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Tuesday, March 27, 2007

The Trouble with US Housing Market

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New India

We are supposed to be a poor country, or, as some smart alecs put it, a rich country with poor people. All poor countries are supposed to be short of capital - which is why they are poor - and that is the reason they woo foreign investors. Or why is it that we are actually exporting capital, not a few million dollars, but billions of them, and acquiring foreign companies by the dozen, something we never did before?

Since even Tatas don't have that much spare cash, they are selling their shareholding in firms like TCS, and Birlas will be doing the same. The rest of the cash will come from foreign banks and financial institutions, some of whom are making so much money in such deals, they do not know where to keep it, and will no doubt use it to finance more such deals and make yet more money!

What is attracting all this foreign money to India is the reputation Indians have recently as managers and entrepreneurs. Somehow, Indians were never thought of as great managers or even as technical people. But the BPO industry has changed all that. For the first time, foreign companies have seen what Indians can do and they are amazed. They always thought of Indians as colonial people, people who are good clerks and babus, but not good enough as managers, let alone good engineers.

I recall once talking to a 'gora' bank manager in Calcutta - it was Calcutta then, not Kolkata - who presided over a huge army of clerks in a humid hall there was no air-conditioning then - none of whom was doing anything more exciting than adding up sums and post them in their flat ledgers.

For every little instruction, or something that involved a simple decision, they would come to him and ask for his advice. And he shook his head from time to time, as if to wonder how long he could go on with this lot, before he went home for his “tiffin”.

I have worked in England, as well as, of course, in India, and I can say that, man for man, or woman for woman and by the same token, an American, or, to put it mildly, a white man. We are far better educated, have gone through many ups and downs in the last two hundred or five hundred years and have a firm sense of who or what we are. What we lacked all these years was a sense of pride and faith in ourselves, having been bossed over by foreigners, goras and others, for hundreds of years.

It has taken us only 50 years to regain our pride and to think of ourselves as free men and women, second to none in any field of human endeavour. We Indians have at last found our voice, and nothing is more important for a people or a nation or a community, than its own authentic voice if only to tell the world that they have arrived.

Tatas took a whole century to raise the size of their first and only steel plant from a bare one million tonnes to three million tonnes. But suddenly they have taken the bit between their teeth and increased it five times, devouring a huge company that once used to be the pride of British steel industry. But Ratan Tata and his colleagues did it without flinching. I don't think his uncle, the great JRD Tata, would have done it. This is the new India I am talking about, an India with a new spring in its stride, and fresh new voice that only free people can command. This is what freedom does to you.

New real-estate stocks trading at discounts to issue price

Stocks of nine real-estate and construction firms, listed between April 2006 and now, are trading at stiff discounts to their listing prices. For two stocks, the discount to their listing price is as high as more than 40%. Six of the nine stocks are even trading below their offer

Analysts with brokerages say forthcoming public issues of construction firms, too, will face a similar fate, with the capital-market regulator tightening the disclosure norms for such companies.

Market regulator Securities and Exchange Board of India (Sebi) chairman M. Damodaran said on Thursday that real-estate and construction firms that plan to enter the market must disclose their land-bank details with ownership pattern or purchase agreements. The firms have also been directed to project the valuation of their land-bank based on its present value, without taking into account any future appreciation.

Worst-hit is Parsvnath Developers Ltd. Its stock closed at Rs275.35, on Friday, a stiff 47.68% discount to its listing price of Rs526.30. It was listed on 30 November 2006 at a massive premium to its issue price of Rs300.

Tantia Constructions Ltd, too, traded on Friday at a substantial discount to its issue price. It closed at Rs124.65, a 43.34% discount to its listing price of Rs220. It made its debut on 28 April 2006, at an over 400% premium to its issue of price of Rs50. Four other stocks, including those of Akruti Nirman and Patel Engineering, are trading at over 20% discount to their listing prices.

The company which suffered the least is Unity Infraprojects Ltd. On Friday, it closed at Rs456.25, a 3.26% discount to its listing price of Rs471.70. It was listed on 12 June 2006 at a much higher issue priceof Rs675.

