STRATEGY INPUTS FOR THE DAY

Not again…a Manic Monday

If we increase freight rates, the goods will move through the roads and the condition of the roads will become worse – Railway Minister Lalu Prasad Yadav.

The condition of most roads are bad enough and so are the condition of the bulls. They have been at the receiving end and are likely to remain under pressure at least in the near term owing to rising inflation and hardening interest rates. All is not lost yet though. The FIIs can resurrect the market. But, it appears they are perhaps waiting for the budget to be out of the way before taking a fresh call on India. Having seen a fall before the budget, expectations are the market need not crack post the budget. Remember, despite the fall, valuations are not cheap as yet. Unless inflation comes down sharply and there is some stability in interest rates, the undertone may continue to be weak.

As for today, we expect a cautious opening on the back of Friday's plunge. Any further weakness at start could result in margin calls and have a cascading effect. Some stability will bring about bottom fishing as the main indices were down 5% each last week. Friday's provisional FII figure of Rs3.43bn in the cash segment could prove to be the savior for the bulls. Our advice is don’t get trapped in any relief rally.

Another positive could be Reliance Industries. The company is making a Rs15bn preferential issue to Mukesh Ambani to raise funds for future expansion. This will lead to a further hike in the promoters' stake in the company when the warrants are converted into equity shares. Also, coming at a time when the stock is close to its all-time high augers well for investors and for the market.

Banking shares may also rebound after the RBI said it will pay interest on CRR for the second half of 2006 and for the period starting Feb. 17. Dena Bank and Canara Bank will be among the stocks to keep an eye on following reports of a possible merger between the two state-owned banks. The banks and the Finance Ministry have denied any such move though.

Cement stocks could continue to underperform amid fears of some unfavourable announcements from the Government for the sector. Some incentives in the railway budget may perhaps bring temporary relief to the cement counters.

Ahluwalia Contracts is likely to fall amid reports that SEBI will probe into the sharp rise in the stock on listing last week.

FIIs have been net sellers in the last couple of sessions in the cash segment. With this, their tally for the month works out to around $877mn, which is actually not bad considering the crash in the market. Mutual Funds were net buyers of just Rs7.56mn on the same day.

Foreign funds offloaded stocks worth Rs13.47bn in the F&O segment on Friday.

3M India, NEPC Textiles and Visaka Industries will announce their results today.

Shares of C&C Construction will get listed today on the bourses.

From the Research Desk - PSL

PSL Ltd. (Q3FY07): Result Update

During the quarter the company executed orders of GAIL, Reliance and some other small orders. More than half the contribution to topline during the quarter has been from GAIL and Reliance. This helped the company register a 22.2% topline growth to Rs4.9bn in Q3FY07 against Rs4.1bn in the corresponding last year. For 9MFY07 the company registered topline growth of 10.4% to Rs11.8bn against Rs10.7bn last year. There was an improvement in bottomline by 54.5% and 47.2% for Q3FY07 and 9MFY07 respectively. This translates into nine month annualized EPS of Rs20.5.

The company has a healthy order book of Rs15bn as on December 31, 2006 majority of which will be executed over the next couple of quarters. Order book consists of orders from GAIL, Reliance and L&T in addition to exports (~20% of current order book) and other smaller orders. Of this orders worth about Rs1.5bn from GAIL and Rs2.5bn from Reliance will be executed over the next quarter. The order book consists of orders from oil & gas and water sector. With continued emphasis being on developing infrastructure for oil & gas and water transportation orders for the sector are expected to keep on flowing.

Robust order book coupled with expanded capacities will facilitate strong growth going forward. With industry demand scenario appearing good for the future especially for large diameter pipes the company is well positioned to take advantage of it. We expect the company to not only gain orders from the domestic arena but also from global markets. Pipes are amongst the most economical medium of transportation for high value commodities i.e. oil and gas, as they can transport large volumes thereby reducing cost. PSL is appropriately positioned to benefit from this development as it is amongst the foremost manufacturers of HSAW pipes in India who offer large diameter pipes. To add to its competitiveness the company’s 11 mills are strategically located across India in close proximity to the ports enabling it quick deliveries and reducing transportation costs. With the scenario for the pipes industry remaining robust over the longer term, our broad calculations indicate the company to close FY07E with an earnings of Rs21.9 and FY08E with 26.2.

