Global cues see Indian markets open with caution

After posting significant gains in the previous sessions, buying interest may continue on the back of a firm trend. However, caution should be exercised as the market may move in tandem with Asian indices which are marginally up in current trades. Investors should also take into account the prevalence of strong intra-day volatility. Among the key local indices, the Nifty could test higher levels at 5088 and 5100 while it has a strong support at 5025. The Sensex has a likely support at 17050 and may face resistance at 17500.

US indices notably the Dow Jones witnessed a subdued trend and ended lower on Tuesday at 14047, while the tech-laden Nasdaq gained marginally to close six points up at 2747.

Indian floats had a mixed outing on the US bourses. Infosys, Satyam, Wipro, ICICI Bank, HDFC Bank, MTNL and Rediff gained around 1-4% each while Dr Reddy's, Tata Motors, VSNL dropped over 1-5% each.

Crude oil prices in the international market closed marginally down on Tuesday, with the Nymex light crude oil for November delivery slipped by 19 cents to close at $80.05 per barrel.

Morning Call

Market Grape Wine :

In House :

Nifty at a supp of 5031 and 5000 with resis at 5107 and 5157. Mkt to open on a positive note.

Intra day: Buy Bajajauto above 2498 with a TGT of 2600 and a SL of 2470

Buy Gujalkali above 165.50 with a TGT of 172 and a SL of 162



Out House :

Markets at a support of 17171 & 17271 levels with resistance at 17571 & 17747 levels .

Buy : RIL

Buy : Relcap & REL

Buy : Sail

Buy : SBIN

Buy : MRPL ,RNRL , TTML , IFCI , Nagarfert & JpHydro

Buy : IBullReal

Buy : GMRInfra

Buy : JpAsso

Buy : NoidaToll & NTPC bullet

Dark Horse : GMrInfra , IBullReal , REL , Aban , RelCap , SBIN & Noida

Bullet for the Day : NTPC , Adlabs & GmrInfra with stop loss

A mixed finish for US Market

Good sales figure from General Motors help Dow erase most of its morning losses

US market closed mixed today as investors weighed more disappointing news on the housing front against strength in the Technology sector. Five out of ten economic sectors posted losses today, Tuesday, 2 October, 2007. The dollar index made some gains and the strengthening dollar weighed on commodities today.

The Dow Jones industrial Average closed lower by higher by 40.2 points at 14,047. But the Nasdaq Composite Index, finished higher by 6.12 points at 2,747.2. S&P 500 finished a slight lower by 0.41 points at 1,546.43.

Sixteen of thirty Dow stocks ended in red. Exxon Mobil led the group of Dow decliners with crude prices slipping even today. General Motors was one of the top Dow advancers. The company reported that its September North American auto sales increased by 4% against a street expectation of just 1%. Rivals – Ford and Toyota reported declining sales.

Earlier in the day, The National Association of Realtors reported that pending home sales fell a larger than expected 6.5% in August from July and 21.5% from a year earlier. The report suggested that existing home sales will most likely remain weak in the coming months.

On the technology front, Google shares once again hit a new all time high. Google's strong performance was partly due to Credit Suisse's announcement that it expects Google to report better than expected earnings.

Homebuilders remain unaffected by weak housing report

When market opened in the morning, indices lingered in the red. The financial sector was the early-morning’s only standout as it continued yesterday's leadership role.

The other surprise for the day was that the Homebuilding group was not fazed by the report that came today. Infact, it led this morning with a good gain. Homebuilding outperformed yesterday after Citigroup upgraded several large cap homebuilders.

The big story this morning was that TD Bank Financial Group is going to acquire Commerce Bancorp for $8.5 billion.

Among Indian ADRs, Rediff.com was the trop gainer today while VSNL was the top loser. Rediff shares gained a little over 4% while VSNL shares dropped by 5.4%. On the finance sector, HDFC Bank and ICICI Bank closed up by 0.4% and 1.3% respectively.

Volume on the New York Stock Exchange topped 1.2 billion shares, and advancing issues edged decliners 9 to 7. Nearly 1.8 billion shares exchanged hands on the Nasdaq, and advancers outdid decliners 4 to 3.