D.S. Kulkarni Developers Ltd and Sobha Developers Ltd are now trading at a discount of less than 20% to their issue prices. However, they are still at a premium to their offer prices. For instance, Sobha Developers Ltd on Friday closed at Rs777.05 against an issue price of Rs640. D.S. Kulkarni Developers closed at Rs280.75, marginally higher than its issue price of Rs275.

Meanwhile, Indiabulls Real Estate Ltd made its debut on the Bombay Stock Exchange on Friday . The company was formed following the de-merger of the real-estate business of Indiabulls Financial Services. It opened at Rs380.05, touched a high of Rs414.80 and closed at Rs325.65, the stock’s lowest level during the day.

“I would not say that the days of construction stocks are over. Only those firms that are fundamentally strong and not riding on projected valuation of their land banks will do well on the bourses. Others may find it tough,” says an analyst with a brokerage, run by a private Indian bank, on condition of anonymity.

Citigroup - TVS Motors, Gateway Distripaks

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10paisa & Newsletter

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Anand Rathi - Daily Strategist - Mar 28

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Hidden Gems - Ashish Chugh - Godfrey Philips

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India's Perk Pampered Techie Workforce

With their swimming pools, tennis courts and even zoos, the campuses of many Indian high-tech companies have more in common with a country club than the average office block.

But perks like these, along with talent contests and even letters to parents, are becoming vital weapons in the HR armory for Indian tech companies desperate to hold onto their best staff.

Much of the success of the Indian services companies to date has been down to the vast talent pool that they can draw on. But hiring--and keeping--the best people is a constant struggle and the top tech companies are getting increasingly sophisticated about how they reward and retain staff.

As use of offshore increases, so does the need for staff to service those deals. The big players--led by Infosys, TCS and Wipro--hire several thousand new staff every quarter in order to keep up with demand.

And even though India is renowned for churning out 300,000 engineering graduates every year, there is still fierce competition for the best. Because despite the huge headline figures, only a subset--say 25 percent--of those graduates are immediately employable.

And keeping hold of the best people once they are hired is just as big a problem.

As a recent McKinsey report stated: "There is almost a frenzy in India to find senior staff to keep more complex projects on track. In this scenario, resource management is a competitive differentiator."

Across the big players, attrition rates (the proportion of staff quitting each year) run at around 14 percent in IT positions but can run much higher in the business process outsourcing sector. Staff with one to four years' experience are the ones most likely to move jobs, many lured away by glamour postings in the United States and Europe. And this means companies have to get clever about how they attract and retain staff.

Pay, of course, is one way to keep staff happy. The lower salaries--particularly for junior staff--are one of the incentives to use Indian outsourcing in the first place but these are rising.

For example, recruits with engineering degrees might be paid somewhere between US$3,000 to US$7,000 per year. But these salaries rise by about 20 percent per year and someone with five years' experience might be earning US$20,000 to US$25,000. The further up the organization, the less of a difference there is between Indian salaries and those in the United States and Europe--for example a senior executive might make somewhere between US$100,000 and US$150,000.

On top of pay, companies are looking at ways of boosting loyalty through softer hearts-and-minds style programs.

Most of the large companies have luxurious campuses where staff can swim, play golf and even visit the zoo. Recently Wipro, for example, held the grand finale of its 'Spark' program, which was a day-long sports event and family entertainment day held in a stadium in Bangalore.

HCL has even gone for the approach of employee first, customer second. S Premkumar, HCL's head of financial services explained: "We believe that the value we generate is generated by our employees."

Hari Thalapalli, human resources director at Satyam, explained his approach: "We recognize that we can't hope to stop attrition completely. So we say we don't want to lose people at a leadership level."

Satyam targets the top 30 percent of staff at every level and gives them perks--like first refusal on new projects and regular exposure to new technologies and industries--and claims to have reduced attrition to five per cent in this group.

Thalapalli said the company also runs a talent competition, even writing letters to parents and partners of staff telling them "they have made a significant difference to the company".

It also tries to keep in touch with people who leave the company. The company's vice president of leadership development, Ed Cohen, said: "There's a high percentage of people at Satyam that leave and come back--how you exit people is becoming as important as how you recruit or retain."

Of course, there are different pressures in different parts of the market. In the call centre space, staff attrition can run at 80 to 140 percent per year, which means a company might have to replace its entire workforce every year.