Market Watch

Insider Trades:
Lloyd Electric & Engineering Ltd: (i) Morgan Stanley & Co. International Ltd. a/c Morgan Stanley Dean Witter Mauritius Co. Ltd (ii) Morgan Stanley & Co. International Ltd a/c Morgan Stanley Investment Mauritius Ltd has purchased from open market 50000 equity shares of Lloyd Electric & Engineering Ltd on 19th February, 2007.

Market Volumes:
The turnover on NSE was 13% to Rs103.3bn.BSE Bank index was the major loser and lost 3.42%. BSE FMCG index (down 3.35%), BSE Technology index (down 3.22%) and BSE Pharma index (down 2.65%) were among the other major losers.

Volume Toppers:
PFC, IFCI, Firstsource, TTML, SAIL, IDBI, ITC, India Cement, Tata Steel, Hindalco, R Com, Ashok Leyland, Satyam Computer, IVRCL Infrastructure, Cinemax India, Reliance Industries and HLL.

Lower Circuit Filters:
Amara Raja, Unitech, GMR Industries, Kesoram Industries, Nelco Ltd, Classic Diamond, KRBL, Fedders Lloyd, Swan mills, Nesco, Alps Industries, Ansal housing, BSEL Infrastructure, Crew BOS and Country Club.

Long Term investment:
Valecha Engineering.

Major News Headlines:

ICICI Bank raises Deposits, Lending rates by 50 basis points

Nitco Tiles to raise funds up to Rs2.5bn by way of FCCBs/GDRs/ADRs/QIP

Pratibha Industries to raise Rs2bn by way of QIP

Atlanta withdraws record date for stock split

Sterlite Optical gets contracts worth Rs1.5bn from power Grid Corporation of India

House of Pearl acquires new warehouse in UK

HOW MARKET FARED

All eyes on Budget

The bulls again were on the receiving for fourth straight trading session. The markets corrected sharply ahead of an important event ‘The Union Budget 2007’ next week. All round selling pressure in the scrip’s across the sectors dragged the benchmark Sensex to hit an intra-day lown of 13568.08. The key indices traded in red throughout the session all the key indices closed in negative territory with BSE Bank index being the major loser losing 3.42%. Finally, the BSE 30-share Sensex plunged by 388 points to close at 13632 and NSE Nifty dropped 101 points to close at 3938. Grasim, Bharti Airtel, ACC and ICICI Bank were among the major losers. However, GAIL, Tata Steel and Reliance industries were among the major gainers outperforming both the key indices today.

ICICI Bank lost over 4% to Rs907. The company raised deposits and lending rates by 50 basis points. The scrip touched an intra-day high of Rs954 and low of Rs892 and recorded volumes of over 17,00,000 shares on NSE

Pratibha Industries declined 5% to Rs183. The company announced that they would raise Rs2bn by way of QIP. The scrip touched an intra-day high of 195Rs and low of Rs183 and has recorded volumes of over 12,000 shares on NSE.

Apollo Hospital was down 1.8% to Rs491. According to reports the company is eyeing UK-based Abbey Hospitals. The scrip touched an intra-day high of Rs505 and low of Rs490 and recorded volumes of over 87,000 shares on NSE.

Hexaware dropped over 2.5% to Rs161. The company is reportedly looking at buying an IT firm in Europe or the US. The scrip has touched an intra-day high of Rs170 and low of Rs160 and has recorded volumes of over 1,00,000 shares on NSE.

Pharma stocks stocks were in poor health today on back of profit booking. Ranbaxy dropped over 3% to Rs356, Sun Pharma slipped 3% to Rs974, Cipla dropped 2.5% to Rs241 and Dr Reddy lost 3.5% to Rs681.

Capital Good index was also on the receiving end. Punj Lloyd plunged by over 6% to Rs830, L&T fell over 2.5% to Rs1611, ABB declined 2% to Rs3708 and BHEL was down 0.8% to Rs2276.

Technology stocks ended lower, the indeed fell over 3%. Heavy weights like Wipro fell over 4% to Rs623, Infosys was down 2.2% to Rs2237 and Satyam Computer slipped 2% to Rs449. Rolta, Mastek and Polaris were the major losers among the Mid-Cap stocks.