For tomorrow, investors will have the Institute for Supply Management releasing its September services report. Other than that, the Department of Energy will release its weekly inventory report at 10:30 ET.

Daily Market Outlook - Oct 3 2007

Daily Market Outlook - Oct 3 2007

Derivatives for October 03, 2007

Derivatives for October 03, 2007

Grey Market - Maytas, Saamya, Supreme, Consolidated

Power Grid Corporation 52 30 to 31

Dhanus Tech. 280 to 295 50 to 55

Koutons Retail 370 to 415 75 to 80

Consolidated Construction 510 160 to 170

Supreme Infra 95 to 108 50 to 55

Saamya Biotech 10 4 to 5

MAYTAS Infra 320 to 370 150 to 160

Circuit Systems (India) Ltd. 35 3 to 4

Kaveri Seeds 170 22 to 25

Trading Calls

Nifty (5069) Sup 5015 Res 5141

Buy Unitech (317) SL 312
Target 326, 329

Buy Dr Reddy’s (658) SL 652 Target 670, 672

Buy ACC (1210) SL 1197
Target 1237, 1242

Sell BILT (137) SL 141
Target 130, 128

Sell Patni (460) SL 465
Target 451, 449

Forget reasons, book some profits

The supreme function of reason is to show that some things are beyond reason.

The rise so far may be beyond reason. And if the markets have to consolidate, (we’ve been expecting it for some time now) there is no need to pinpoint reasons. But thoughts that come in when weakness is likely to set in include quarterly results, political uncertainty and stretched valuations. How the bulls will react in the event of mid-term polls only time will tell. Given the strong fundamentals of the Indian economy and solid growth momentum for corporate earnings, the market should be fine after a temporary blip.

The sharp spurt off late has taken the main indices to all-time highs practically everyday for the last couple of days. Lock in some gains at every rise in counters which have run too fast. Stay invested in quality stocks, irrespective of the market cap, as the medium to long-term outlook is still positive. Get out of weak stocks or the ones that haven't lived up to your expectations.

Today, we expect a positive start and a choppy day of trade. Global markets had a pretty good outing on Tuesday, especially in Asia. The Dow Jones, meanwhile has crossed the 14k mark. Expect some buying to come into pharma counters in the coming days. Cipla, Ranbaxy, Divi’s Lab are showing positive signals.

US stocks ended mixed on Tuesday after a volatile session. Disappointing news on auto sales and the housing sector prompted investors to take a breather after the previous day's rally, when the Dow Jones Industrial Average closed at an all-time high of 14,087.55.

Financial shares climbed to the highest since July after Commerce Bancorp agreed to be bought by Canada's Toronto-Dominion Bank and Citigroup said it will purchase the rest of Japanese brokerage Nikko Cordial.

Homebuilders had their biggest two-day gain since August amid growing optimism that the contagion from the subprime-mortgage losses is waning.

Seven stocks advanced for every five that declined on the New York Stock Exchange.

The Dow lost 40 points, or 0.3%, to 14,047.31. The S&P 500 finished little changed at 1,546.63, and the Nasdaq Composite Index rose by 6 points, or 0.2%, to 2,747.11.

US stocks moved lower after the National Association of Realtors reported a bigger-than-expected decline in the August pending home sales, which slipped to its lowest level on record.

The report failed to boost the broader stock market, which has been betting that weak economic data would force the Federal Reserve to continue cutting interest rates. However, more rate cuts this year may not be in the cards.

Treasury prices gained, lowering the yield on the 10-year note to 4.53% from 4.55% late on Monday. In currency trading, the dollar rebounded against the euro and gained versus the yen, which helped send commodity prices lower.

Oil prices recovered slightly from an early selloff but remained lower. Crude prices fell 19 cents to settle at $80.05 a barrel on the New York Mercantile Exchange. COMEX gold for December delivery fell sharply after last week's run-up, falling $17.80 to settle at $736.30 an ounce.

European shares advanced. The pan-European Dow Jones Stoxx 600 index increased 0.5% to 382.70, with banks leading the advancers, followed by gains in the construction sector. The French CAC-40 advanced 0.5% to 5,799.27 and the German DAX 30 rose by 0.3% to 7,946.79. The UK's FTSE 100 closed down 0.1% at 6,500.40.