Souvik Chakraborty, managing director of recruitment company CAPntel, said the growth of IT means some top techies try to demand massive salary hikes when moving between employers. "The expectations are pretty ridiculous," he added.

BPO has meant a big change for graduates. He said: "For a plain undergraduate for whom getting a job would be a big challenge, BPO has changed the whole scenario. Now they are not just getting jobs, they are getting multiple offers."

There are also other reasons for the fast turn over in some BPO areas, as Venkatesh Roddam, CEO of BPO company Nipuna--part of Satyam--points out: "The call centre employee's job is scientifically rated as the most stressful in the world." After all, who wouldn't find it stressful if they were to deal with complaints all day?

On top of this there is big demand for good workers. He added: "The market is buzzing with opportunities for people today. These are youngsters that are becoming extremely employable in the call centre space."

As a result, Nipuna has a chief fun officer who is tasked with keeping the atmosphere vibrant. And BPO operations regularly latch onto celebrations such as Valentine's Day and have themed days in the office.

The next trick, of course, is to make sure the clients are as happy as the staff. And that can be a little trickier than just laying on a pool as an after-work treat.

Ansals keep Rs200 crore to buy distressed companies

Ansal Properties & Infrastructure Ltd (APIL) is setting aside about Rs200 crore to buy small development companies that have run into financial trouble. The company said it has been approached by several such sellers, an indication that some pockets of India’s overheated real-estate market have started to cool.
India’s fourth-largest listed real-estate developer said it hasn’t sealed any deals yet. “The market is slowing down and funds from banks are not easily available,” said Anil Kumar, chief executive officer, APIL. “Some of them would like to exit.”
The acquisitions are likely to be in the same places where the company operates: Rajasthan, Punjab, Uttar Pradesh and National Capital Region. Kumar said the company might also consider other financial arrangements with distressed companies. Ansals, for example, could build a project on a company’s land, and then return a portion of it to the company, he said.
Real-estate prices in most cities have increased by 30% in the past year, fuelled by a booming economy, easier availability of home loans and a rush to buy property in anticipation of high returns. But analysts say the market, in some pockets, has begun to show signs of a slowdown as interest rates rise and higher prices of lands slow buying. The concern over sky-high land deals has prompted the country’s central bank to warn banks against excessive lending to the real-estate sector.
Kumar said small companies have more difficulties riding out problems such as delays in approvals which add to their cost of developing a property. Ansals could get a discount of up to 25% on market value for the properties it buys, depending on site approvals, the status of the project and location of the land. But the larger advantage is that Ansals would be able to buy assembled land rather than having to endure price increases as it pieces together the site.
Typically, developers who want to acquire large tracts of land have to often buy it bit- by-bit because of fragmented holdings. While they may get the first few parcels at relatively affordable prices, land-owners, who hold out for long, charge several times more, taking advantage of splintered ownership which makes it mandatory for developers to negotiate with each owner to ensure continuity of the land parcel.
Sujit Jain, a real estate analyst at PINC Research in Mumbai, said many smaller companies paid high prices in land auctions and were unable to make projects viable. Now it makes sense for large developers to sweep in and acquire the distressed companies’ land banks, he said.
“Instead of going out and buying plots at high prices, why not go and buy companies who have already built up land banks,” Jain asked. “These people (promoters of smaller firms) will look to liquidate and take out as much money as possible.”

Markets turn distinctly weak, Sensex down 162 points

The stock markets turned distinctly weak on 26 March on all-round selling amid squaring up of long positions that took its toll on shares’ values and the benchmark Sensex tumbled by 162 points.
Bank, auto and IT shares led the fall and were at the receiving end on heavy offloading.
Squaring up long outstanding positions by operators and retail investors ahead of the expiry of March contract on 29 March also impacted negatively on the market sentiment.
The Bombay Stock Exchange (BSE) 30-share sensitive index opened strong at 13,345.73 points, which was also to be the day’s high, but reacted downward on sustained selling and touched a low of 13,090.80 before ending at 13,124.32, a steep fall of 161.61 points or 1.22%.
Similarly, the broader S&P CNX Nifty of the National Stock Exchange (NSE) dipped by 41.10 points, or 1.06%, to 3,819.95 from previous close of 3,861.05 points.
Auto counters were under heavy selling pressure following possibility of slowdown in sales due to high interest rates amid spiralling global crude oil prices near $63 a barrel, dealers said.
IT stocks also bore the brunt of selling as the rupee rose against the dollar to a 20-month-high, they added.
The fall in the Sensex could be gauged by 26 out of 30 index-based shares suffered sharp to moderate losses.