Edelweiss Daily Market Outlook

Market Snapshot

The Sensex opened with a positive gap of 50 points at 14,071, but selling pressure forced the index into the negative zone. Unabated selling, mainly in bank, cement and pharma stocks, saw the index drift to lower levels as the day progressed. The index tumbled to a low of 13,568 before finally settling with a significant loss of 389 points at 13,633. Nifty lost 101 points to 3,939.

The NSE cash volumes were significantly lower compared to the previous day at INR 103 bn while the BSE cash volumes were better at INR 45 bn. The F&O volumes were significantly lower compared to the previous day at INR 359 bn.

Sentiment Indicators

The Implied Volatility (IV) across Nifty strikes has increased to 27-29% levels. The WPCR of Nifty Options decreased to 0.84 compared to the previous day while the 5 day average is 1.07. The February futures are now trading at 5 points discount. The Nifty Futures OI has increased by 11%.

Outlook

Nifty breached crucial trend line support of 3965 on the last trading session. The tone of the market is of abundant caution before the fiscal budget and we expect volatile movement to continue after last week’s fall. Significant OI addition was seen across strikes in the Nifty puts signaling hedging of long positions. At the same time, call IVs have decreased slightly indicating covered calls being written in the market.

Also, Rail Budget will be announced today. Any kind of positive surprises on Capex front would augur well for the market and might trigger small pull back till Union Budget is announced on Wednesday. Capital Goods and Engineering sector is expected to see lot of action today on expectations of Rail Infrastructure Capex. High metals prices at LME will strengthen metal stocks.

A close below 3965 indicates intermediate term bearishness as predicted. It completes the bearish lower top, lower bottom pattern. The immediate support of Nifty is 3880 and the next at 3880. On the upper side Nifty has a resistance at 3965, followed by 4014.

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Outlook remains weak

Fears over inflation nearing to its two years high and the Sensex losing over 1000 points in the last three weeks may keep the bias negative. The market is also worried about the Union budget, which is expected to remain populist and profit booking on any rise is also cause of concern which may keep the market volatile. Mixed Asian markets in the morning trades also likely to keep pressure on investors sentiment. Among the domestic indices, the Nifty could test 3900 and below this level may slip to 3850, while on the upside it could edge higher to 4050. The Sensex has a likely support at 13568 and may face resistance at 13780.

The Nymex light crude oil for April delivery rose 19 cents to close at $61.14. In the commodity space, the Comex gold for April series gained $3.70 to settle at $686.70 a troy ounce.

The speech Chidambaram will not make

Ten years ago I promised to reduce Indian tax rates to Asean levels, and thus become part of the Asian economic miracle. I am happy to announce that I am cutting the peak import duty to 8%, the targeted Asean level. Some people are inconveniently reminding me that I had also indicated 10 years ago that I would reduce direct taxes to the Asean level, which is now around 25%.

I cannot do this overnight for revenue reasons, but will target this rate over the next five years. For starters, I considered reducing the peak income and corporate tax rate to 30% inclusive of surcharge. But the latest Times of India poll suggests that citizens hate taxes but like cesses. So I propose to abolish income and corporate tax, and instead impose a social services cess of 30% in lieu thereof. I hope this will help us win the Uttar Pradesh election.

Our effective corporate tax rate is only 17% because of a myriad exemptions. The most unwarranted exemption is for software companies, which are not infant industries but prize athletes. I propose to levy a Minimum Alternative Cess (replacing the Minimum Alternative Tax) of 15% on all companies other than those covered by the law on Special Economic Zones. The new Minimum Alternative Cess will also apply to units in SEZs unless they export at least 85% of their output.

Our policies have yielded record GDP growth of 9.2%. I hope you agree that the entire credit for this goes to Sonia Gandhi. The economic boom has boosted tax receipts, and I am happy to announce that I have met the FRBM target of reducing the fiscal deficit to 3% two years ahead of schedule. Having said that, let me confess what serious economists have long know — that, rather like Enron, we have been hiding part of the debt in off-budget items (oil bonds, debts of the FCI).

Borrowings of the Food Corporation for political purposes like the public distribution system are logically part of the government’s own deficit, and so are subsidies to oil consumers financed by forcing oil companies to run at a loss.

Inclusive of these items, the fiscal deficit is higher by more than 1% of GDP. In the interests of transparency and accountability I propose henceforth to include these off-budget items in the official fiscal deficit, and get this consolidated figure down to 3% by 2009.

