Report by Nirmal Bang:

Market Analysis

Markets ended flat amidst concerns about rainfall deficit & drought being declared across various villages of the country. The market was highly volatile during the month with global positives being weighed down by the monsoon concerns. Sensex ended almost flat down 0.02% & Nifty gaining a meager 0.55%. The selling pressure from the FIIs to the tune of Rs.3767 crs was fully absorbed by the Domestic Institutions who were buyers to the tune of Rs.4985 crs. Midcaps & Small caps however outperformed the benchmark indices gaining 5.6% & 12.75% respectively.

Sector Analysis

Realty Sector outperformed all other indices gaining 12.92% on the back revival in demand across different housing segments & firming up of property prices across key markets within the country. IT sector was the other major gainer, up by 5.31% during the month amidst signs of revival in the major developed countries. Capital goods gained 4.41% in the current month amidst revival of demand in the sector. Oil & Gas was up by 3.11% during the month on back of positives in the major players within the sector. Auto continued its good run in the markets gaining 2.88% during the month on the back of excellent monthly sales figure for the month & expectations that the festival season ahead will bring further revival in the sales numbers in the coming months. Healthcare & Power were the only other sectors to end in green gaining 2.52% & 0.72% respectively. FMCG was the major loser during the month losing 6.74% on the back of concerns that a deficient monsoon may hamper demand & higher raw material prices will reduce margins.

Fund Activity

FII’s continued their selling spree in the month of August 2009. FII”s sold shares worth Rs. 3767 crs on increasing concerns of drought in the country and valuation concerns. However DII’s lent support to the markets and remained net buyers for consecutive last three months. DII’s were net buyers of Rs. 4985 crs. Overall the secondary markets witnessed a net inflow of only Rs. 1218 crs on the institutional front.

Currency Fluctuations

The rupee fell to its lowest level since mid-July as weaker global equities raised worries foreign investors may start pulling out funds from emerging market assets including local shares. The partially convertible rupee closed at Rs 48.83/84 per dollar. The unit`s fall in August was its biggest since its 4.4% decline in February, which came just before it hit its record low of Rs 52.2 in early March. Foreign funds moving in and out of the stock market are a key driver of the rupee. Foreign investors have bought a net $8.3 billion worth of local shares so far in 2009, following net sales of more than $13 billion last year. Dealers said data showing the economy grew 6.1% in the June quarter from a year earlier had little impact as it was in line with expectations and a weak monsoon has confused the outlook. We believe that gains in the dollar versus major currencies also hurt rupee sentiment. The dollar index, a gauge of the US unit`s performance against six majors, was up 0.2%.

The yen got an early boost on the clear-as-day election result, which eliminated any uncertainty about Japan`s political leadership. The sharp selloff in Shanghai equities also supported the yen as dealers sought a safe haven.

News that China would act to restrict redundant investments underscored concerns about the global economy and triggered safehaven buying of the US dollar which leads to the gain of dollar against major currencies.

International Markets

During the month of August we witnessed different country equity indices moving to different directions. Dow, FTSE, Nikkei were up but Hang Seng, Straits and Taiwan were down.

Japanese factory output grew more than expected in July and is poised to expand for a second quarter as global stimulus boosts exports, supporting a brighter central bank assessment of the deflation-bound economy. The economy was showing some signs of a recovery, Bank of Japan Governor Masaaki Shirakawa said, and a decline in consumer prices was likely to slow as the economy recovers in line the central bank projections.

The Dow Jones industrial average closed up 324 points, or 3.54%, at 9496. Orders for long-lasting US manufactured goods registered the biggest advance since July 2007, but excluding transportation goods, orders for durables were slightly below expectations. Economic data in Europe showed further signs of recovery, as did a report showing US new home sales jumped in July to their fastest pace in 10 months. US Treasuries edged higher as solid demand at a $39 billion auction of five-year government debt offset data suggesting the moribund US housing market was stabilizing.

Hong Kong’s Hang Seng index declined 924 points, or 4.46% to 19789, while Tokyo’s Nikkei 225 average was up by 213 points or 2.06%, to 10541.

BSE 500 Review

Gainers

For the month of August-09 the major gainers were HOEC, Ganesh housing, KPIT Infosys, Aban Offshore and Fresenius Kabi Oncology Ltd. Whereas the major losers were REI Agro, TVS Motor Co, Cals Refineries, Baja Finserv, REI Six Ten Retail Ltd.

