All Eyes on IT Sector Results

Software companies could deliver the numbers in Q2 FY08, but the sector may not outperform over the next year.

The apple of investors’ eyes for more than a decade, the information technology (IT) sector has only lost money for shareholders this year. Software companies are in a soup from both ends.

On one side, the Americans wouldn’t pay them more for their services, and on the other, the depreciating dollar wouldn’t let them take home more rupees. And now, talks of a US slowdown are doing the rounds in the markets, following the credit crunch brought to you by the subprime crisis.

The first act of the show has been played well by the first quarter results, which caused considerable damage. The scene for the second act is being set up by global financial majors, key customers of Indian software services companies, issuing profit warnings and retrenching people.

As we close into the announcements of Q2 results this week, it is difficult to hazard a guess on what directions the stocks would take.

Seasonally strong

Most IT companies affect wage hikes in the June quarter every year, and the result is usually seen in the first quarter numbers. Therefore, the second quarter results have been historically better than Q1, for all the players.

This year, the margin pressure arising out of wage hikes was compounded by the rise in the rupee, which gained nearly 7 per cent against the dollar during the first quarter, chomping away the growth in earnings drastically.

During the second quarter, the rupee has appreciated just around 1.6 per cent, and IT companies too, have reworked their hedges at around Rs 39 a dollar, which puts them in a relatively safer position. Further, new contracts are being signed at slightly higher prices which should aid in improving realisations, thus protecting margins.

Volume growth too, does not seem under any threat so far. Says Asit Bhandarkar, a fund manager at JM Mutual Fund, “There is no concern on the business front for IT companies. However, the broader issue of currency appreciation still remains as realisations are taking a hit.”

American blues

“Prior to the subprime crisis, there was a hunch that the US economy may have a soft landing,” says Andrew Holland, managing director – strategic risk group, DSP Merrill Lynch. “Now, the soft landing is not too soft after all,” he adds.

The impact of the subprime-led credit crunch appears to be far-reaching as global financial majors issue profit warnings and announce lay-offs. “If you retrench staff, you do not outsource; so there would be pressure on the outsourcing sector in the short run,” says Holland.

On the other extreme, there is another set of people who believe that a slowdown in the US will boost offshoring, and hence outsourcing majors will rather gain from it in terms of volumes. However, the outlook is uncertain until the end of the year, when US companies review their budgets, and thus, their IT spending as well.

If there are any cuts in the IT spend at the clients’ end, the impact will surely be seen on Indian vendors, but with a lag effect of about six to nine months. “So far, there has been no indication of ramp downs from any of the clients of IT companies is what we hear,” says Bhandarkar, “but there is no way to estimate what is going to happen when the IT budgets are reviewed.”

Currency crash?

Markets were awash with inflows from foreign institutional investors’ (FIIs) and the stock market indices soared, right after the US Federal Reserve reduced rates by 50 basis points last month. Increased foreign investments however spelled doom for the currency situation, as the dollar whooshed below the Rs 40 mark.

A recent UBS report has pegged the dollar at Rs 39 by December 2007 and at Rs 37 by the end of 2008. And by now, this should not surprise anyone, since it is rather the weakness in the dollar which is being reflected in the continuing appreciation.

Therefore, for a considerable time to come, IT majors have to get used to a strengthening rupee scenario, finding alternative ways out such as increasing their dollar expenditure.

Time to recognise

It is clear that even if there is a slowdown in the US economy, it is not going to show any impact before the next six-nine months. Further, the impact of changes in currency rates will depend on each player’s ability to hedge its exposure.

In such times of uncertainty, Indian IT and outsourcing players are left with few options. “The only way for IT companies to survive this crisis is by increasing realisations and improving efficiencies,” opines Bhandarkar.

Increased geographical diversification, and adding new industry verticals appears to be another option. So far, the big players have remained highly dependent on the US among geographies, and on banking, financial services and insurance (BFSI) among industry verticals.

If the US slowdown is prolonged – the environment is still to emerge clearly – smaller companies, which are already in a soup, will find the going more difficult.

“Compared to our larger peers, our profits are more sensitive to any change in currency movements as we rely on a higher proportion of offshoring,” says Rostow Ravanan, chief financial officer, MindTree Consulting.

“Larger companies are better placed to deal with a slowdown too, since they have a proven track record, long-standing relationships with their clients and big ticket projects,” Bhandarkar adds.