In the emerging markets, the Bovespa in Brazil was down 0.5% at 62,017 while the IPC index in Mexico gained nearly 2% to 31,451. The RTS index in Russia surged by 3% to 2108 and the ISE National-30 index in Turkey added 1.1% to 69,522.

Asian stocks were trading mostly higher this morning. The Nikkei in Tokyo was up 8 points at 17,055 and the Hang Seng in Hong Kong shot up by 273 points to 28,472. The Straits Times in Singapore advanced 45 points to 3838.

The Morgan Stanley Capital International Asia-Pacific Index added 0.6% to 167.16 as of 10:54 a.m. in Tokyo, after a four-day, 4.8% rally that lifted the benchmark to a record. Financial stocks contributed the most to today's gains.

Benchmarks climbed elsewhere in Asia, except for New Zealand. Markets in South Korea and China are shut for holidays today.

In a volatile trading session markets managed to make a comeback ending in positive territory. Key indices extended their longest winning streak in more than a year led by the Oil & Gas and Pharma stocks. Vital support was yet again provided by the Reliance pack of stocks led by REL, R Com, RNRL and RPL. However, IT, Auto and Banking stocks were offloaded. Finally, BSE 30-share benchmark Sensex ended 37 points higher to close at 17,328. NSE Nifty added 47 points to close at 5,068.

M&M advanced 1% to Rs759 after the company announced their September sales figure which was at 19,871 units (up 8.7%). The scrip touched an intra-day high of Rs777 and a low of Rs755 and recorded volumes of over 9,00,000 shares on NSE.

Hero Honda dropped 2% to Rs732. The Company’s September sales rose 4.6% to 314,000 units. The scrip touched an intra-day high of Rs762 and a low of Rs727 and recorded volumes of over 2,00,000 shares on NSE.

TVS Motors advanced 1% to Rs70 on October sales outlook. The company announced that sales would rise 20% from September. The scrip touched an intra-day high of Rs73 and a low of Rs70 and recorded volumes of over 13,00,000 shares on NSE.

Biocon surged by over 3.5% to Rs489 after the company announced that they have completed sale of Enzymes unit to Novozymes. The scrip touched an intra-day high of Rs502 and a low of Rs471 and recorded volumes of over 5,00,000 shares on NSE.

Alphageo India was frozen at 5% upper circuit to Rs512.7. The Board of Directors of the company has approved selling warrants to founders. The scrip touched an intra-day high of Rs512.7 and a low of Rs470 and recorded volumes of over 10,000 shares on BSE.

Omaxe advanced by 0.4% to Rs334 after the company announced that its unit would apply for Unified access service for 22 circles. The scrip touched an intra-day high of Rs341 and a low of Rs331 and recorded volumes of over 1,00,000 shares on NSE.

PSU stocks recorded smart gains. NTPC rose by over 6.5% to Rs206, Union Bank was up by over 6% to Rs173 and Chennai Petroleum added 3% to Rs287.

Pharma stocks were in momentum led by gains in heavyweight, Ranbay advanced by 1.5% to Rs440 and Dr Reddy’s Lab added 1.5% to Rs659, Biocon was up by 3.5% to Rs489, Lupin gained 1.5% to Rs596.

Banking stocks were under pressure. ICICI Bank slipped by 0.5% to Rs1057, SBI was down by 2.6% to Rs1894 and HDFC Bank declined 1.7% to Rs1411. Syndicate Bank, Andhra Bank and PNB were the major losers among the Mid-Cap stocks.

Refinery stocks were in the limelight after the Indian Refiners announced that they have raised Jet fuel prices by 4.2% for October. HPCL advanced by 3.4% to Rs275, BPCL surged 5.6% to Rs377 and IOC added 4.6% to Rs492.

Stocks in News:

Reliance Retail plans to enter insurance, travel and NBFC businesses.

TCS to use Germany as its base to become the top ten IT companies in Europe.

GSPC to invite final bids for 20-30% stake dilution in its KG basin offshore gas find.

Tata Steel plans to raise prices of some of its products due to rising demand.