A bet on the dollar’s fall

Last week, I laid out a case for a weakness in growth prospects for the US economy, given the likelihood of trouble in its housing sector. It was not just a case of excess supply as more houses come into the market but also one of rising financial distress. Of course, financial markets are like our makers. They choose to mock at our seeming intellectual arrogance and contentment. Two sets of data in the US—the housing starts (laying the first brick or ‘breaking ground’) and the sale of existing homes— turned out far better than expected. Financial assets globally have breathed a sigh of relief. Indian readers would not have missed it either in their stock markets.
As has been their wont in the last two/three years, investors have developed a remarkable tendency to look at the sunny side of things. The confidence of US home builders declined rather sharply in March. Most experienced investors would view that as a forward-looking indicator of how the housing market would develop, rather than feeling relieved at the sale of homes (new or old) in the previous month. In addition, US leading indicators fell sharply in February and the small positive number in January gave way to a negative change. Therefore, we have had two consecutive months of sizeable declines in the leading indicators. As this indicator has a good track record of presaging recessions in the US, one must attach a high probability of a recession in the US in the coming two/three quarters. But investors ignored this data as it didn’t fit into their sunny framework.
Similar was their disposition towards the communication released by the US Federal Reserve. The committee in the American central bank (equivalent of India’s RBI) that decides on official interest rates made no change to the key, short-term rate for overnight loans to banks, at 5.25%. That was no surprise. They made some important changes to their press statement. Hitherto, they had felt that the next move in rates was more likely to be up than down, and that the only undecided elements were the timing and the magnitude of such an increase. They dropped that line. At the same time, they insisted that they were concerned about inflation remaining above their “comfort” levels (2.7% vs 2%). Importantly, they changed their assessment on US housing from “stabilising” to “ongoing adjustment”.
While certainly this means that they are open-minded on the next move in interest rates, they were also hinting at the potential combination of high inflation and slowing growth. Economists’ contribution to the English dictionary is to come up with a term called “stagflation” to describe such a combination. Perhaps, it was too abstract to register in investors’ minds. Consequently, share prices jumped on the Fed taking their finger off the interest rate button. The US dollar weakened, as it should.
What the leading indicators suggest is that the economy could slow down significantly. The Federal Reserve has expressed a dilemma. But, the American central bank, being a politically-sensitive institution, would be forced to drop interest rates regardless of whether inflation was above or below their comfort zone. Past form indicates that too. If the past is no guidance to the future and Ben Bernanke (the chairman of the Federal Reserve) is less inclined to ride to the rescue of avaricious mortgage lenders, ignorant borrowers and their willing collaborators on Wall Street as his predecessor used to do, then the risk is that the growth gloom is stark. Therefore, whichever way we slice the argument, the US dollar has to fall quite a bit against other currencies.
America is usually sanguine about US dollar declines. After all, it is a large economy and imported inflation because of a cheap currency is a remote threat. Further, all its debt is denominated in US dollars and hence a falling dollar is a legitimate way of defaulting on the debt while the burden falls entirely on lenders. These are additional reasons to bet on a dollar weakness in the months ahead.
Exchange rates are about relative fundamentals and not just about the darkening clouds on America’s economic horizon. Much could be written about equally bleak and more long-term economic prospects in the Eurozone. The proportion of economically active population (15-59 years) in 2050 would be less than 50% in Italy and in Germany, whereas it would be 56% in the US. That is vital for innovation, creativity, entrepreneurship and productivity.
Therefore, what do investors do when all currencies face short-term and/or long-term challenges? Well, in these times, it is not going to hurt at all to load up on gold and silver and there is the bonus of a happy home that comes along with it.