Over the years, Indian IT majors have moved into taking up contracts which form a part of the clients’ non-discretionary IT spend thus assuring sticky revenues. Smaller players are still vulnerable on this front.

Up or down?

The sentiment for the sector on the streets is mixed, as it was beaten down largely due to the rupee appreciation. So far, there have been assurances that the subprime crisis has not affected the Indian IT companies, preventing further declines of IT stocks.

However, concerns over an impending slowdown in the US economy have resulted into risk aversion among investors, and the price-earnings (P/E) multiples that the IT biggies commanded have contracted. Historically, Infosys traded at a one-year forward multiple of 25-28 times, which has now come down to 22-24 times. To some, this is a good time to enter.

“Valuations are fair after the correction, and there is ample liquidity in the markets since there is new money flowing in after the US Fed rate cuts,” claims A Balasubramanian, chief investment officer, Birla Sun Life Mutual Fund. “Considering the present situation, it appears that the sector may not outperform, but neither will it under-perform,” he adds.

Valuations

Given that the industry expects volume growth to remain strong in the near term, one can assume that the results of a couple of imminent quarters wouldn’t really show any sign of gloom.

It remains to be seen whether there are any cuts in the capital expansion plans or IT spends at the US clients’ end, which will further set the direction for Indian IT stocks. However, this uncertainty does not seem to be fading before the end of the year.

The potential upside from the sentiment of strong volume growth appears to be factored-in in the present valuations of large-cap IT stocks. In spite of chances of large players weathering the storm, the glum outlook makes a strong case for investors to stay away from mid-cap IT counters, until clarity emerges.

Most large-caps being reasonably valued, one has to take a pick on the prospects of individual companies. Apart from this, currency hedges and geographical diversification too, have become important parameters.

TCS, HCL Technologies and Infosys (in that order) have built-up the largest hedge positions as on June 2007. Although unlikely, any improvement over the rupee guidance declared last quarter by tech companies will surely reflect positively in stock prices.

Potential candidates: Infosys, Wipro and Satyam. TCS and HCL Tech are likely to report robust volume growth, with the former reporting a moderate rise in realisations too.

Among the smaller players, MindTree Consulting and Mphasis BFL may report strong revenue growth, while Hexaware and iGate Solutions could be under fire due to slack revenue growth.

Investors may hold on to their IT portfolios with patience, and new buyers with a slight appetite for risk could log in to large-caps and expect rewards but not in the near term.

Markets depend on results now

The Indian stock markets are waiting for cues from three important events in the coming week – Results of software major Infosys, industrial production data and the UPA-Left meeting on the nuclear issue. to be held on October 9. The markets may go up on Monday as the US job data for September was better than expected and there were upward revisions for July and August as well. The encouraging figures have postponed concerns regarding a slow down in the US economy.

Last Friday’s selling wave was mainly due to uncertainty on the US employment data front and the weekend factor.

The foreign inflows are still strong. “The foreign investors are in a buying frenzy and till that continues, the market will keep moving up,” said Vibhav Kapoor, group chief investment officer, IL&FS. The Indian market has been among the top three momentum markets, along with Hong Kong and China.

The Sensex is presently trading at a PE of 24, which is a yearly high. Foreigners have invested more than 5 billion US dollars in capital market following the US Fed rate cut.

The results season, beginning next week, will dictate how momentum and valuations play out in the near term. Motilal Oswal Financials has issued a results preview for the second quarter. “We estimate 2QFY08 earnings growth at 16 per cent for Sensex, as compared with 27 per cent in 1QFY08 and an average growth of 26 per cent in the last nine quarters”, the report stated.The slowdown in growth is attributed to the impact of rupee appreciation on export-oriented businesses and the effect of interest rates on the auto segment.

“Our profit estimates could see upsides due to forex gains and other income (Earnings in 1QFY08 grew at 27 per cent as against our estimate of 18 per cent, led by higher other income).”

Edelweiss has already told its clients “to buy only on dips.”

The IIP data for July revealed a slowdown in the growth rates, But the market discounted the slowdown as it was on a higher base and the monsoons generally impact production in July. It will be interesting to watch the August IIP data, which is to be announced next week.. Though it might still cross 18,000 mark on FII buying, volatility is expected to continue.

Most brokerage houses are expecting 18,200-18,300 levels on upper side and a steep correction thereafter. Profit booking has already begun from some retail and high net worth individuals. The Sensex was up by 2.79 per cent last week. The total market cap of BSE is Rs 5,402,061.28 crore, or $1.38 trillion in dollar terms.