HOEC gained 159.1% in the month of August-09

Ganesh Housing increased 64.68% in the month of August-09 as the economic conditions improve and demand for real estate increases thereby benefiting Ganesh Housing Ltd. Furthermore smart rally of 12.92% in the realty index for the month of August 2009 due to low valuations also helped the stock move up.

KPIT Infosys increased by 52.24% during Aug-09. The company declared strong set of results for quarter ended June 2009. Although the top line declined to Rs. 172.8 crs in Q1 FY2010 as

Aban Offshore gained 56.92% in the month of August-09. Aban offshore has signed contract with duration of 3 years for 4 of its jack up rigs. Wherein 3 rigs will be deployed in the Middle East and 1 will be deployed in Latin America. The company has signed this contract at a day rate of approximately US$183000 for three rigs deployed in Middle East. Whereas the rig in Latin America has been deployed at a day rate of approximately US$100000. The day rates the company has achieved are at a premium to the current prevailing day rates thereby indicating demand revival going forward.

Fresenius Kabi Oncology Ltd gained 49.43% in the month of Aug-09.

Losers

REI Agro was down by 26.54% in the month of August 09. The company in a board meeting has approved to increase it authorized capital from Rs. 120 crs to Rs. 200 crs. The borrowing limit has been increased from Rs. 5000 crs to Rs, 10000 crs. Furthermore the company has authorized to issue 29945550 equity shares of Re 1/-  each at a price of Rs 61/-  per equity share aggregating to a Issue size of Rs 182.66 crs indicating dilution of equity.

TVS Motor Co declined by 18.67% in the month of August 09. As the larger competitors like Hero Honda and Bajaj Auto came out with new models during the month whereas TVS has not launched any new models during the month of August. Thereby underperforming the overall two wheeler segment in the month of August 2009.

Cals Refineries was down by 17.81% in the month of August 09þ

Bajaj Finserv declined by 17.64% in the month of August 09.

REI Six Ten was down by 14.39% in the month of August 09. The company has given in principal approval for issue of Convertible Debentures up to Rs 100 Crs. Furthermore, the company has approved to increase in authorized capital from Rs. 35.69 Crs to Rs. 50 Crs. compared to Rs. 175.9 crs in Q1 FY09. However the profitability increased sharply. The company reported PAT of Rs. 22.4 crs in Q1 FY10 as compared to Rs. 12.9 crs in Q1 FY09.

Economic Activity for the month of August 2009

Indian economy grew at 6.1% in the Q1FY10, the highest quarterly growth since the onset of the global economic slowdown in September 2008, primarily due to expansion in manufacturing and services sectors. However the drought situation in the country is a cause for concern. Till the end of August rainfall has been 25% below normal. The next two quarters may see a lower growth than 6.01% due to the impact of poor monsoons. Another concerned is the mounting inflationary pressures, which would force the RBI to roll back monetary expansion. The consumer price index for the industrial workers rose to11.89% in July, a sharp increase from Junes 9.29%. Whole sale price index contracted for the month contracted at - 0.95% as compared to - 1.53% fortnights ago. The Index industrial production continued to accelerate at a significant 7.8% growth in June09 against 5.8% in June 08. A strong 7.3% growth in manufacturing sector accompanied by a robust 15.4% and 8% growth in mining and electricity sectors succeeded to push the overall industrial production growth to a 15 month high in June 09. Also rate of decline in exports moderated to 28% in July compared to 27.2% dip in June, suggesting some sign of stabilization in the exports demand. Contraction in imports was around 37%. India`s fiscal deficit reached a 40% of the target set for the fiscal year in the first 4 months as the government doled out a number of incentives to stimulated the economy. With drought forcing government to increase its spending, Finance Minister Mr. Mukherjee revised direct tax collection target to 4, 00,000 cores an increase of 8% over 3,70,000 crores mentioned in the budget.

Due to the government`s intervention and hefty stimulus packages across the countries, global economy appears to be stabilizing; however the degree of stabilization varies across countries. US GDP fell by 1.0% in the second quarter against the record fall of 6.4% in the first quarter, showing signs of easing. A better performance in the second quarter was on the back of an improved nonresidential fixed investment, exports, and private inventory investment, coupled with huge federal spending.

