At the close, the benchmark 30-share index, BSE Sensex added 234.75 points or 1.31% at 18,205.87 with 27 components registering rise. Meanwhile, the broad based NSE Nifty went up by 69.45 or 1.29% at 5,471.85 with 43 components posting rise.

European stocks gained as Chinese manufacturing accelerated and Australia`s economy expanded at the fastest pace in three years. Asian stocks rose, with the regional benchmark index rebounding from the worst monthly performance since May, and copper climbed after China`s manufacturing quickened and Australia’s economy grew faster than economists estimated.

Sensex Movers
Infosys Technologies contributed rise of 43.4 points in the Sensex. It was followed by Reliance Industries (42.4 points), I C I C I Bank (24.53 points), Bharti Airtel (16.89 points) and Larsen & Toubro (14.29 points).

However, Housing Development Finance Corporation contributed fall of 4.48 points in the Sensex. It was followed by Hero Honda Motors (4.28 points), Oil & Natural Gas Corporation (2.81 points), Sun Pharmaceutical Industries (0.9 points) and Tata Motors (0.46 points).

Major gainers in the 30-share index were Reliance Communications (4.94%), Hindalco Industries (4.48%), Sterlite Industries (India) (3.57%), Bharti Airtel (3.10%), Tata Steel (2.94%), and D L F (2.57%).

On the other hand, Hero Honda Motors (1.85%), Housing Development Finance Corporation (0.42%), and Oil & Natural Gas Corporation (0.38%) were the major losers in the Sensex.

Mid & Small-cap Space
The BSE Mid and small caps outperformed their larger counterparts gaining 1.67% and 1.81% respectively.

The major gainers in the BSE Midcap were Alfa-Laval (India) (2.42%), Core Projects and Technologies (1.91%), Aban Offshore (1.37%), A I A Engineering (1.09%) and Alstom Projects India (0.1%).

The major gainers in the BSE Smallcap were A B G Shipyard (2.95%), Aarti Industries (2.84%), Abhishek Industries (1.68%), A B G Infralogistics (1.5%) and INEOS ABS (India) (0.56%).

Sectors in Limelight
The Metal index was at 15,429.53, up by 452.03 points or by 3.02%. The major gainers were Hindustan Zinc (6.62%), Hindalco Industries (4.48%), JSW Steel (3.73%), Jindal Steel & Power (1.81%) and National Aluminium Company (1.16%).

The Realty index was at 3,430.91, up by 99.15 points or by 2.98%. The major gainers were Anant Raj Industries (3.86%), Indiabulls Real Estate (3.69%), D B Realty (3%), Housing Development and Infrastructure (2.72%) and D L F (2.57%).

The TECk index was at 3,450.80, up by 75.93 points or by 2.25%. The major gainers were Dish TV India (6.43%), Bharti Airtel (3.1%), Reliance MediaWorks (1.81%), Mphasis (1.16%) and Idea Cellular (0.91%).

The IT index was at 5,483.34, up by 107.72 points or by 2.00%. The major gainers were Infosys Technologies (2.54%), Oracle Financial Services Software (1.47%), Tech Mahindra (1.36%), Mphasis (1.16%) and H C L Technologies (0.78%).

Market Breadth
Market breadth was positive with 2,242 advances against 771 declines.

Value and Volume Toppers
I C I C I Bank topped the value chart on the BSE with a turnover of Rs. 419.73 million. It was followed by Jet Airways (India) (Rs. 344.10 million), Sesa Goa (Rs. 271.90 million) and Larsen & Toubro (Rs. 156.01 million).

The volume chart was led by Sesa Goa with trades of over 0.83 million shares. It was followed by Jet Airways (India) (0.48 million), I C I C I Bank (0.42 million) and Natco Pharma (0.34 million).

The Sensex settled above the psychological 18,000 mark, after alternatively moving above and below that level in intraday trade. The barometer index had fallen below the psychological 18,000 mark on Friday, 27 August 2010, in a broad-based decline in share prices. The market breadth was negative, in contrast with a strong breadth earlier in the day.

Intraday volatility was high. The market surged in early trade, tracking gains in Asian stocks. The market came off the day’s high in morning trade as index heavyweight Reliance Industries (RIL) pared gains. The Sensex hit a fresh intraday low in morning trade. The market regained strength in mid-morning trade. The market held positive zone in early afternoon trade. The market came off the lower level in afternoon trade. The Sensex regained positive zone after turning negative for a brief period in mid-afternoon trade. Immense volatility was witnessed in the last one hour of trade as the Sensex alternatively swung between gains and losses.

Foreign funds today, 30 August 2010, bought shares worth a net Rs 184.41 crore, as per the provisional data from the stock exchanges. Domestic funds purchased shares worth a net Rs 68.71 crore.

NSE’s volatility index, India VIX, a gauge of traders’ perception of near-term risks in the market based on options prices, was down 6.47% at 18.36. The index had jumped 14.86% to 19.63 on Friday, 27 August 2010, a day after dropping 9.67% at 17.09, on Thursday, 26 August 2010. The index risen 11.36% to 18.92 on Wednesday, 25 August 2010. India VIX is calculated based on the S&P CNX Nifty options prices. India VIX is a measure of the market’s expectation of volatility over the next 30 calendar days.

Finance Minister Pranab Mukherjee today, 30 August 2010, tabled the Direct Tax Code (DTC) Bill in parliament. As per reports, the DTC will be effective from 1 April 2012, instead of 1 April 2010, proposed earlier by the finance minister. The taxation for short-term capital gains will be in three slabs — 5%, 10% and 15%, as per reports. Besides, the new DTC Bill will have dividend distribution tax of 5% for both equity mutual funds (MFs) and unit linked insurance policies (ULIPs), reports suggest.

The DTC bill seeks to widen income tax slabs to levy 10% tax on income between Rs 2 lakh to 5 lakh, 20% on between Rs 5-10 lakh and 30% above Rs 10 lakh. For senior citizens, tax exemption is sought to be raised to Rs 2.5 lakh from Rs 2.40 lakh. Currently, income between Rs 1.6-5 lakh attracts 10%; between Rs 5-8 lakh, 20% and beyond Rs 8 lakh, 30%.