V. Anantha Nageswaran is head, investment research, Bank Julius Baer (Singapore) Ltd.

Market Close: some profit taking in lacklustre trades

Jittery investors sentiments saw profit booking in the indicies after a very strong week where Sensex made the highest gains ever. There markets were lacklustre ahead of the Investors were also in a holiday mood as well as cautious ahead of F&O expiry. Market lost its ground in mid-day trade under selling pressure across index heavyweights which continued to slip southwards. Adding to this fall was the weakness in Dollar as the Rupee surged to a 20-month high. High crude oil prices also weighed on the bourses. Selling pressure was witnessed in selective stocks of Auto, Software and Airlines, while Cement and Telecom sector were in investors favour. Asian Markets managed to trade in green before closing, while Europe trading in mixed.

Sensex closed down by 162 points at 13124.32. Weighing on the Sensex were losses in Tata Motors (753.85,-5 percent), HDFC Bk (982,-3 percent), Wipro (584.8,-3 percent), Maruti (818.9,-2 percent) and TCS (1261.25,-2 percent). Losses were restricted by gains in Satyam (472.25,+2 percent), ONGC (853.2,+1 percent), TISCO (441.9,+1 percent), RCVL (426.3,+0 percent). Volumes were low as they were expected to be. However FNO expiry for March and the year end date accounting may bring in high volumes for the rest of he week.

Glenmark Pharmaceuticals inched a deal to buy more than 90% of the Czech firm Medicamenta. Glenmark joins bigger Indian rivals such as Dr. Reddy's and Ranbaxy in trying to expand into Europe's growing generics market. This acquisition provides Glenmark with a strategic entry point into two of the fastest-growing and attractive markets in Europe. Glenmark also expects Medicamenta to provide a base for its branded products in Europe and will also look to develop and expand Medicamenta's current portfolio. Medicamenta, with marketing operations in Czech Republic and Slovakia is expecting its revenues to touch US$ 8 m in 2007. Pharma sector traded firm with Glenmark Pharma (up 6%) and Pfizer (up 4%) being the key gainers.

Sugar sector was back in demand today on government's decision to give incentives to companies that export the sweetener giving some cushion. The government would give a subsidy of as much as Rs 1,450 a tonne to sugar exporters while an incentive of Rs 440 a tonne will be provided on the export of raw sugar and will also consider creating buffer stocks of 20 lakh tonnes for two years in view of the high production of 250 lakh tonnes estimated this year. Market observed the incentives offer and expected to give a boost to sugar sector and the subsidy will provide a cushion to sugar makers. Bajaj Hindustan, Balrampur Chini closed up by 4%, while Sakthi sugars and Renuka sugars were the other major gainers.

Imported liquor might see scrapping of additional customs duty on wines and spirits. Currently there is a basic customs duty of 100-150 per cent and an additional customs duty (ACD) of 25-150 per cent on wines and spirits. The total incidence of tax is between 250-550 per cent depending on the import price of products. If the bill is passed then the imported liquor will be really cheap that will slow down smuggling. Though this is negative prima facie for United Sprits, and Radico Khaitain but the Indian system of distribution within states is so controlled that benefits of this will only accrue to existing players given that they understand the system. The foreign brands in any case dont have such a mass following we believe. However even Champagne could do the imports and benefit from the same though really it could slow the growth of its own brands which is key. There was little action here though.

Technically Speaking: It was a volatile morning but Sensex then after making an intraday high of 13330 kept its nose pointed downwards. Sensex is in a correction mode, after a big spurt last week. Supports were seen at 12950 and 12905 and Resistance at 13286- 13428 levels. Key positive would be with Sensex breaking out of 13520 levels. With the Derivatives expiry nearing in, markets likely to see some volatility before it can break above those levels. Market turnover stood at Rs 3126 cr. Market breadth was in favor of Decliners as; Advances were 849 against Decliners of 1746.

Sell-off towards end weakens Sensex

A big sell-off of stocks towards the end of trading hours on Monday pulled down the benchmark indices. The first trading session of this week seemed to mark a snap in the spell of the indices' upward trend that was witnessed during most of the trading days of last week.

The markets had started last week from an oversold position. The cues that investors had taken from the strong rise of key indices in the major Asian markets and the attraction of buying into the frontline cement and information technology stocks at low rates had proved to be key drivers of the indices' rise during the first trading session of last week.

Overall market trend

However, despite the fact that the global markets were stagnant and seemed to remain calm even though a few weak economic indicators from the US were expected, this Monday's session turned distinctly volatile during the second half at the two major bourses of the country.