China economy grew by an impressive 7.9% during the quarter, up from 6.1% recorded in previous quarter. Chinese Industrial output grew by more than 10% YOY basis in June 2009 reflecting pickup in production activities in factories. However the worst came from UK which posted contraction of 5.6% in the second quarter resulting in the highest annual contraction in the recorded history of UK, dampening the hopes of early revival. However, based on seasonally adjusted quarterly series, there was an improvement over previous quarter as GDP dropped by an annualized 3.2% in the second quarter. Japans GDP expanded at an annual rate of 3.7% in the second quarter, first growth in five quarters.

Outlook For September 2009

We had seen in the recent past that across the world including US and Europe economies are improving. In US ISM (institute for supply management) Manufacturing index for August month has come at 52.9, first time over 50 in last 19 months( ISMA over 50 indicate growth in economy). Even housing data, auto sales all are showing improvement.

But equity markets across the world are not able to perform.

Reason,
1. Valuation has factored in this improvement
2. China is controlling easy landing growth and
3. Fear of sustainability of the improvement if the stimulus packages provided by most of the government to their economy are withdrawn.

Apart from above reasons, for India one more reason for not performance of equity market is poor monsoon.

What is positive for India in the near term is Sep-09 quarterly result are expected to be better and government is aggressively pursuing various development and policy measures.

Since valuation in Indian equity market is also stretched for near term we do not see secular up move emerging tile the earning increases.

If we see in above chart, during the last Bull Run between 2003 - 2008, trailing Price earning of Nifty was not able to go up above 22 mark except in the last lag when it breached that and went upto 28 marks. Similarly we do not see in the present scenario trailing PE crossing above 22 marks right now it is already at 21.02.

We feel Nifty upside is capped at 4800-4900 in September month and we may see a good correction during the month based on international event.

Flashback Aug`2009

The Aug series opened at 33,460 cr. as against 29,483 cr. last month, wherein the Nifty future was 11,345 cr. and Stock futures were 22,115 cr. compared to Nifty Future 9,668 cr. and Stock Future 19,818 cr. last month. The rollovers in the Aug series were healthy as the quarter results were very positive and the global market trend was also very strong.

During the first week of Aug we saw the Nifty touching a new 2009 high of 4,731 but the markets could not sustain the higher level and corrected sharply. This correction lasted for some time where we saw nifty correcting at-least 8% from the intermediate top. But in the third week of Aug we saw the markets taking a U-turn on the day of Adani Power listing. It did not see any extraordinary listing. It listed at Rs 105 on the BSE and closed just near to the issue price of Rs. 100.

Huge buying continued from 20th Aug and major action was seen in the midcap and small cap stocks which kept the momentum going. The main reason for the uplift of the market could be to keep the market mood strong for the forthcoming NHPC listing. The GDP numbers for the first quarter were announced stood at 6.1% versus growth of 5.8% in the previous quarter and 7.8% in Q1 of last year. There was huge volatility seen in the Indian market on the back of selling witnessed in the Chinese markets. But the out-performer was auto, IT and real estate counters. For the month both the indices closed up 3%. During the Aug month, the FIIs remained net sellers of Rs. 3,767 cr. while domestic institutions were aggressive net buyers of Rs. 4,984 cr. which kept the momentum going.

Road ahead Sept`2009

The Sept series opened at 35,613 cr. as against 33,460 cr. last month, where in the Nifty future was at 11,852 cr. and Stock futures were at 23,761 cr. The Sept month once again continues to be a challenging month as markets are trading at the higher end of the channel from where we have seen huge selling pressure emerging in the Aug month. NHPC, India's largest hydro power generator, disappointed the street on its debut. It started at Rs 39 on the BSE and traded around Rs 37 for majority of the session and closed at 36.70.

Both Adani and NHPC have disappointed the streets and going forward we see very less positive surprise for the market. The short-term trend remains cautious as the global markets are also not showing any positive signs and the rising commodity prices and draught situation will remain a great concern.

The Chinese market, Shanghai Comp which is creating lot of turmoil for the entire global market is currently giving a strong bearish signal. The 200-day moving average is placed at 2,470 and the index is currently at 2,680. The short-term outlook looks very pathetic and in the near term we could see 2,300.

The outlook for Sept series remains slightly cautious as global markets are not healthy and the major two IPO which got listed were very disappointed. The markets may now enter a consolidation phase over the medium-term. The long term view looks very attractive and we don`t see the Indian markets correcting very sharply and falling below 4140/13900 levels. In the medium term 4350/14600 should act as a very strong support where investors could think of entering the market. And on the higher side 4730-4770 remains a supply zone, unless markets sustain above these levels for some time, fresh buying should be avoided.