The bill seeks to fix corporate tax at the current 30% but without surcharge and cess. With surcharge and cess, the current tax liability on corporates comes to over 33%. The legislation also proposes to increase the minimum alternate tax (MAT) from 18% to 20% of book profit of a company. It seeks to levy dividend distribution tax at 15%.

The special economic zones (SEZs) will be allowed profit linked tax deduction under DTC. Also SEZs notified as on 31 March 2012 will get tax break and that started by March 2014 will also get tax subsidy, reports suggest.

On the macro front, the government will unveil data on GDP growth for Q1 June 2010 on Tuesday, 31 August 2010. The economy expanded an annual 8.6% in Q4 March 2010.

European shares turned negative in thin trading on Monday, 30 August 2010, tracking declines in US stock futures, with persistent concerns about the sustainability of the global economic recovery weighing on investor sentiment. The key benchmark indices in France and Germany fell by between 0.32% to 0.44%. UK markets were closed for the summer bank holiday.

European confidence in the economic outlook improved to the highest in more than two years in August after surging exports helped the economy expand at the fastest pace in four years in the second quarter. An index of executive and consumer sentiment in the 16 euro nations rose to 101.8 from a revised 101.1 in July, the European Commission in Brussels said.

Japanese shares pared their early gains on Monday, 30 August 2010, as the yen strengthened from morning levels after the Bank of Japan’s (BoJ) emergency policy meeting resulted in additional easing steps that fell well within market expectations. The Nikkei 225 stock average ended 1.76% higher, after closing the morning session with a 3.1% gain, amid doubts on whether the steps that emerged from the emergency BoJ meeting would have a sustainable affect on yen strength.

As many expected, the BoJ said it would expand its current 20 trillion yen ($233 billion) quantitative-easing program to a six-month program from its current three-month time frame. It also increased the amount of funds available by 10 trillion yen. The decision to extend the easing was by an 8-1 vote, with policy board member Miyako Suda dissenting. The BoJ held its key overnight call rate steady at 0.1%.

In other Asian stocks, the key benchmark indices, China, Hong Kong, Singapore, South Korea and Taiwan were up by between 0.24% to 1.77%. However, Indonesia’s Jakarta Composite fell 0.17%.

US index futures reversed initial gains. Trading in US index futures indicated that the Dow could fall 23 points at the opening bell on Monday, 30 August 2010.

US stocks rebounded to post their best gains in nearly four weeks on Friday, 27 August 2010, overcoming initial skittishness brought on by a revenue warning from Intel and dour comments from Federal Reserve Chairman Ben Bernanke. The Dow Jones Industrial Average gained 164.84 points, or 1.65% to 10,150.65. The Standard & Poor’s 500 Index jumped 17.37 points, or 1.66% to 1,064.59. The Nasdaq Composite Index climbed 34.94 points, or 1.65% to 2,153.63.

The stock market started on a positive note after US economic growth was revised down in the second quarter, but still the reading was better than expected. Strong buying interest at a key technical level and short-covering sparked the market’s comeback, and the tone improved as investors took a more positive view of Bernanke’s comments about the economy and the Fed’s readiness to act.

Bernanke told central bankers at a conference in Jackson Hole, Wyoming the recovery has weakened more than expected but the US central bank was ready to take further steps if needed to spur the recovery. The Fed chairman downplayed concerns that the economy might slip back into recession, reassuring investors spooked by his recent comments the US economy faced “unusual uncertainty.”

Closer home, the infrastructure output grew 3.9% in July, marginally higher than annual growth of 3.6% in June, as crude oil and refinery output grew in double-digits, government data showed on Friday. In July, the electricity sector grew 3.8%, the same as the year-ago period, but cement contracted by 0.2% from 13.8% growth and finished steel shrank by 0.9% from 4% growth a year ago. Growth in coal slowed to 4.5% in July compared with 10.5% a year ago. Cement and finished steel output contracted because of heavy rains in mining areas and a slowdown in construction during the monsoon. The infrastructure sector accounts for 26.7% of industrial output. The industrial output rose 7.1% in June from a year earlier, its slowest pace in 13 months.

The food inflation declined further in the middle of this month even as prices of fuels remained steady, the latest data showed. Inflation in the Food Articles group stood at 10.05% for the week ended 14 August 2010, versus 10.35% in the previous week, the Commerce & Industry Ministry said. Inflation in the Primary Articles group stood at 14.75% in the week under review as against 14.85% in the week ended 7 August 2010. Inflation in the Fuel & Power group was unchanged at 12.57%. But, inflation in the Non-food Articles group rose to 22.20% from 21.70% in the preceding week.

The economic growth is getting more broad-based and inflationary pressures are easing and the central bank will calibrate policy action to the evolving growth-inflation dynamics, the Reserve Bank of India (RBI) governor D Subbarao said on Friday, 27 August 2010. Going forward, the Reserve Bank will calibrate policy action to the evolving growth-inflation dynamics, Subbarao said in a speech at a conference in Bangalore. Given the uncertainty in the world and the lags in monetary transmission, it is not possible to offer more precise guidance, he added.

The RBI is expected to raise key rates by 25 basis points at its 16 September 2010 policy review, after raising its lending rate by 100 basis points since March 2010.

The yield on the benchmark 10-year 2020 bond was hovering at 7.99%, higher than Friday’s (27 August 2010) close of 7.97%. The yield on the second most traded, 8.13% 2022 bond was hovering at 7.97%, lower than Friday’s (27 August 2010) close of 7.98%

The good news is that the kharif sowing has been remarkably good this year. As per reports, nearly 95 million hectares, constituting over 90% of the normal kharif area, has been brought under crop cover by 26 August 2010. This is nearly eight million hectares more than last year’s coverage. Almost all crops have gained in area, compared to last year, with paddy, coarse cereals and pulses accounting for two million hectares of additional acreage, each, reports suggest. The crop condition is generally satisfactory, as per reports. Diseases and pests have remained largely below the threshold mark in most places.

Surge in rainfall in late August 2010 has resulted in rapid rise in total water stock of 81 major reservoirs. It stood at 82.793 billion cubic metres on 26 August 2010, which is 31% above the last year’s corresponding level and just two per cent below the long-period average. However, there is still some worry about water storage in 36 dams which have hydel power units attached to them. The water level in 23 of these is still below normal.