India Banking Sector - What lies ahead

After a sharp rally, banking stocks seem to offer a limited upside from current levels.

While the BSE Sensex has given a return of 45 per cent in the past year, the BSE Bankex has gained about 58 per cent led by both large and small banks.

The robust credit growth of 30 per cent for three years till FY07 on the back of an 8 per cent GDP growth and foreign investments chasing reasonable valued stocks have led to the huge demand for banking stocks.

The recent rate cut of 50 basis points by the US Federal Reserve has revived hopes that the rising interest rate regime of the past few years may come to an end in India as well, which augurs well for the economy and for banks too.

Besides macro factors, there are also fundamental reasons for the stocks to shoot up. The banking industry has witnessed one of the most challenging times this year and yet exhibited good financial performance partly due to robust growth of non-interest income for many players.

Banks have weathered various storms such as rising interest rates, inflationary concerns due to high oil prices and constant pressure from the Reserve Bank of India (RBI) to reduce their exposure to lucrative but risky sectors like capital markets and real estate. What lies ahead?

Credit growth is slowing down... RBI’s earlier measures of hiking key rates like repo, reserve repo and cash reserve ratio (CRR) in the past and its objective to protect banks from riskier assets seems to have worked. Interest rates in India have risen by 400 basis points since 2006.

As a result, credit growth has come down to 23 per cent y-o-y as on September 14 from the earlier 30 per cent. Deposit growth, which was lagging behind the blistering advance growth in the past, is growing at the same rate.

While this may look healthy, the credit growth between April and September 2007, traditionally a lean season, looks disappointing. While deposits grew at 7 per cent, advances have risen at less than half the rate of 3 per cent.

Last year, advances had increased by 7.4 per cent in the same period. With SLR (statutory liquidity ratio) investments at near stipulated levels of 25 per cent, banks have to fund their credit growth through deposits, which has led to a higher growth in deposits than advances.

Says an analyst, “This will become a normal business cycle in future as banks will garner huge deposits in the lean season, which will be utilised in the next half or busy season.”

Is this just a blip? Says Tarun Bhatia, head-financial sector, ratings, Crisil, “Credit growth will pick up in the next two quarters though the overall growth in 2007-08 will be lesser than what we are used to in the past few years.”

Adds Hitesh Kuvelkar, associate director, research, First Global, “Bank credit has to grow at more than 20 per cent if India has to achieve its targeted GDP growth of 8-9 per cent.” Even if credit growth drops to 23 per cent for FY08, nobody is complaining as it comes on a higher base.

How will margins shape up? Due to lacklustre credit market, players have started resorting to rate cuts or discounts. Some banks have also started lending to corporates at sub-PLR rates.

According to Rupa Rege, chief economist, Bank of Baroda, effective yield on advances have come down by 50-100 basis points. However, interest rates on deposits still remain high levels at over 8 per cent.

Thus, net interest margins (NIMs) will vary from bank to bank depending on magnitude of cut in the deposit rates.

Adds Rege, “Margins may contract by 20 basis points in Q2 FY08 as deposit rates continue to remain high and advances growth has been lacklustre.”

Crisil’s Bhatia also agrees and adds that profitability will be impacted marginally.

He adds that the net profitability margin, a parameter used by Crisil, which considers interest income from interest bearing assets, fee-based income, interest cost on borrowings and operating expenses is likely to decline by 10-15 basis points.

However, margin contraction will be supported by higher fee based income, treasury gains both from equities (Sensex at new high) and bonds (with yields declining from 8.15 per cent in May-June to the current 7.8 per cent) and robust recoveries.

But net profit growth will vary from bank to bank depending on the provisions. But the situation will not be all that bad.

Strategy: accumulate or hold After a steep rally, investors will have to be patient while putting money in private banks, which have appreciated more than their public sector counterparts.

Analysts advise investors to have a horizon beyond 2010 while investing at the current levels.

Says Ajit Dange, analyst, Pinc Research, “Valuations seem to factor in FY09 growth in business.”

Kuvelkar of First Global prefers to wait till Q2 results before recommending stocks and revising price targets even though he is bullish over the long term. Existing investors with a medium term view may even liquidate their holdings and enter again on dips.

