSVNATH 18.0 25.9 43.6

FORTIS 114.0 162.2 42.2

IBSEC 29.1 39.6 36.3

Price Price % chg 30-Jan-15 28-Feb-15

RASOYPR 0.6 0.4 -33.3

ESSDEE 266.2 190.7 -28.4

APOLLOTYRE 242.6 175.0 -27.8

J&KBANK 152.5 113.6 -25.5

GODFRYPHLP 590.6 469.5 -20.5

ERAINFRA 8.2 6.6 -20.1

MAHSCOOTER 993.1 804.0 -19.0

BIRLACORPN 531.3 430.3 -19.0

CESC 731.3 594.0 -18.8

UNIONBANK 209.2 171.5 -18.0

Top Gainers From F&O Top Losers From F&O Top Gainers From CNX 500

Top Losers From CNX 500

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400 Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com

Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document may or may not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.