The India Meteorological Department (IMD), in its monsoon forecast update issued on 27 August 2010, has predicted 15% above-normal rainfall in September 2010.

The south west monsoon is important for India as about 60% of the country’s farmlands are rain-fed and more than half of the workforce is employed in the agriculture sector. The weather office expects this year’s monsoon rains to be at 102% of the long-period average. If the southwest monsoon for the June-September monsoon season turns out good and if it is well distributed, it will help raise farm output, boost rural incomes and lower food inflation.

The BSE 30-share Sensex was up 33.70 points or 0.19% to 18,032.11. The Sensex rose 218.09 points at the day’s high of 18,216.50 in early trade. The index fell 38.18 points at the day’s low of 17960.23 in late trade.

The S&P CNX Nifty was up 6.75 points or 0.12% to 5,415.45.

The BSE Mid-Cap index rose 0.08%. The BSE Small-Cap index fell 0.05%. Both the indices underperformed the Sensex.

Sectoral indices on BSE were mixed. The BSE Metal index (up 1.46%), Consumer Durables index (up 0.54%), Auto index (up 0.36%), Realty index (up 0.29%), Oil & Gas index (up 0.26%), Healthcare index (up 0.24%), and PSU index (up 0.23%), outperformed the Sensex. The banking sector index Bankex (up 0.07%), Power index (down 0.01%), Capital Good index (down 0.62%), IT index (down 0.64%), and FMCG index (down 0.67%), underperformed the Sensex.

The market breadth, indicating the health of the market, was negative, in contrast with a strong breadth earlier in the day. On BSE, 1616 shares declined while 1361 shares advanced. A total of 86 shares remained unchanged.

From the 30-share Sensex pack, 17 stocks advanced while the rest of them declined.

BSE clocked turnover of Rs 4415 crore, lower than Rs 5302.60 crore on Friday, 27 August 2010.

Index heavyweight Reliance Industries (RIL) fell 0.21% to Rs 947.75, with the stock falling for the sixth straight day. The stock came off the day’s high of Rs 962. The government’s proposal to raise the minimum alternate tax (MAT) on book profits to 20% from current 18% will affect the profitability of RIL, which pay taxes under MAT.

Mukesh Ambani, chairman and promoter of Reliance Industries (RIL), recently restructured his shareholding in the company by transferring his 34% stake to a set of investment firms, which include a large number of limited liability partnerships (LLPs). The company or its promoters did not disclose the reason behind the rejig in shareholding of the promoter group. Reports suggested the move is aimed at streamlining the holding of various promoter groups in a tax-friendly manner.

Meanwhile, Reliance Industries (RIL) is reportedly close to inking a deal with global hedge fund DE Shaw to launch a $700-$800 million infrastructure fund.

RIL announced after market hours today, 30 August 2010, that through its wholly owned subsidiary — Reliance Industries Investment & Holding, it has acquired shares in EIH from Oberoi Hotels and certain other promoters of EIH, representing 14.12% of EIH, for a total consideration of Rs 1021 crore.

Shares of EIH jumped 12% to Rs 151.50. A number of other hotel shares rose on expectations room occupancy may rise as monsoon season nears end and ahead of the Commonwealth games in October 2010. Hotel Leelaventure, Indian Hotels, EIH Associated Hotels and Royal Orchid Hotels, rose by between 2.46% to 16%.

In an attempt to cash in on the peak winter season and the improved economic scenario, hoteliers are reportedly planning to increase the average room rates (ARRs) by 10-15% from September 2010 as they expect tourist traffic to improve. Reflecting a sign of improvement over last two seasons, the hotel industry is inching closer to the benchmark 2008-09 levels in terms of booking volumes, reports suggest. Although, demand in the leisure travel segment may take longer time to revive, the demand from the business segment, besides local tourists, is likely to push up occupancy rates.

Most realty stocks fell in volatile trade. HDIL, Anant Raj Industries, Phoenix Mills, DLF, Orbit Corporation fell by between 0.08% to 2.76%.

Banking stocks fell on profit taking. India’s largest bank by net profit and branch network State Bank of India fell 0.06%. The government may reportedly cut the size of a rights issue sought by the nation’s biggest lender to raise Rs 20,000 crore ($4.26 billion).

Punjab National Bank, Bank of India and Bank of Baroda fell by between 0.38% to 0.93%.

India’s second largest private sector bank by net profit HDFC Bank fell 0.43%, with the stock falling for the fourth straight day. But, India’s largest private sector bank by net profit ICICI Bank rose 1.05%.

Capital goods stocks reversed initial gains. Bharat Heavy Electricals, Thermax, SKF India, Larsen & Toubro, Siemens fell by between 0.05% to 2.23%.

Metal stocks rose as LMEX a gauge of six metals traded on the London Metal Exchange, rose 2.13% on Friday, 27 August 2010. Sterlite Industries, Hindalco Industries, Steel Authority of India, Sesa Goa, Jindal Saw, JSW Steel rose by between 0.09% to 2.22%.

Jindal Steel & Power rose 1.53%. The environment ministry has reportedly approved Jindal Power’s Rs 13000 crore power project in Chhattisgarh. Jindal Power is a unit of Jindal Steel & Power.

India’s largest steel maker by sales Tata Steel rose 3.49%, after Sahaviriya Steel Industries Public Co. (SSI), Thailand’s largest steel producer, said it plans to buy Tata Steel’s Cast Products unit in the UK for about $500 million as it seeks to turn around the unprofitable business. The stock was the top gainer from the Sensex pack. Tata Steel’s UK unit Corus signed a memorandum of understanding with SSI and aims to complete the terms of a transaction as soon as possible, Corus said in a statement. The proposed sale includes coke ovens, power generation facilities and the Redcar Blast Furnace.

Shares of software exporters extended recent losses as the government’s proposal to raise the minimum alternate tax (MAT) on book profits to 20% from current 18% will affect the profitability of most IT firms, which pay taxes under MAT. India’s second largest software services exporter by sales Infosys was down 0.47%, with stock falling for the third straight day. India’s largest software services exporter by sales TCS fell 1.06%, with the stock falling for the second straight day. But, India’s third largest software services exporter Wipro rose 0.49%, with the stock snapping a four-day slide.