Jain Irrigation will invest nearly Rs500mn to set up pipes and drip irrigation manufacturing facility in Tamil Nadu.

Singapore has agreed to allow SBI and ICICI Bank to launch full banking operations under the CECA with India.

The Tatas may sell their stake in tea plantation business and are in talks with overseas investors.

VSNL plans Rs10bn spend for WiMax out of its total capex budget of Rs25bn.

Tata Tea rejected Cadbury’s offer to acquire its global beverages business.

Indo Asian Fusegear is in talks with SEBs, corporations and utilities in North India to for taking up power distribution network on franchise basis.

IFC plans to invest in Karnataka Bank to support network expansion and asset growth.

ICICI Bank to raise US$11bn in the next 12 months to fund its expansion abroad and credit growth in India.

Bajaj Auto management will meet with the company Union to resolve ongoing dispute between workers and the management.

DLF plans to extend its retail footprint to tier II and tier III cities, indicates an investment of Rs25bn.

DLF plans to develop an integrated township spread over 9,178 acres on the outskirts of Bangalore at an investment of Rs600bn.

L&T has floated a new arm L&T Power Projects to foray into the power generation business.

BSNL has announced plans to offer CDMA mobile services in class-A cities, beginning with Kolkata.

BHEL will have to shell out additional Rs4bn for acquiring the ailing Bharat Heavy Plates and Vessels.

Two foreign shipping companies, Zim, Israel and Mediterranean Shipping Co, Geneva have indicated to pick up stake in ABG Heavy Industries.

The Government is in advanced stage of finalizing standard bid documents for inviting PPP in the transmission sector through tariff based competitive bidding.

Average room rates of star hotels may rise by 15-20% during the coming festive season.

The Government to invest Rs100bn in five new deep sea ports during the 11th Five year plan.

Cement manufacturers hike prices in North India by 2% wef October 1.

IMF projects 8% mid-term growth for India.

Entry level bike sales have been slowing on falling rural demand.

The railways is likely to extend its 30% discount for construction, cement and steel companies on empty flow direction for freight carriage till December.

Fund Activity:

FIIs were net buyers of Rs17.22bn (provisional) in the cash segment on Monday and the local institutions pulled out Rs9.3bn. In the F&O segment, foreign funds were net sellers of Rs12.99bn.

On Friday, FIIs were net buyers to the tune of Rs34.93bn in the cash segment. This figure includes a slew of big bulk deals. With this, the net investment by overseas investors in the past eight days has risen to US$3.6bn.

Major Bulk Deals:

h.

Upper Circuit:

Binani Industries, RIIL, Tourism Finance, Bag Film, Raj Tele, Karutari Network, Swan Mills, Ruby Mills, DS Kulkarni, Jai Corp and Marksans.

Lower Circuit:

IID Forgings and Bombay Burmah.

Stock Picks

Reliance Energy
CMP: Rs 1,349.40
Target Price: NA

SSKI has upgraded Reliance Energy (REL) to outperformer on account of the expected value unlocking through the public offer of its 50% subsidiary, Reliance Power (RPL). Incidentally, the board of REL has already given its approval for the IPO of Reliance Power. RPL holds all the new power generation assets of REL such as Dadri (7,480 MW), Rosa (1,200 MW), Shahpur (4,000 MW) and Sasan UMPP (4,000 MW) among others.

The total power capacity being set up by RPL is around 25,000 MW. According to reports, the IPO is likely to raise around Rs 80-100 billion at a dilution of 15-20%, implying a valuation of Rs 400-667 billion for RPL. “We believe the IPO is positive for REL shareholders as it unlocks the value for its power assets. The capex of power assets is funded through the IPO funds as well”, said the report in a note to its clients.

Overall, we like REL’s strategy of backward integration of its distribution business by setting up generating capacity across various fuels such as gas, coal and hydel, it adds. Fifty per cent of RPL is held by REL and the balance 50% is held by ADAG.