Overall, the markets had closed marginally lower on the final trading session of last week, after a gain of over 6 per cent during the previous sessions. Opening this week on a negative note, profit-booking and squaring-off of positions on Monday led to a large fall in the indices.

The key indices - Bombay Stock Exchange's Sensex and the National Stock Exchange's Nifty index had both opened in the black during the morning session on Monday.

After being range-bound, the indices seemed to slide down slowly into the red till mid-session, when a sudden bout of buying support pulled the indices back into the black.

However, the sharp rise in selling pressure led to the indices plummeting into the red within a short span of two hours. By the time the markets closed for the day, the NSE Nifty had fallen by over 41 points and the BSE Sensex had lost over 161 points. The fall had shaved off over 1 per cent from both the indices. There were only nine stocks from the Nifty's 50 and only four stocks from the Sensex 30 that were gainers at the close of Monday's trading session.

Sector Focus

Some of the biggest losers came from the information technology, auto, banking, capital goods and engineering sectors. The major gainers amongst Nifty stocks during Monday's session were MTNL, HPCL, Satyam Computers, Oriental Bank and ONGC. The top five losers from the Nifty were Tata Motors, HDFC Bank, Dabur, Wipro and Jet Airways.

At the BSE, the big losers from the Sensex were HDFC Bank, Tata Motors, TCS, Reliance Energy, Maruti Udyog, ICICI Bank, SBI, Reliance Industries, NTPC, L&T, Infosys Technologies, ITC, Cipla, Gujarat Ambuja Cements, Hindalco, Hero Honda, Dr Reddy's Laboratories, BHEL, Bajaj Auto, ACC and Bharti Airtel.

Sugar sector stocks were again in the limelight on Monday with at least a dozen of them recording gains. The prominent amongst them were Ponni Sugars (Erode), Dharani Sugars and Chemicals, Shree Renuka Sugars, Sakthi Sugars, Bajaj Hindusthan, Balrampur Chini Mills and Triveni Engineering & Industries.

Select pharma and banking stocks also managed to close the day with gains.

RCom begins FLAG Tele IPO process

Reliance Communications has shortlisted four merchant banks for the initial public offer of its overseas subsidiary FLAG Telecom, which operates a global fibre optic cable network.

RCom will select from among Goldman Sachs, Morgan Stanley, Deutsche Bank and UBS to lead manage the IPO, said sources.

RCom will offload around 10-15 per cent stake in FLAG, which will list again on London Stock Exchange.

Before it was fully acquired by RCom (then Reliance Infocomm) in 2004, FLAG was listed on both NASDAQ and LSE.

The IPO proceeds will part-fund a $1.5 billion expansion plan for FLAG that involves the addition of 50,000 kms of `Next Generation Network' over the next three years.

After RCom acquired FLAG, it augmented it with a new network called FALCON connecting 11 countries in West Asia.

RCom is also planning an additional landing station for FALCON in Thiruvananthapuram in Kerala that will connect the Maldives, said sources. This will be in addition to FALCON's landing station in Mumbai and FLAG's landing station, also in Mumbai.

Reliance had acquired FLAG — which had filed for bankruptcy — for $207 million in early 2004.

Sharekhan Investor's Eye dated March 26, 2007


Bharat Heavy Electricals
Cluster: Apple Green
Recommendation: Buy
Price target: Rs2,650
Current market price: Rs2,255

Foray into defence equipment space

Bharat Heavy Electricals Ltd (BHEL) is planning to produce defence equipment, including weapons. It has already applied for a licence to produce defence products. It is likely to manufacture all types of guns, including field guns, air defence guns, and mortars for the Indian defence sector and para-military forces. It has also firmed up plans to produce underwater weapon systems, weapon control solutions and their components.


ABC Bearings

Expansion to drive growth
The bearing industry is expected to grow at a rapid pace of about 15-20% going forward. ABC is expected to keep pace with the industry. To cater to the strong demand, the company is expanding its capacity from the current 6.5 million units to about 8.0 million units by October 2007. The company would be able to do this at a minimal capital expenditure. With technological inputs from NSK it would be able to make all its lines "universal", capable of producing both taper as well as cylindrical bearings. At present, the company is operating at 100% utilisation

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Sharekhan Daring Derivatives for March 28, 2007

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