Shares of state-run utility NTPC were flat. NTPC has signed a preliminary agreement with Bangladesh Power Development Board (BPDB) for developing the power sector in the neighbouring country. NTPC may consider setting up a 1,320 megawatts coal-based power plant in Bangladesh in a joint venture with BPDB, subject to techno-economic viability, NTPC said in a statement.

India’s largest oil & gas exploration firm by sales ONGC rose 2.03% extending Friday (27 August 2010)’s 2.87% gains on reports the Centre is likely to slash ONGC’s royalty obligation to the Rajasthan state government on the blocks owned by Cairn India, which will result in $350 million in saving on annual royalty outgo for ONGC. The stock today hit a 52-week high of Rs 1,360. ONGC has 30% interest in the block. The Centre will compensate the Rajasthan government for the remaining amount though the modalities of the compensation have not yet been finalised, reports suggest.

The reduction in royalty is likely to result in ONGC dropping its objections to the Vedanta-Cairn deal, reports suggest. Under a planned takeover, London-listed Vedanta on 16 August 2010 announced buying 40% to 51% in Cairn India from Cairn Energy Plc and up to 20% from the open market. The value of the deal is $9.6 billion (Rs 45120 crore).

Auto stocks rose ahead of the vehicle sales figures for the month of August due this week. Maruti Suzuki, India’s top car maker by sales rose 1.41%. Maruti’s marketing and sales chief Mayank Pareek, last week, said the company is witnessing good sales this month.

India’s top truck maker by sales Tata Motors rose 0.08% after the company’s American depository receipt, or ADR rose 2.32% to $22.08 on the New York Stock Exchange on Friday, 27 August 2010.. The company said that one of its $2,500 Nano models caught fire on 27 August 2010 in New Delhi, at least the third reported case in India this year involving the world’s cheapest car.

India’s largest bike maker by sales Hero Honda Motors rose 0.39%. The stock today turned ex-dividend for final dividend of Rs 30 per share for the year ended March 2010. India’s second largest bike maker by sales Bajaj Auto rose 0.4%.

But, India’s top tractor maker by sales Mahindra & Mahindra fell 0.25%, reversing initial gains. The company recently signed a memorandum of understanding to buy a majority stake in troubled South Korean automaker Ssangyong.

Prakash Steelage clocked the highest volume of 2.17 crore shares on BSE. Cals Refineries (2.06 crore shares), Piramal Healthcare (1.02 crore shares), Ispat Industries (95.45 lakh shares) and Gilshan Chemfill (80.43 lakh shares) were the other volume toppers in that order.

Piramal Healthcare clocked the highest turnover of Rs 501.69 crore on BSE. Prakash Steelage (Rs 483.07 crore), Tata Steel (Rs 105.13 crore), Aqua Logistics (Rs 86.25 crore) and Reliance Industries (Rs 77.81 crore) were the other turnover toppers in that order.

For investors with a cautious view of the global economy Asia financials can offer defensive qualities, in our view. We screen banks using criteria that are generally considered indicators of defensiveness.

■ We screen consensus bank data for names that have a 2011 consensus PE below 12x, consensus eps growth above 10%, a dividend yield above 3%, a beta below 1.2 and a tangible common equity ratio above 5.5%.

■ The scan highlights defensive characteristics in names in Hong Kong, China and SE Asia.

■ China names qualify because despite capital raisings, dividend yields have remained high.

■ India and Indonesia banks are clearly more growth oriented. They fail the defensive screen with low dividend yields and in the case of India with high valuations.

■ Covered names highlighted include:
■ Daegu (005270.KS, KRW 13850, Outperform)
■ BOC(HK) (2388.HK, HKD 20.55, Market Perform)
■ Hang Seng Bank (11.HK, HKD 107.60, Market Perform)
■ ICBC (1398.HK, HKD 5.74, Market Perform)
■ CCB (939.HK, HKD 6.60, Outperform)
■ BOC (3988.HK, HKD 4.04, Outperform)
■ The screen is arguably too defensive. Growth markets can continue to perform strongly, in our view, if global growth does not deteriorate further, inflation pressures in those countries remains in check and policy globally avoids a protectionist lurch.

To read the full report: ASIA STRATEGY

Modelling in risk of possible rise in tax incidence
Despite a delay in capacity addition, our FY11E EBITDA goes up by about 9% on higher merchant tariffs and more power available for spot sales. However, our FY11E EPS goes up only by 1.5% as we assume a 20% income tax rate versus 0% earlier to factor in the risk from the government’s proposals to levy an export duty or to withdraw tax exemptions to units situated in Special Economic Zones (SEZs). Our FY12E EBITDA goes down by 2.7% as we assume lower capacity utilization as new plants ramp-up. We cut our FY12E EPS by 15.9% as we assume a 20% income tax rate versus nil earlier. Ceteris Paribus, our valuation is not impacted by a higher tax incidence as we were valuing APL on a fully taxed basis.

Raising TP to INR160 – BUY
We raise our DCF-based TP by 18.5% from INR135.00 to INR160.00 , primarily on a roll-over to FY12. We continue to like APL as we believe it will be the fastest growing IPP on the back of solid execution. We value APL’s 6.6GW of projects by estimating project free cash flows for the next 15 years and then discounting it using project-specific WACCs. We consolidate the project discounted cash flows and assume a 3% terminal growth rate. For our WACC calculation, we continue to assume a cost of equity of 15% and a cost of debt of 11.5%. APL trades at our FY13E EV/EBITDA of 6.0x vs the global peers at 7.4x. At our TP, the stock would trade at an FY13E EV/EBITDA of 6.5x. Key risks stem from execution delays, higher-than-expected coal costs, lower utilization and lower-than-expected merchant tariffs.

To read the full report: ADANI POWER

• Key Debate: Reliance Industries’ MSCI India index weight converged with Infosys’ weight earlier this week. In our view, this is significant because it was only at the end of 2007 when the stocks were separated by 11% points in terms of index weight with Reliance at about 17% and Infosys below 7%. They are both now at just below 11%. What is also significant is that Morgan Stanley’s analysts rate both these stocks Equal-weight, that is almost 22% of the index accounted for by two stocks expected to move in line with the index. We see these noteworthy developments especially given that both companies are in some way linked to global growth and in other ways are solid proxies on India’s long-term growth story. The key debate is what lies in store ahead, where are these stocks in terms of what the market is pricing in and what is the market view on these stocks?