Mid-caps vs large-caps Stock prices of mid-cap banks such as Yes Bank, Centurion Bank and Federal Bank have zoomed.

Explains an analyst, “Stock prices of mid-cap banks are going up on hopes of an imminent consolidation as shareholders of acquired banks gain more than that of the acquiring bank due to better price offered.”

As a result, most of them are quoting at comparable valuations of large-cap banks. Analysts prefer large-cap banks in the long term as they believe that banking in India is eventually a market share game. Here are some banks worth looking at:

Allahabad Bank: The bank’s valuation of around one time estimated price to book multiple for FY09 makes it attractive.

According to analysts, the bank is unlikely to give any negative surprises on the key financial indicators like net interest income, margins, non-performing assets (NPAs) and net profits in the next few quarters.

Union Bank of India: UBI’s renewed focus on areas like maintaining NIMs, improving CASA (current and savings accounts) ratio further, bringing down NPAs and shift to retail and SME segments have already started yielding results. The bank looks attractive at 1.4 times estimated price to book for FY09.

Indian Overseas Bank: IOB trades at a price-book multiple of 1.4 FY09 estimates and looks promising given its high NIM (3.5-4 per cent), return on equity (25 per cent) and return on assets (1.4 per cent).

Though the bank continues to have higher gross NPAs, they are declining and net NPAs of less than one per cent look encouraging. Analysts are hopeful that the bank will maintain the strong financial performance.

More correction in the markets

There is strong support at Nifty 5065 and it is quite likely that the market will oscillate between 5120-5220.

A burst of sustained buying on Wednesday propelled the market to new highs. Thursday and Friday saw more muted trading and some profit-taking.

The Nifty moved above 5200 to 5260 levels before easing back to 5185 points for a week-on-week gain of 3.28 percent. The Sensex hit highs of 17979 before closing at 17773 for a gain of 2.79 per cent. The Defty was up 3.85 per cent as the rupee continued to gain muscle.

Domestic and foreign investors showed contrasting attitudes. The FIIs remained very positive while the Indian funds were consistent sellers through the week. Overall advance-declines ratios were positive and volumes were good.

The BSE 500 was up 2.31 per cent. The Nifty Junior crossed 10,000 before actually seeing a weekly decline of 1.47 per cent – the Bank Nifty saw a sell-off of 2.45 per cent, which was reflected in the Junior because of the high bank representation in the index.

Outlook: The chart patterns suggest the correction could continue. There is strong support at 5065 and it is quite likely that the market will oscillate between 5120-5220 rather than even fall to 5065. So expect either a small sell off or range-trading unless the FIIs stay positive and the Indian funds turn buyers as well.

Rationale: Strong resistance was visible above the 5220 level. Momentum broke on Thursday and Friday saw selling from many institutions. On the downside, buying seemed to come in at about the 5150 level. That pattern could continue or there could be a swing down to 5065 which appears a really strong support.

Counterview: It all depends on the FII attitude. This rally has been overwhelmingly driven by overseas fund flows. At least part of that cash has come in on the assumption of rupee hardening, which boosts dollar returns. If the FIIs move out, there could be a significant drop.

Bulls & bears: As stated above, banks and financial stocks saw a sell off – IFCI was especially hard-hit – Corporation Bank appeared to be bucking the sector-wide trend since it actually gained. Despite the rupee, the CNX IT rose 1.34 per cent but there was selling on Friday and Infosys weakened ominously.

The star of the week was new listing Power Grid, which went berserk doubling its allotment price. That energised several other power stocks – ABB, Bhel and Suzlon all did well.

However NTPC saw a big sell-off on Friday after sustained buying over five previous sessions. Among other engineering counters, Larsen was very strong. IPCL and Reliance Industries both saw renewed buying after a few sessions of consolidation.

MICRO TECHNICALS

Bharti Airtel Current Price: 994 Target Price: 1035

The stock saw an engulfing formation on Friday when the high-low range was larger than previous sessions and the trend was strongly positive. It has a target of 1035 and it may touch 1065 in intra-day moves. Keep a stop at 975 and go long. Start booking profits above 1035.

Bajaj Auto Current Price: 2615 Target Price: 2725

The stock appears to have made a breakout from a trading range. It has a target of about 2725. In case of an overall correction next week, it could be a defensive holding. Keep a stop at 2590 and go long.