The Fringe Benefit Tax has attracted criticism because of its complexity. I know this is a bad tax, but I hate admitting that I am wrong. So I propose to give companies the choice of paying an additional 2% corporate tax in lieu of the fringe benefit Tax. Some of my Marxist colleagues want me to re-impose capital gains tax on shares.

This would be a bad idea, since prudence requires that people should churn their portfolios (constantly selling some assets and buying fresh ones), and a capital gains tax will tax such prudence. It will also place Indians at a tax disadvantage compared with foreign institutional investors.

A better way of promoting egalitarianism without affecting growth is to levy estate duty at 5% on all properties of deceased persons in excess of Rs 20 lakh. This will encourage people to save and invest in their lifetime, while ensuring that they pay their dues to society (rather than undeserving heirs) after entering the next world. It also helps that dead people do not vote.

The biggest tax anomaly is that services account for 55% of GDP but only a small fraction of taxes. I am widening the service tax net to include several categories including lawyers, so nobody can accuse me of trying to keep myself out of the service tax net.

I am also raising the level of service tax to 16%, and moving most excise duties to 16%. I hope this will lay the foundation for moving in the next four years to an all-India Goods and Services Tax levied mainly at 16%. As part of that transformation, I propose to abolish the Central Sales Tax in one go, and compensate states in full for this loss.

We spend vast sums on unproductive subsidies, of which two-thirds non-merit subsidies benefiting mainly well-off people. The fertiliser subsidy has induced farmers to use nitrogen rather than phosphorus and potassium, thus ruining the soil. Free power encourages overpumping and the drying up of drinking-water wells and shallow tubewells of small farmers. I cannot control power subsidies given by state governments. But I propose to abolish subsidies on food, fertilisers and employment programmes, and instead give a cash grant of Rs 5,000 to every family with a BPL card or Job card. That will be a more rational subsidy regime, and will also reach those most in need.

Little is known of the outcome of vast sums spent on various programmes, and I cannot trust any ministry to honestly assess its own shortcomings. So I propose to hire independent evaluators to track the actual outcome of programmes. This will give us an accurate picture of which programmes deserve to be overhauled or abandoned, and which expanded.

All eyes on Railway Budget

Sensex lost 723 points last week as a major correction gripped bourses due to caution ahead of the announcement of the Railway Budget and Union Budget 2007-08. Data showing heavy FII sales in derivatives and their outflow in the spot market for the second day in a row on Thursday 22 February may weigh on the bourses today.

Railway Minister Lalu Prasad Yadav today unveils the Railway Budget. Market talks are that the government may cut some passenger and freight fares in a bid to combat inflation. Last year passenger and freight rates were left broadly unchanged.

Union Budget 2007-08 to be presented on Wednesday 28 February remains a key near term trigger for the market. Concerns that the government may raise short-term capital gains tax on sale of shares from the current 10% have gained currency. The securities transaction tax (STT) may also go up further. The STT was raised in the previous budget. The removal of 10% corporate surcharge may be offset by removal of certain open-ended exemptions. Market men also expect the finance ministry to give a big impetus to agriculture and infrastructure in the budget.

FIIs were net sellers for the second day in a row on Thursday. They were net sellers to the tune of Rs 225.20 crore on Thursday compared to their outflow of Rs 40.20 crore on Wednesday 21 February. But as per provisional data, FIIs were net buyers to the tune of Rs 334 crore on Friday 23 February, the day when Sensex had lost 389 points.

While FIIs were net buyers in the spot market, they pressed heavy sales in index-based futures on Friday. They were net sellers to the tune of Rs 1547 crore in index-based futures on Friday. They were net buyers to the tune of Rs 18 crore in individual stock futures on that day. Nifty March futures settled at 3933.75 on Friday, a discount of 5.20 points compared to spot Nifty closing of 3938.95.

Asian markets were mixed on Monday (26 February). The key benchmark indices in Japan and Taiwan were up by between 0.4% to 1.5%. The key benchmark indices in Hong Kong and Singapore were down by between 0.2% to 0.7%.

US stocks fell for a third straight session on Friday as concern over rising defaults in the subprime mortgage industry drove down financial services shares and the price of oil hit a 2007 high. The Dow Jones industrial average fell 38.54 points, or 0.30 percent, to end at 12,647.48. The Standard & Poor's 500 Index dropped 5.19 points, or 0.36 percent, to finish at 1,451.19. The Nasdaq Composite Index lost 9.84 points, or 0.39 percent, to close at 2,515.10.