• Infosys is pricing in slightly more growth than Reliance but Reliance finds greater favor with investors:

• Infosys has handsomely outperformed Reliance since the beginning of 2008 (by 110% points).

• Infosys (Rs2,778.60) has gone through a big earnings and stock rating upgrade cycle since May 2009. For the first time (since we have data going back ten years) the sell side is rating Reliance (Rs972.25) below the market average. The earnings estimates have been recently cut by the sell-side consensus for RIL along with its stock rating.

• That said, institutional investors have been buying Reliance over Infosys over the past five quarters. This is especially true for domestic institutions who have purchased Reliance and sold Infosys since March 2009.

• Both companies have gone through a weak patch, fundamentally speaking, with ROEs dipping below trend line. The prospective estimates suggest a recovery with RIL expected to beat INFY on earnings growth (3-year CAGR of 23% vs. 18%).

• Our single stage implied growth model suggests that the market is implying INFY’s long-term EPS growth to be 15.2% vs. 12.2% for RIL. Thus, RIL is a tad more attractively valued although this has to be seen in the context of its cyclical business mix.

• Conclusion: Both these stocks appear to be set for a period of consolidation relative to the market and maybe even some downside. On a five-year basis, both stocks represent high quality investments though from a top-down perspective we think the scales are tilted slightly in favor of RIL given valuations and earnings growth prospects. Investors with a 12-month horizon could be better off in more attractive large cap stocks such as SBI (Rs2784), DLF (Rs315.75), L&T (Rs1804.80), Adani Power (Rs141.30), Ranbaxy (Rs445.20) and Bharti (Rs317.55) – all rated OW.

To read the full report: INDIA STRATEGY

A state of the-art manufacturing facility was set up at Nandesari, Baroda (45 minutes by air from Mumbai) in 1999, to manufacture high value fragrance chemicals and fragrance chemical intermediates based on inhouse technology. Products manufactured at this plant are of international standard and are well accepted in markets abroad and at home.

CAPL has two plants – first at Bareilly, UP & second at Baroda, Gujarat. CAPL also has a dedicated in-house Research Center CAPL has been witnessing major change in the performance and profitability since the change in the management in 2008. The company was taken over in 2008, via stake purchase and open offer @ Rs 167/share.

The new promoters are leaders in fragrance industry – Oriental Aromatics Ltd. Since then the turnover has increased from 105 Cr to 165 Cr and NP from 0.49 Cr to 10.18 Cr.

Camphor has manufacturing facilities in Bareilly (Uttar Pradesh) and Nandesari (Gujarat). Its product range includes fragrance chemicals such as amberone, pharmaceutical products such as camphor and terpineols, aromatic chemicals.

To read the full report: CAPL

■ 1QFY11 results impress on EBITDA, but disappoint on PAT
GMR Infra recorded consolidated normalised PAT post minority of Rs24m (-89% yoy, -95% qoq) on net sales of Rs12.3bn (+5% yoy, +9% qoq). Even though EBITDA was 11% ahead of our estimate, growing 17% yoy and 20% qoq to Rs3.78bn, PAT disappointed due to FX translation impact, a sharp decline in other income and higher taxes. In terms of divisional performance, all except roads and others recorded qoq dips in EBIT, while, on a yoy basis, airports and roads recorded a sharp increase.

■ Delay in DIAL ramp-up impacts financials
We halve our FY11 EPS forecast, as we build in the more than three-month delay in DIAL becoming fully operational, the change in our revenue-recognition method from assured returns to actual sales, and higher interest and depreciation costs for GMR’s Turkey airport. Our FY12F EPS cut is limited to 25%, as the Vemagiri power-plant expansion is ahead of schedule and operations are likely to start six months early, in October 2011. These EPS cuts have little impact on our DCF value for individual projects, as airport returns are assured by the government for the time value of money. We value the 50% stake in Intergen at the restructured equity investment of Rs15.8bn (Rs8.5bn earlier), which raises our SOTP-based target to Rs79 (from Rs78.40). Upside could come from pending financial closure of projects that we haven’t valued, like Male International Airport and 2,800MW in power projects.

■ Intergen overhang is behind us, focus on domestic project execution. Buy
We expect sales traction to improve sharply in the coming months, with the commissioning of GMR Infra’s largest asset, DIAL Terminal 3, and GMR Energy’s gas-based Kakinada power plant. For the medium term, GMR’s plan to sell its 50% stake in Intergen and deploy it in the domestic power business should help drive ROE higher. We expect a sharp ROE uptrend in FY13, which puts GMR at only 1.18x FY13F PB with low equity-dilution risk following the improvement in its net debt/equity to 1.43x in June 2010. We reiterate Buy on 27% upside.

To read the full report: GMR INFRASTRUCTURE

■ What’s new: Our proprietary input cost index has risen 8% YoY with prices of palm oil up 14% and copra up 4% over the past month. Higher input costs further squeeze FMCG companies in an already intensely competitive environment. We estimate that an inability to pass on input costs could erode operating margins of the HPC companies under our coverage by 90bps in F11.

■ Where we differ: Valuations of Indian consumer companies are the highest in four years (25x F11E earnings vs. last four-year average of 22x). Part of the outperformance can be explained by an investor penchant for consumer stocks in emerging economies in the current volatile macro environment – the MSCI AxJ consumer index has outperformed the MSCI AxJ index by 15% over the past year. However, with an improving global economy and thus increased appetite for risk, Indian consumer stocks may underperform. We believe investors are factoring in sporadic and short-lived competition in the domestic HPC segment, while we expect competition to persist, since it is driven by companies with long-term commitments and strong balance sheets.

To read the full report: INDIA CONSUMER

■ Stock trading closer to bear-case value — RIL now trades close to our bear-case value of Rs930/sh (5% downside from current levels), offering attractive riskreward. Our bear-case value is based on an avg of: (1) our bear-case SOTP that assumes lower GRMs of US$8.0/8.5 over FY11/12E, steeper yoy petchem EBITDA declines of 12/7% over the same period, and E&P valued at Rs364/sh, a moderate 15% premium to NAV, and (2) our bear-case P/E-based valn methodology that assumes 8-14% lower earnings over FY11-12E and a lower 14x Sep-11E multiple.