Infosys Current Price: 1983 Target Price: 1925

The stock shot up on Wednesday but it saw selling on both Thursday and Friday. One would expect a correction to between the 1925-1945 level. If the 1925 support is broken, the stock could dip till the 1865 level. Just ahead of Q2 results, this trend is indicative of general sentiment. On the upside, 2000 appears to be a resistance.

L&T Current Price: 3089 Target Price: NA

Huge volumes of institutional buying pushed the price up and created a breakout from a trading range and to new highs close to 3200. It's not possible to set an upside with this pattern. Keep a trailing stop at 3055 and go long. Move the stop up 25 points for every 50-point rise.

Suzlon Energy Current Price: 1650 Target Price: 1800

The stock has spurted up but the volumes eased on Friday although the price rose. There is a target of about 1800 with a four-week perspective. Keep a stop at 1600 and take delivery. Book some profits above 1720.

Daily Technical Futures, Market Outlook - Oct 8 2007

Daily Technical Futures, Market Outlook - Oct 8 2007

Earnings to propel to market

Indian companies’ fiscal second-quarter results season is set to kick off this week, offering evidence as to whether the soaring Sensex benchmark index of the Bombay Stock Exchange (BSE) has real legs, and what toll, if any, has the significant belt-tightening on the credit front, as well as a sharply rising rupee, taken on many companies.
One macro earnings forecast from brokerage firm Motilal Oswal Securities Ltd predicts that Sensex companies—the 30 bellwether companies in the index—would only grow revenues at 16% compared with 27% growth in the April-June quarter and an average of 26% in the last nine quarters.
The report suggests that the impact of rate hikes by the Reserve Bank of India—the overnight lending rate of 7.75% is at a five-year high—and the steady appreciation of the rupee—at a nine-year high against the dollar—could lead to earnings for auto, information technology and pharmaceutical firms being dented.
With Infosys Technologies Ltd set to report on Thursday, followed by HDFC Bank Ltd, the health and future expectations from two key sectors will be quite visible before a stampede of earnings from all companies in a two-week period.
“We expect growth to continue in line with the trend of the last few quarters,” says a bullish Shriram Iyer, head of research at Edelweiss Securities Ltd. “We are not expecting positive surprises. But we are also not expecting negative surprises.”
Other market observers are also bullish. Amitabh Chakraborty, head of equities at Religare Securities Ltd, also predicts “strong” earnings and a forecast from his brokerage says revenues for stocks under their coverage will grow by 21% with profit margins growing by 16.6%, especially for cement, real estate as well as oil and gas companies.
Analysts also point to stronger-than-expected advance tax collections as a sign of what could be robust results. Such collections from the top 10 Sensex companies could be as much as 35% more than last year, on an average, notes Deven Choksey, managing director of KR Choksey Securities.
While analysts remain focused on what impact the earnings will have on the Sensex, which closed last week at 17,773.36, gaining 482.26 points or 2.79% during the week, and setting an intra-day record on Friday of 17,979.18, other indicators of economic and corporate health have been less bullish. And anecdotally, there is growing evidence of inventory pile-ups in sectors such as auto. Advertising in print media, often a key measure of belt-tightening by companies, has also been quite soft during the quarter, due to a pull-back from realty and other sectors.
Meanwhile, credit growth has slowed to 25% this year from 30% last year, and the Index of Industrial Production grew by 7.1% in July, compared with 13.2% in the year-ago month, suggesting slowing consumer spending and corporate earnings. In April-July, the index slowed to 9.6%, compared with 11.1% in the year-ago period.
Meanwhile, revenues for the top 100 companies on BSE fell 3.28% in the April-June period compared with the January-March period and profits barely rose, up 1.6% according to a Mint analysis, perhaps suggesting what trend might be in store for the July-September period. However, from a year-before perspective, revenues grew 15.20% during April-June compared with the same quarter last year, and net profit grew 36.96%.
Just for the top 30top 30 top 30 top 30 top 30 Sensex firms, revenues fell 2.9% during April-June against the January-March quarter even as net profit rose 7.73%. But revenues rose 17.5% during that quarter in the year-ago period with net profits rising a healthy 31.9%.

India Media

India Media

Weekly Technical Analysis

Nifty — The index closed on a positive note on the opening session of the week, after which it rallied toward 5261. It exhibited range-bound movement toward the closing session of the week. It ended the week with gains of 165 points.