US crude rose for a fourth day, up 31 cents to $61.45 a barrel on Monday and nearing a fresh 2007 high, as rising tensions over Iran's nuclear programme added to concerns over on an unexpectedly deep drop in US fuel stocks and supply disruptions. Western powers prepare to meet in London on Monday to discuss tightening sanctions on Iran over its nuclear plans amid tough talk between Washington and Tehran. Iran insists it is entitled to nuclear power to generate electricity but many in the West suspect it is trying to build an atomic arsenal.

Emkay Morning Notes, Patel Engineering

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Nikkei nears seven-year high, Nikko Cordial jumps

The Nikkei share average rose to its highest in nearly seven years on Monday, gaining 0.51 percent as Softbank Corp., Nippon Steel Corp. and other firms popular with retail investors benefited from improving market sentiment.

Shares of Nikko Cordial Corp., Japan's third-largest brokerage, shot up 13.2 percent to 1,371 yen. Citigroup is in talks to buy a one-third stake in Nikko, which faces a possible delisting due to an accounting scandal, financial industry sources told Reuters on Saturday.

Retail investors, many of whom were hit with big losses in last year's small-cap sell-off, were now returning to stocks, on expectations of higher profits from leading companies such as Nippon Steel, market participants said.

"With the rebound of Sony Corp. and steel companies, individual investors have bounced back a lot," said Katsuhiko Kodama, senior strategist at Toyo Securities.

The Nikkei finished the morning session up 92.43 points at 18,280.85, after earlier hitting 18,300.39, its highest since May 2000.

The broad TOPIX index was up 0.35 percent at 1,821.30, after earlier hitting 1,823.46, its highest since November 1991.

Mobile telephone provider Softbank, a favourite of Japanese retail investors, rose 3.1 percent to 3,030 yen. Its shares have recovered some 31 percent so far this year, after a decline of 54 percent last year.

Nippon Steel gained 2.4 percent to 841 yen after earlier hitting its highest in more than 17 years. The world's second-largest steel maker has gained 23 percent this year, helped by expectations of better earnings and further consolidation in the industry.

READY TO SELL?

But some market participants said they were expecting a decline in the near term, given recent gains.

"I think we are ready for a slowdown," said Ken Masuda, senior dealer in equities at Shinko Securities.

"I think steel stocks and shippers look ripe for some selling."

Shipping stocks have gained about 22 percent so far this year.

Shares of Nissan Chemical Industries Ltd. jumped 8.7 percent to 1,596 yen after brokerage Goldman Sachs raised its rating on the chemical manufacturer to "buy" from "neutral", citing its prospects for earnings growth.

Goldman Sachs said in a note on Friday the company's earnings growth was likely to outpace the industry average in the next year.

Sony rose 0.8 percent to 6,400 yen after Merrill Lynch on Monday raised its rating on the consumer electronics giant to "buy" from "sell" and lifted its target share price to 7,600 yen from 5,100 yen.

The company was likely to benefit from continuing yen weakness and the strength of overseas economies, Merrill said.

Trade volume remained active with 1.5 billion shares changing hands, compared with last week's morning average of 1.3 billion shares. Advancers outnumbered decliners 964 to 636.

Ashish Chugh - HIDDEN GEMS - Linc Pen & Plastics

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Investsmart - Morning Call

Nifty at a support of 3885 & 3835 levels with 3965 & 4010 as resistance for
the markets .

Buy : BajaHind above 162 target 170 s/l 158

Sell : ITC below 165.2 target 160 s/l 167

Markets to be choppy and volatile and any rally to see profit booking at
all higher levels do not take any fresh psotion before the Budget .


Out House :

Railway Budget today .

Sensex at a support of 13515 & 13425 levels with resistance at 13786 &
13838 levels .

Buy : RIL & RelCap

Buy : ONGC & Gail

Buy : INFY & Satyam at dips

Buy : Polaris & Mphasis at dips

Buy : Texmaco at dips

Buy : Gitanjali at dips

Buy : ADlabs & Glenmark at dips

Buy : UtiBank & KTK bank at dips

Dark Horse : RIL , Gitanjali , Utibank , Adalbs , SesaGoa , NDTV , Glenmark
& Sail

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Anagram Daily Call

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