■ Structural changes in gas sector — Following recent, higher prices set by the Gov’t for ONGC’s production from new fields (US$4.75-5.25), we expect gas prices from other domestic sources (e.g. KG) to also structurally move higher driven by: 1) cheap domestic gas (vs. expensive LNG) remaining scarce, with growth backended, 2) demand continuing to substantially exceed supply, 3) increasing acceptability of higher priced LNG (e.g. NTPC). Customers, however, will continue to benefit, with economics vs. naphtha/FO still remaining extremely compelling.

■ US$4.2 now a base price…possible price surprise? — Post the APM price hike, US$4.2 is now a base price level of domestic gas, with gas from all other sources (ex-KG) now priced higher (Figure 15). With rising E&P costs and demand for higher prices to exploit new/marginal fields, there exists a case for the benchmark to move higher. Given the Government’s recent moves, we believe any willingness on its part to implement higher prices for incremental KG production (possibly over the next 6-9 months) could lead to reserve value enhancements and potential earnings upsides (~3-5%) for RIL, driving stock performance.

To read the full report: RIL

Index heavyweight Reliance Industries (RIL) edged lower after a hike in the rate of minimum alternate tax. The BSE 30-share Sensex lost 227.94 points or 1.25%, off close to 250 points from the day’s high and up close to 55 points from the day’s low. The Sensex fell below the psychological 18000 mark. Except the BSE Oil & Gas index, all the other sectoral indices on BSE fell.

Intraday volatility was high. The market recovered from lower level at the onset of the trading session. The intraday recovery gathered strength in morning trade as Asian stocks came off lows, led by recovery in Japanese shares. The market moved between positive and negative zone after hitting fresh intraday high in mid-morning trade. The Sensex hit a fresh intraday high mid-morning trade. The market once again slipped into the red later. The market extended losses to hit fresh intraday lows in mid-afternoon trade as European stocks extended initial losses and as US index futures reversed initial gains. The market slumped in late trade.

NSE’s volatility index, India VIX, a gauge of traders’ perception of near-term risks in the market based on options prices, jumped 14.86% to 19.63. The index had lost 9.67% at 17.09, on Thursday, 26 August 2010, a day after it had risen 11.36% to 18.92 on Wednesday, 25 August 2010. The index had lost 0.88% to 16.99 on Tuesday, 24 August 2010. India VIX is calculated based on the S&P CNX Nifty options prices. India VIX is a measure of the market’s expectation of volatility over the next 30 calendar days.

The latest data from global fund tracker EPFR Global showed investors have become cautious about emerging market equities, an asset class that has been a standout for the past year. Global emerging market equity funds had net inflows of $322 million in the week ended 25 August 2010, the lowest total since a streak of inflows began 13 weeks ago. Asia-Pacific equity funds were relatively hard hit, posting outflows of $289 million for the week, on fears a US slowdown would hurt the region’s exporters.

The finance ministry and the Reserve Bank of India (RBI) have reportedly started discussions to raise the cap on foreign fund investments in debt from $20 billion a year. The talks come at a time when India needs strong capital inflows to finance a high current account deficit, a newspaper report said. Foreign institutional investors (FIIs) are currently allowed to invest up to $20 billion every year in bonds — $15 billion in government bonds and $5 billion in corporate bonds. They have poured in $16 billion this fiscal, reports suggest. The limit on investment in government bonds has already been reached, as per reports.

Meanwhile, the Union Cabinet on Thursday approved a new set of direct tax rules that propose to raise income tax exemption limit from 1.6 lakh to 2 lakh, leaving more money in the hands of individuals, and a lower tax rate for companies. The much-awaited Direct Taxes Code, or DTC, Bill, which seeks to replace the nearly 50-year-old income tax law, is likely to be introduced in Parliament on Monday, 30 August 2010, and may then be referred to a select committee of members of both houses of Parliament.

The basic exemption limit is proposed to be raised to 2 lakh from the current 1.6 lakh and corporate tax rate for both domestic and foreign companies is proposed at 30%, finance minister Pranab Mukherjee said after the meeting of the Union Cabinet. Senior citizens and women will enjoy a higher exemption of up to 2.5 lakh. There will be no surcharge or cess on companies, thereby bringing the corporate tax rate to 30% from present 34%. The new changes in the tax rates, expected to come into effect from 1 April 2011, could lead to some loss in revenue and raise the government’s deficit.

The new code proposes three income tax slabs — income of up to 2-5 lakh will face 10%, 5-10 lakh will attract 20% and income over 10 lakh will face tax at the rate of 30%. The housing loan exemption of 1.5 lakh would also be available to individual taxpayers on the interest component.

However, the government proposes to raise the minimum alternate tax (MAT) on book profits to 20% from current 18%. The move will be a big blow for Reliance Industries (RIL) and a host of IT and infrastructure companies that pay MAT.

Investors are keenly watching data on sowing for the kharif harvest. Overall, nearly 90% of the total normal kharif acreage was seeded till 20 August 2010 and the standing crops are reportedly in good shape. The southwest monsoon rains were 29% above normal in the week to 25 August 2010. There were good showers over Bihar, Jharkhand and West Bengal, where the seasonal rains were scanty until last week. That will help farmers in these areas grow coarse cereals, pulses and fodder.

The cumulative rainfall during the period from 1 June 2010 to 25 August 2010 was 2% below normal. Rainfall over the country as a whole for the second half (August to September) of the 2010 southwest monsoon season is likely to be normal, according to the India Meteorological Department (IMD). Quantitatively, rainfall for the country as a whole during the period August-September 2010 is likely to be 107% of long period average (LPA) with a model error of plus/minus 7%, according to the weather office.

The revival in monsoon rains has raised water level in reservoirs to 55% of capacity, up 6 percentage points in the past week. More water in reservoirs will boost the supply of hydropower, which shares for a quarter of India’s total generation capacity, and help irrigate crops even after the monsoon season.

The south west monsoon is important for India as about 60% of the country’s farmlands are rain-fed and more than half of the workforce is employed in the agriculture sector. The weather office expects this year’s monsoon rains to be at 102% of the long-period average. If the southwest monsoon for the June-September monsoon season turns out good and if it is well distributed, it will help raise farm output, boost rural incomes and lower food inflation.