Arvind Mills
CMP: Rs 63
Target Price: NA

Merrill Lynch has maintained a sell rating on Arvind Mills as it feels that the valuations are expensive and the near-term earnings outlook remains extremely weak. “We have cut our earnings estimates by 28-29% over FY’08-09 to factor in a deteriorating second half with costs set to escalate further. We have also factored in slower than expected growth from the garment exports business on the back of a rising rupee”, says the report.

Further, cotton prices are likely to rise at least 10-15% by the time the company runs out of low-cost inventory. Power cost is also set to shoot up November onwards when the gas contract for captive power generation expires. A hardening rupee is making matters worse, with the company having to put on hold its jeans capacity expansion, notes the report.

Meanwhile, the company has issued 50.6 million warrants to promoters, convertible into equity shares at Rs 52 per share over a period of 18 months. This will result in a 24% increase in share capital and the promoter holding will rise from 33.9% to 46.8%. “We assume the funds, aggregating to Rs 2.6 billion, will be utilised for debt repayments over FY’08-10. As a result, we estimate the gearing will fall to 1.2 times in FY’08 and 1 time in FY’09”, says the foreign brokerage.

Yes Bank
CMP: Rs 211.30
Target Price: Rs 230

Citi has initiated coverage on YES BANK with a buy rating due to the bank’s focused asset portfolio, apart from a strong treasury and advisory income businesses. The brokerage has set a price target of Rs 230 for the country’s youngest private sector bank.

According to the foreign brokerage, the key catalysts for the stock’s medium-term performance are likely to ease domestic interest rate and liquidity environment that will provide a respite to margins and bolster quarterly performance over the next two to three quarters, along with fresh capital and strong growth in investment banking fees.
“We expect YES BANK to grow significantly more than peers, in part, due to its smaller absolute size, with advances and total assets estimated to grow at 70% and 64% CAGR, respectively, over FY’08-10 estimates. We also estimate earnings to increase 56% and profits by 61%, driven by strong loan growth, continued momentum in fee incomes (51% CAGR), and relatively lower (though increasing) provisioning charges”, adds the report.

Ennore Foundries
CMP: Rs 181.60
Target Price: Rs 480

ICICI Securities has initiated coverage on Ennore Foundries with an 18-month price target of Rs 480, factoring in the high-growth trajectory and capacity expansion that, according to the brokerage, will make it the largest foundry in Asia.

“Ennore Foundries has embarked on an aggressive capex plan of Rs 3.5 billion over the next three years. This would treble its capacity to 210 TPA from 75 TPA in FY’07. Post completion of its capex, EFL would emerge as the largest foundry in Asia”, notes the report. Meanwhile, the company staged a smart turnaround FY’04 onwards by registering a 29.8% revenue CAGR and 430 basis points EBITDA margin improvement over FY’04-07.

“We believe the company will be on a high-growth trajectory through FY’08-11 (estimates), clocking in 34.8% revenue CAGR and 73.4% recurring net profit CAGR after a subdued FY’08 due to high depreciation and interest charges”, says the report. The company is also aggressively exploring inorganic growth avenue for expanding global footprint.

IPO market hots up

With sub-prime jitters allayed to some extent, the IPO market is once again hotting up. Most of the IPOs in the grey market that are open for subscription or have been scheduled for listing in the coming weeks are trading at a 30-50% premium in the grey market. The announcement of the Reliance Power IPO has only infused further buoyancy to the primary market.

The remaining quarter could see further action as many infrastructure, energy and power companies are slated to hit the market.

Issues like Koutons Retail, Consolidated Construction, Dhanush Technologies, Saamya Biotech, Kaveri Seeds, Supreme Infra, among others, are all trading at a significant premium to their offer price as per grey market sources. IPOs like that of Power Grid are further expected to generate good returns for retail investors. Going by the current grey market premiums, each share will fetch a premium of about Rs 35. Thus, gaining roughly Rs 10,000 excluding the borrowing cost.

Experts say while pricing the issue, usually 20-25% listing gains are set aside for investors. However, when markets fall, this premium shrinks and many a times the issue becomes unattractive for subscription. Bankers are now trying to leave more on the table, keeping in mind the volatile market conditions.

Sub-prime concerns had taken a toll on some issues slated to hit the markets during those months. Typically, when markets nosedive, listing returns diminish significantly, even if there is enough money left on the table for the investor. Public issue mop-up by Indian companies has gone up during September, with realisations of around Rs 4,000 crore, compared with just about Rs 665 crore in August.