Commodity View

Commodity Market Overview:

Commodities finally witnessed some correction during last fortnight except precious metals, energy and base metals complex witnessed significant correction. Agro commodities in domestic market also witnessed health correction as revival in monsoon from last week of August triggered selling in the Agro commodities, so have we entered into bear market? Well the answer is no! But we have entered into a phase of consolidation where most these commodities are likely to consolidate and upside might get capped. The correction which took place in China was very healthy as per us and much desirable. Talks of China might curb lending triggered sharp selloff in Chinese stock markets which also triggered selling in base metals and energy complex. Last fortnight we have seen some excellent reports coming out from different economies but despite of that we have seen correction taking place in commodities. It would be quite frustrating for a commodity trader on the eve where U.S. ISM Manufacturing Index for the month of August, 09 was at 52.9, which was somewhere around 36-37 in the month of December,08 it indicates the U.S. manufacturing sector expanded the most in 2009 in the month of August and ironically on the same eve base metals, energies crashed. With higher volatility, traders founded last fortnight difficult to trade as on positive news distribution took place in commodities.

Commodity Specific Overview:

Precious Metals:
It`s all precious metals shining all the way, despite of weak retail demand in India where imports since last one and half years continues to remain depressingly low, haul in fresh buying from ETF`s, ahead of Shradha (slack season for bullion) yellow metal kept shining brighter and may continue to do so as fundamental weakness of dollar, long term inflationary concerns and in near term rising volatility are the main factors supporting in bullions. Silver kept outperforming gold with holding in Silver ETF`s since last two months have been moving up and bias for next fortnight is buy at dips.

Base Metals:
Base metals, finally copper imports dropped for the first time in the month of July, 09. It seems that Chinese State Reserve Bureau`s first phase of buying in base metals is done, so that in coming fortnight we see is Rs.320/kg to Rs.325/kg and on downside we feel that it may not go below Rs.280/kg - to 285/kgas China after stocking huge quantities of copper might lend support to falling prices. Nickel prices were seen under pressure during fortnight as they retreated from Rs.975/kg to Rs.875/kg. We don`t remain very bearish in metals but upside might get capped till Rs.960/kg- Rs.970kg. Lead was the top performer and can continue to do so as environmental issues in U.S. Doe Run, largest lead producer and Chinese Authorities told lead smelters to stop their operations as 1,300 children were found having high lead levels. Parents blamed Dongling Lead and Zinc Smelting Plant for the same. Hundreds of children diagnosed with lead poisoning in Shaanxi Province, China. A state-run consultancy has said as much as 60 percent of China's lead plants do not meet pollution standards, a big risk to world supply for a country that now produces more than a third of the world's 8.59 million tonnes annual output of the metal. With supply from the world's top producer constrained and alternatives to the lead-acid battery far off, the rally in lead can extend provided supply concerns remains.

Energy Complex:
Energy, well we don`t want to talk about crude oil first instead will start with Natural Gas, scenario is quite depressing in the commodity the huge difference between near month and far month, as high as Rs.60/mmbtu makes bear win all the time eventually. Despite of Sharp downfall in U.S. Natural gas rig counts in U.S. commodity kept sliding down as markets remain oversupplied with Natural Gas inventories at record high levels. We have not seen single draw since last many months. We don`t want to be loud and say "Buy Natural Gas" but all we want to say is even crude oil markets is and was oversupplied and we want to relate current scenario of Natural Gas with what happened in crude oil at the start of year 2009. When crude oil prices were hovering around $35-$45 barrel the contango (difference between near and far month) was as high as $6-$7 but once in the month of February this contago shrank we have seen spectacular rally. Natural gas markets remain over supplied as lots of new gas discoveries are emerging around the world and demand in key consumer i.e. U.S. remains weak. No major hurricanes to support prices. One should wait for triggers like hurricane or any major draw in inventories or if contango shrinks sharply which can take prices up. Crude oil driven mainly on sentiments rather than fundamentals interestingly Russia, second largest oil producer`s supply rose by 1% last month, and upside in crude oil looks capped as markets are over supplied finally we are witnessing some signs of revival in demand in WTI crude oil but not enough to take it to $80 per barrel and we don`t expect prices to move above $75 barrels and on downside it may test $65/barrel.