European stocks edged higher in volatile trade on Friday, as investors remained wary ahead of economic data that will give an insight into the health of the U.S. economy, and a speech on the economic outlook by Federal Reserve Chairman Ben Bernanke. The key benchmark indices in France, Germany and UK were up by between 0.06% to 0.13%.

Britain’s economy grew faster than originally estimated in the second quarter of this year, hitting its fastest rate of growth in more than nine years, official data showed on Friday. The Office for National Statistics said the economy grew by 1.2% in the three months to June, up from its preliminary estimate of 1.1%.

Japanese stocks led a recovery in Asian stocks on Friday, 27 August 2010. The Nikkei 225 Average rebounded from a 1% loss earlier in the day to end 0.95% higher on hopes of government action to stem the rise in the yen. Shares of Japanese exporters rose as the yen declined on reports Japanese Prime Minister Naoto Kan is set to speak with reporters later in the day to discuss steps to boost the economy and possibly measures to ease the yen’s recent strength.

Japanese Prime Minister Naoto Kan told reporters on Friday, 27 August 2010, that he was ready to take decisive action in currency markets when needed, news reports said. Kan said excessive currency moves can undermine financial stability and that he hoped the Bank of Japan would take appropriate steps on monetary policy, agency reports said. Japanese authorities have been seeking to arrest the rise of the soaring Japanese yen, which hit a 15-year high versus the US dollar earlier this week.

In other Asian markets, the key benchmark indices, China, Singapore and Taiwan were up by between 0.28% to 0.44%. But, some other Asian markets remained in the red as investors nervously awaited a speech by Federal Reserve Chairman Ben Bernanke later in the global day amid growing worries over the pace of the US economic recovery. The key benchmark indices in Hong Kong, Indonesia and South Korea were down by between 0.01% to 1.28%.

In US market action on Thursday, 26 August 2010, the Dow Jones Industrial Average closed below 10,000, a day ahead of an expected downward revision in US second-quarter economic growth and ahead of a speech by Federal Reserve Chairman Ben Bernanke. Stocks initially rose on data showing first-time claims for jobless benefits fell more than expected last week, but the number was still too high to signal a shift in the weak labor market. The Dow Jones Industrial Average fell 74.25 points, or 0.74% to 9,985.81. The Standard & Poor’s 500 Index shed 8.11 points, or 0.77% to 1,047.22. The Nasdaq Composite Index lost 22.85 points, or 1.07% to 2,118.69.

Trading in US index futures indicated that the Dow could gain 32 points at the opening bell on Friday, 27 August 2010. US index futures swung between gains and losses

Closer home, on macro front, food inflation declined further in the middle of this month even as prices of fuels remained steady, the latest data showed. Inflation in the Food Articles group stood at 10.05% for the week ended 14 August 2010, versus 10.35% in the previous week, the Commerce & Industry Ministry said. Inflation in the Primary Articles group stood at 14.75% in the week under review as against 14.85% in the week ended 7 August 2010. Inflation in the Fuel & Power group was unchanged at 12.57%. But, inflation in the Non-food Articles group rose to 22.20% from 21.70% in the preceding week.

The Reserve Bank of India (RBI) said in its annual report for 2009-2010 released early this week that the relative price variability has declined since November 2009 despite inflation remaining high, which indicates that the inflation has become increasingly generalised, and hence, requiring appropriate monetary policy actions to anchor inflation expectations. Persistent large fiscal deficit has several adverse macroeconomic risks, ranging from higher inflation to lower savings, crowding-out pressures on private investment, decline in potential output, and worsening of external imbalances, the RBI said in the report.

In a globalised world, a congenial global economic environment and a sustainable balance of payments position are critical for achieving the policy goal of stable growth, the RBI said in the annual report. Despite lower trade deficit, the decline in invisibles surplus led to a higher current account deficit of 2.9% of GDP during 2009-10 as compared with 2.4% of GDP a year ago. A higher current account deficit led to stronger absorption of foreign capital, the RBI said.

Given the stronger growth outlook of India and the probability of monetary exit being delayed by the advanced economies, capital inflows could be expected to accelerate, which will have to be managed, as in the past, the central bank said. The government’s borrowing programme for 2010-11 has to be managed, keeping in view the pressure on yield from the elevated inflation, gradual withdrawal of excess liquidity and stronger pick-up in the private sector credit demand, the RBI said.

Going forward, as the monetary position is normalised, addressing structural constraints in several critical sectors is necessary to sustain growth and also contain supply side risks to inflation. The Reserve Bank of India has stated its commitment to containing inflation through its calibrated monetary policy normalisation, with clarity on the direction of the policy rates in the near-term as well as timely actions in cautious steps based on careful assessment of risks to both inflation and growth.

The conduct of monetary policy of the Reserve Bank of India, while being driven by the domestic outlook, will have to recognise the possibility of sudden changes in the global outlook, the central bank said. While managing global shocks, India will also have to increase its resilience and productivity levels so as to strengthen its position in the global economy, the RBI annual report said.

The infrastructure gap of India, both in relation to other major countries and its own growing demand, has been a key factor affecting the overall productivity of investments. The requirement of high initial capital outlay, that too over longer terms, necessitates measures to address the financing constraint to capacity expansion in infrastructure, the central bank said.

Bond yields declined today, 27 August 2010. The yield on the benchmark 10-year 2020 bond was hovering at 7.97%, lower than Thursday’s (26 August 2010) close of 8.03%. The yield on the second most traded, 8.13% 2022 bond was hovering at 7.98%, slightly higher than Thursday’s (26 August 2010) close of 8%.

The Reserve Bank of India (RBI) at its Q1 monetary policy on 27 July 2010 raised a key lending rate by 25 basis points to curb surging inflation. With growth taking firm hold, the balance of policy stance has to shift decisively to containing inflation and anchoring inflationary expectations, the RBI said at that time. The RBI also at that time signaled its strong preference for tight liquidity, saying it would ensure that excess liquidity in the system doesn’t dilute the effectiveness of policy-rate actions.

Coming back to stocks, foreign funds sold shares worth Rs 276.62 crore on Thursday, 26 August 2010, as per provisional data from the stock exchanges. Domestic funds bought shares worth Rs 38.93 crore on that day.