This was mainly because markets did not perform well in August. The mobilisation in September is also significantly higher than about Rs 882 crore raised in the year-ago period, as per Prime Database.

“There is a large pipeline of issues in the coming months. If global markets see a downturn, the issues that have already closed for subscription could see some decline in the grey market premium,” says a merchant banker.

Sterlite Industries, Mahindra and Mahindra

Sterlite Industries, Mahindra and Mahindra

Daily Technicals, Futures - Oct 3 2007

Daily Technicals, Futures - Oct 3 2007

Gold and silver prices slip

Gold and silver prices drop as dollar strengthens and crude weakens

Gold and silver prices dropped today at New York. The drop for gold prices was the highest since August, 2007. A drop in crude oil and a partial strengthening of the dollar against other currencies hurt gold's appeal as an inflation hedge.

In recent days, the weakening of dollar had continued to affect the price of the metal. Investor sentiments were boosted by the fact that gold and silver were alternate sources of good investment in the face of declining dollar and rising energy prices. Till last week, gold had rallied six straight weeks to the highest in 27 years as the dollar tumbled to a record against the euro.

Gold for December delivery fell $17.80 (2.4%) to close at $736.3 an ounce on the New York Mercantile Exchange today, 2 October 2007, 2007. The contract had touched a low of $730.8 during the day but rebounded back. Yesterday, gold had climbed to an intraday high of $755.7. This was the highest intra day price seen since the last 28 years.

Silver futures for December delivery dropped 40.5 cents (2.9%) to $13.45 an ounce. The metal has climbed 4% this year.

Gold prices have jumped 15% during the third quarter and it is the most since 1999. The yellow metal has climbed 15% this year.

The U.S. currency today rose after touching all-time lows in the previous eight sessions. The currency ignored a couple of weak economic reports. The Dollar Index, which tracks the performance of the dollar against a basket of other currencies, moved up by 0.5% to 78.28. Previous to today, dollar had dropped more than 7% against the euro this year. Crude prices continued to trade below $80/barrel.

As per Nymex data on last Friday, Gold warehouse inventories rose by 79,316 troy ounces to stand at 7.1 million troy ounces but Silver supplies fell to 132.6 million troy ounces, down 1.4 million troy ounces.

Broker Recommendations

Bharati Shipyard Reco price: Rs 579 Current price: Rs 589.90 Target price: Rs 798 Brokerage: Anand Rathi

The booming shipbuilding industry, along with government subsidy of 30 per cent for the industry has brought the sector to centre stage.

Globally, orderbooks for shipbuilders are pegged at an estimated $118.7 billion, and India has less than 1 per cent market share, since Indian shipbuilders can build vessels less than 100,000 DWT. Indian shipbuilders are therefore expanding capacities to grab a greater share of the pie.

Bharati Shipyard has planned a greenfield capacity in Mangalore to build six 60,000 DWT vessels, investing about Rs 450 crore. At full capacity, this capacity can generate a turnover of Rs 1400-1500 crore, according to Anand Rathi.

This facility would turn operational from Q2 FY08; however peak sales would come at full utilization in 2010. It has been awarded SEZ status; hence, it would benefit from the five-year tax holiday.

Overall, Bharati Shipyard scores well on the profitability front. The operating margin, at 18 per cent, is expected to be consistent (excluding the subsidy).

In offshore supply vessels and rigs, the operating margin is as high as 18.5 per cent whereas it is 17 per cent in the cargo segment. The company’s present order book amounts to Rs 4,000 crore, with the unexecuted portion to be around Rs 3,300 crore, providing a fair visibility of earnings.

The brokerage expects Bharati Shipyard’s bottom line to grow by 39 per cent in FY08 and 61 per cent in FY09. At Rs 579, the stock traded at 15 times estimated FY09 earnings, and the brokerage recommended a “buy” with a target price of Rs 798.