Momentum Oscillators — On the daily chart, MACD is in buy mode. RSI (14) – Relative Strength Index is exhibiting a reading of 83.71 (reading above 70 signifies overbought). Stochastic (5, 3) is in sell mode and in overbought zone. Momentum oscillators are exhibiting overbought reading on daily charts.

Moving Averages — The 50 dma = 4531, 20 dma = 4796, 10 dma = 5035. The index is trading above the averages. Rising moving averages act as a support during declines. Support during the week's trading can be expected around 10 dma around 5035.

Support — The index has support around 5126 (low of 4 October 07) and 10 dma around 5035. Intra-week declines should find support around these levels. Lower
support is around 5000 levels.

Resistance — The index faces resistance around the recent high at 5261 (3 October 07), close above the 5261 levels can see the index exhibit strength during the week's trading.

Conclusion — Upswing can continue with support around 5035; close below 5035
can see intra-week declines.

Secrets of Dalal Street

The phone in the dealing room rang just as Rohan Chawla had finished briefing his colleague. It was about a buy order from an overseas client for 10 lakh shares of Steel Authority of India (SAIL) to be executed at a particular price. Mr Chawla (name changed), who heads the equity sales team at one of the reputed institutional stock broking firms, was impassive as he took the call. Nobody could have guessed that he had been expecting the call. There were 10 minutes still left for the day’s trading session to begin.

The conversation that followed may sound as a harmless exchange of market views between two participants. But what actually takes place is a typical ‘front running’ operation. Technically, front running is an act in which a trader takes up a position of unfair advantage ahead of a large buy or sell order by a client.

This is something as old as the stock market itself. After the usual exchange of pleasantries, the voice at the other end asked “How do you think the European market will play out today, Rohan?” “It looks very good to me,” Mr Chawla replied, and before ending the conversation added, “I am in a bit of a rush, we shall speak at 10 ‘O’ clock tonight.”

On the other side, JC, as the market operator was known to friends, gave instructions to his dealers after disconnecting the call. “Buy 1 lakh shares of SAIL as soon as the market opens and sell it if it rises by over Rs 5 later in the day, and buy another 10,000 shares in account L264.”

Innocuous codes

Through a coded language, Mr Chawla informed JC that he had a buy order for 10 lakh shares of SAIL to be executed later during the day(Europe was the code for SAIL while 10 ‘O’ clock was the code for the quantum of the buy order. Under the arrangement, JC would take positions in the stock before the order was executed, and also buy some shares in the account of Mr Chawla, who had passed on the information. When the price of SAIL would rise as a result of the client’s buy order, JC would square off his position for a neat profit, and share a part of it with Mr Chawla.

If it had been a sell order, JC would have short-sold SAIL shares and then covered it up later. Dealing room phones in all leading institutional broking firms are recorded. But even if a Sebi investigating officer were to play back the recorded conversation between JC and Rohan Chawla for suspected front running, he would have little evidence to prove that the two were in collusion. Also, the players who indulge in these activities had different sets of codes and these keep changing all the while so as to not arouse any suspicion.

The quantum of the order could correspond to the days of the week (Sunday=1, Monday=2 and so on) or time of the day or days of the month, while in many cases a parallel set of stock codes have been devised. On that list, Arvinds Mills may be the code for ACC, and similarly for other stocks. So if a dealer or sales official at a broking house tells somebody on the phone that Arvind Mills looks very good, he is actually leaking out information that he has a buy order for ACC. If he has a sell order for ACC, he may say that Arvind Mills looks weak.

The real players

Market players are divided on whether front running is as rampant as it used to be in the mid-90s till about 2004. “Earlier the market was very shallow and there were limited opportunities for making money; so front running was common,” says a veteran BSE broker.

“But today the market has become too huge and there are ample opportunities. Most players have grown rich beyond their wildest imaginations, so they would not want to risk their careers by doing something silly,” he added. With the depth of the market having increased tremendously over the past few years, it is difficult for players like JC and Chawla to win consistently.

JC may know about the 10 lakh-share buy order in SAIL at Chawla’s firm. But if some other broking house has a sell order for 20 lakh shares of SAIL and JC is unaware of that, he may end up losing money by front running the buy order. But smart operators like JC usually have friends at more than one institutional broking house.

But many players disagree with the view that instances of front running have reduced. They argue that the stakes have only gotten bigger. And these days, it is not as much about cash market transactions as it is about orders on Nifty futures, the new playing ground for institutional investors.