The BSE 30-share Sensex was down 227.94 points or 1.25% to 17,998.41. The Sensex rose 22.01 points at the day’s high of 18,248.36 in mid-morning trade. The index fell 282.19 points at the day’s low of 17,944.16 in late trade.

The S&P CNX Nifty was down 69.20 points or 1.26% to 5,408.70.

The market breadth, indicating the health of the market, was weak in contrast with positive breadth earlier in the day. On BSE, 2094 shares declined while 886 shares advanced. A total of 81 shares remained unchanged.

From the 30-share Sensex pack, 26 stocks declined while the rest of them advanced.

The BSE Mid-Cap index fell 0.95%, outperforming the Sensex. The BSE Small-Cap index fell 1.38%. It underperformed the Sensex.

BSE clocked turnover of Rs 5276 crore, higher than Rs 4862.55 crore on Thursday, 26 August 2010.

Index heavyweight Reliance Industries (RIL) fell 0.73% to Rs 949.75, with the stock falling for the fifth straight day. The stock hit a high of Rs 970 and a low of Rs 946.65. The government’s proposal to raise the minimum alternate tax (MAT) on book profits to 20% from current 18% will affect the profitability of the company. RIL pays MAT.

Mukesh Ambani, chairman and promoter of Reliance Industries (RIL), recently restructured his shareholding in the company by transferring his 34% stake to a set of investment firms, which include a large number of limited liability partnerships (LLPs). The company or its promoters did not disclose the reason behind the rejig in shareholding of the promoter group. Reports suggested the move is aimed at streamlining the holding of various promoter groups in a tax-friendly manner.

Meanwhile, Reliance Industries is reportedly close to inking a deal with global hedge fund DE Shaw to launch a $700-$800 million infrastructure fund.

India’s largest oil & gas exploration firm by sales ONGC rose 2.87% after the company discovered oil in a block on the western onshore basin, which the company had won under the sixth round of the New Exploration Licensing Policy. Meanwhile, the company’s board approved investment of Rs 372.11 crore for development of BHE and BH-35 Area in western offshore. The stock was the top gainer from the Sensex pack.

PSU OMCs rose as crude oil fell, heading for its third weekly decline on lingering doubts over the outlook for US oil demand. US crude for delivery in October fell 17 cents to $73.19 a barrel, after touching an intraday trough of $70.76 on Wednesday, 25 August 2010, the lowest price since early June. Prices have slid about $10 from a peak near $83 on 4 August 2010.

HPCL, Indian Oil Corporation (IOC) and BPCL rose by between 1.29% to 1.89%. For Indian state-run oil refining and marketing firms, the recent steep fall in crude oil prices augurs well as it will reduce under-recoveries on domestic sale of diesel, LPG and kerosene at government controlled prices. The government recently decontrolled petrol prices.

Most metal stocks reversed initial gains. Sterlite Industries, Hindustan Zinc, Hindalco Industries, Steel Authority of India, Sesa Goa, Jindal Saw, JSW Steel, Jindal Steel & Power and National Aluminum Company fell by between 0.07% to 2.38%.

LMEX a gauge of six metals traded on the London Metal Exchange, rose 2.63% on Thursday, 26 August 2010.

Realty stocks reversed initial gains. Omaxe, HDIL, Anant Raj Industries, Unitech, Parsvnath Developers, Sobha Developers, Indiabulls Real Estate, DLF fell by between 0.35 % to 3.84%.

Shares of software exporters fell after the Union Cabinet approved the new Direct Taxes Code bill wherein it proposed a hike in the rate of minimum alternate tax on book profits to 20% from the prevailing 18%. India’s second largest software services exporter by sales Infosys was down 1.98%, with stock falling for the second straight day. India’s largest software services exporter by sales TCS fell 2.1%. India’s third largest software services exporter Wipro was down 0.88%, with the stock falling for the fourth straight day.

Banking stocks fell on profit taking. India’s largest bank by net profit and branch network State Bank of India fell 2.16%. Chairman O.P. Bhatt said on Wednesday, 25 August 2010, the bank has no plans to raise lending rates further in the short term.

Punjab National Bank, Bank of India and Bank of Baroda fell by between 1.66% to 3.37%.

India’s largest private sector bank by net profit ICICI Bank fell 2.84%. India’s second largest private sector bank by net profit HDFC Bank fell 1.7%, with the stock falling for the third straight day.

FMCG stocks also fell on profit taking. ITC, Hindustan Unilever, Nestle India, Marico, Dabur India and Britannia Industries fell by between 0.5% to 2.39%.

Consumer durables stocks reversed initial gains. Videocon Industries, Titan Industries, Gitanjali Gems, Blue Star and Rajesh Exports fell by between 0.14% to 3.36%.

Auto stocks reversed initial gains. Maruti Suzuki, India’s top car maker by sales fell 0.73%. Maruti’s marketing and sales chief Mayank Pareek on Thursday said the company is witnessing good sales this month.

India’s top truck maker by sales Tata Motors fell 0.7%. Chief Executive Carl-Peter Forster on Thursday, 26 August 2010, said Tata Motors may raise up to $1 billion through a mix of instruments. Tata Motors had said in June it would raise about Rs 4700 crore through shares, bonds, debentures and other equity-linked instruments to cut debt and grow its business

India’s largest bike maker by sales Hero Honda Motors fell 3.18%. India’s second largest bike maker by sales Bajaj Auto was flat.

India’s top tractor maker by sales Mahindra & Mahindra fell 1.4%. The company recently signed a memorandum of understanding to buy a majority stake in troubled South Korean automaker Ssangyong

Cals Refineries clocked the highest volume of 2.47 crore shares on BSE. FCS Software (1.76 crore shares), Prakash Steelage (1.53 crore shares), Ispat Industries (1.15 crore shares) and Sanraa Media (1.11 crore shares) were the other volume toppers in that order.

Piramal Healthcare clocked the highest turnover of Rs 497.31 crore on BSE. Prakash Steelage (Rs 337.34 crore), Great Offshore (Rs 179.06 crore), Tata Steel (Rs 135.64 crore) and Reliance Industries (Rs 127.22 crore) were the other turnover toppers in that order.