Housing Development & Infrastructure (HDIL) Reco price: Rs 609 Current price: Rs 626.55 Target price: Rs 760 Brokerage: PINC

HDIL has built huge competence in the niche of Slum Rehabilitation and Development. It has developed 2 million sq ft of rehabilitation housing area and another 5.5 million sq ft of slum rehabilitation development is underway.

The company has a land bank of nearly 112 million sq ft to be developed over the next five years. It now plans to foray into other geographies such as Kochi and Hyderabad.

Its land holding in the Mumbai Bandra Kurla Complex (1.1 million sq ft) has high monetising potential (approximately Rs 20,000 per sq ft).

Besides, the significant opportunity being presented by redevelopment of Dharavi and slums around the Mumbai airport, have the potential of propelling HDIL’s financial and operational parameters.

On the commercial real estate front, HDIL has focussed mainly on medium-sized projects targeted at financial and service sector companies. Currently, it has around 19 million sq ft of retail space under construction to be completed by FY12. It also has plans to build multiplexes, either as stand-alone structures or within malls.

Recently, the company has also incorporated a wholly-owned subsidiary known as HDIL Entertainment for its multiplex business, which could provide value unlocking going forward.

PINC expects HDIL’s net sales to grow by 76 per cent to Rs 2,120 crore in FY08 and by 80 per cent to Rs 3820 crore in FY09. At Rs 609, the stock traded at 7.5 times estimated FY09 earnings.

Kirloskar Electric Company Reco price: Rs 262 Current price: Rs 270.70 Target price: Rs 361 Brokerage: IndiaInfoline

Kirloskar Electric underwent a turnaround in FY06 via restructuring, transfer of certain assets and liabilities to a subsidiary and relocation of manufacturing facility.

The company’s new transformer unit in Mysore is likely to help capitalise on robust demand expected over the next five years. Average realizations for transformers and motors divisions, which contribute majority of the revenues, witnessed an improvement of 45.6 per cent and 32 per cent respectively in FY07.

Strong demand arising out of government and private sector capex should further improve Kirloskar Electric’s realizations. IndiaInfoline expects the company to witness a strong revenue growth at a compounded annual rate of 38 per cent between FY07 and FY09, owing to the sharp focus on core operations.

The growth in the bottom line is expected to outdo the top line growth at a compounded annual rate of 53 per cent over FY07-FY09, as a result of improving margins due to higher realizations.

At Rs 262, the stock traded at 14.6 times and 10.9 times estimated FY08 and FY09 earning per share of Rs 18 and Rs 24.1, respectively. IndiaInfoline recommends a “buy” with a one year price target of Rs 361, an upside of 38 per cent.

Worst US Recession in 25 years?

On September 18 the Fed cut its target for the fed funds rate by 50 basis points (0.5 percentage points), from 5.25% to 4.75%. The move surprised many analysts who had been expecting a more modest cut of 25 basis points.

For those versed in the Austrian theory of the business cycle, as developed by Ludwig von Mises and elaborated by Friedrich Hayek, the aggressive Fed "stimulus" is ominous indeed. Not only will it pave the way for much higher price inflation than Americans have seen in decades, but it will also exacerbate what could be the worst recession in twenty-five years.

How the Fed "Sets" Interest Rates

Before discussing the history of interest rate manipulation by the Fed, a primer will be useful. When people say the Fed did such-and-such to "interest rates," they are specifically referring to the Fed's target for the federal funds rate. The Federal Reserve itself is neither a borrower nor a lender in this market; the fed funds rate is the interest rate that banks charge each other for overnight loans of reserves. Recall that in our fractional reserve banking system, the Fed mandates that banks keep a certain amount of reserves (either cash in the vault or deposits with the Fed itself) in order to "back up" their total outstanding deposits. At any given time, some banks have more reserves than they need, while others have less. The banks with excess reserves can thus loan them to those with deficient reserves, and the (annualized) interest rate is the fed funds rate.

Now a further complication: the Fed itself does lend reserves to banks, but it does this at the so-called "discount window," and the relevant interest rate is the discount rate. In recent years the Fed has traditionally maintained a margin between the fed funds target and the discount rate, in order to encourage banks to borrow from each other, rather than coming hat in hand to the (more expensive) Fed. Some readers may recall in mid-August that the Fed Dlashed the discount rate (not the fed funds rate) and encouraged banks to borrow from it in an effort to restore liquidity and calm to the credit markets.

It is clear enough how the Federal Reserve can set the discount rate: since the Fed is the one loaning these reserves, it can insist on any rate it wants. (Of course, if the rate were too high it might not get any takers.) But how does the Fed influence the federal funds rate, if it doesn't directly participate in this market? Is the target enforced the way, say, the government in some areas controls apartment rents or minimum wages?

The process is much more complicated. Very briefly: the Fed can control the quantity of reserves held by banks, and thus indirectly can control the price the banks charge each other for lending out reserves. If the Fed thinks banks are charging each other too much for reserves — in other words, if the actual fed funds rate is higher than the target — then the Fed will engage in an "open market operation," buying assets such as US Treasury bonds from banks. The Fed pays for these purchases by adding numbers to the accounts the selling banks have with the Fed.

This is the precise point of entry for the new money that the Fed creates out of thin air. To repeat: When the Fed buys (say) $1 million in bonds from Bank XYZ, Bank XYZ surrenders ownership of the bonds but sees that its deposits of reserves at the Fed go up by $1 million. But the Fed didn't transfer this money from some other account. No, it simply increased the electronic entry representing Bank XYZ's total reserves on deposit. There is no offsetting debit anywhere in the banking system. Bank XYZ now has $1 million more in reserves, while no other bank has less. Bank XYZ is now free to go out and loan more reserves to other banks, or to make loans to its own customers. (In fact, due to the fractional-reserve system, the bank could make up to $10 million in new loans to customers.) The money supply has increased, putting upward pressure on prices measured in dollars.

But back to our original theme, the injection of reserves obviously increases their supply and thus (other things equal) pushes down the rate Bank XYZ will charge other banks who might want to borrow reserves from it. The open market operation has thus achieved the Fed's goal of pushing the actual fed funds rate down to the desired target. Of course, going the opposite way, if the actual fed funds rate were too low, the Fed would sell assets to the banks, thereby destroying some of the total reserves in the system.

Austrian Business Cycle Theory

According to Ludwig von Mises and his followers, the boom-bust cycle is not inherent in the free market, but is rather caused by the government's interference in the credit markets, specifically its manipulation of interest rates. The government causes the boom period when it injects new credit into the system (pushing down rates), and then the unsustainable, non-economic investment projects put into motion necessitate a bust at some future date.

Generally speaking, the chart indicates an inverse relationship between the two series. This accords with the commonsense view that cutting interest rates provides a stimulus while hiking them is contractionary. However, what the Austrian approach provides is the understanding of the real forces behind the boom-bust cycle. In other words, most financial commentators think that today's interest rates affect today's economic growth, end of story. But if a previous boom period has led to massive malinvestments, there must be a bust period to liquidate the various projects (for which there is an inadequate capital structure to complete).

To put it another way, many commentators seem to believe that if the Fed held interest rates low indefinitely, then we'd never have high unemployment, just rampant price inflation. And yet, the recent experience shows that this is dead wrong. The Fed didn't cause the recent problems by "responsibly" hiking interest rates. No, rates had been steady at 5.25% for some time, and then the housing bubble burst and the mortgage market faltered, thus "forcing" the Fed to take action.

Looking back at the chart above, we can see why the worst may be yet to come. In (price) inflation-adjusted terms, the early-2000s levels of the actual fed funds rate is the lowest since the Carter years. And many readers may recall the severe recessions of 1980 and 1982 that followed that period.

Conclusion

In the Austrian view, the boom-bust cycle is caused by the ed's maintenance of artificially low interest rates, which causes businesses to expand, hire workers, buy other resources, and so forth, even though these projects are not justified by the true supply of savings in the economy. The greater the "stimulus" the worse the malinvestments.

From 2001–2004, the Fed kept (real) rates at the lowest they've been since the late 1970s. One of the consequences that has already manifested itself is the housing bubble. But a more severe liquidation seems unavoidable. The recent Fed cut may postpone the day of reckoning, but it will only make the adjustment that much harsher.

Robert Murphy is the author of The Politically Incorrect Guide to Capitalism