And equity sales staff and dealers executing the orders are only the small fish in the oldest game in equity markets. The sharks are some of the ‘rotten apples’ in the fund-manager community. The dealers may execute the trades in all honesty. But what if the fund manager — the client who has placed the order — has already tipped off an operator about the order. There are enough such instances, claim dealers at broking houses.

Keeping tabs

Last week, the regulator barred a dealer at UTI Securities, a sub-broker at Emkay Share and Stock Brokers, and a director of Prayas Securities from dealing in shares of Ballarpur Industries till further notice for alleged front running. This is the first time that the regulator has passed an order in a matter relating to front running.

Sebi’s contention is that the dealer at UTI Securities passed on the information about a huge sell order in Bilt by an overseas client to the other two, who along with their retail clients, then short-sold Bilt shares.

The regulator has arrived at the conclusion by observing the trading pattern in Bilt shares. But proving charges of front running may turn out to be as difficult as proving an insider trading violation. What can make the regulator’s task easier is the power to seize e-mail and phone conversations of the accused. And if those involved have managed to come up with clever codes, it may make matters even more difficult for Sebi. Whether it manages to get a conviction in the abovementioned case or not, the regulator’s aim may also have been to warn intermediaries resorting to unethical practices.

Via ET

Weekly Technical Analysis

The Sensex hit a new high of 17,979 points, but profit booking saw some paring of gains. The Sensex finally ended with a gain of 2.79% over last week on volumes which were significantly lower. The star performing sectoral indices for the week were CGS (+7.24%), Oil & Gas (+5.73%), Tech (+3.58%) while the losers were Bankex (-2.58%) and FCMG (-2.51%).

Last week, the Sensex almost hit price cycle Expansion (PCE) target (17,996 point) of 12,425-15,869-13,779 points. The alternate cycle projection (ACP) target of the same move is 18,159 points. Therefore, one has to be cautious of any further rise as far as the short term is concerned. However, their is nothing to worry about in the medium and long term. Traders should keep a stop loss below 17,632 points, while the medium-term support are at 17,073 and 16,797 points. Till these support levels hold, the upside price for this week are 18,159 and 18,466 points.

The recent rise in Fibonacci retracement levels from 13,779-17,979 points to 16,375 (38.2%), 15,880 (50%) and 15,384 (61.8%) are supports to watch out for in the weeks ahead. The previous top of 15,869 points is also a strong support.

The next 2-3 weeks indicate that a short-term top is ‘probable’ (no confirmation though as yet) and volatility is likely to be extremely high. The short-term indicators are in the over-bought territory, which implies that one should book profits in any further rise. A sudden announcement of elections could create a hiccup in this juggernaut. Medium and long-term players should use corrections as buying opportunities.

The sectors which outperformed the Sensex (+25.68%) by a significant margin from the recent low (in close) of 14,141 points (August 17, 2007) are metals (+43.94%), oil & gas (+36.12%), and the capital goods sector (+30.86%). Therefore, stocks belonging to these sectors should be bought for trading purposes whenever they get oversold in short-term corrections. Banking is also a sector to bet on during corrections with a medium- to long-term horizon.

However, from a trading perspective, one has to take a contrarian call and look for buying opportunities in sectors that have been subdued or have underperformed during this period. Even the IT sector stocks, which are currently underperforming the market, could see a gradual recovery. Taking this contrarian stance one should look to auto and healthcare stocks.

Tata Motors (Rs 779.70)

From the auto pack, Tata Motors looks interesting from a medium- to long-term perspective. In fact, if it consistently closes above the Rs 800-mark on high volumes, it has the potential to move up to the Rs 900-925 area in the medium- to long-term with some resistance at Rs 845. Support in declines is pegged in the Rs 720-735 range.

Amtek India (Rs 173.25)

The weekly chart of Amtek India shows a big sideways movement between Rs 135 and Rs 186 for almost 11 months. The weekly averages are positively phased and the weekly oscillators are also indicating strength. There is strong support pegged in the Rs 157-162 range. One can buy at current levels as well as accumulate in declines for the next 3-5 months with a minimum upside price target of Rs 216 and a maximum of Rs 235.

Biocon (Rs 498.75)

Biocon has finally succeeded in crossing the crucial resistance zone of Rs 475-485 on very high volumes. One can buy in dips with a strict stop loss below Rs 471 in close for a minimum target price between Rs 530 and Rs 555 in the short term and Rs 585 in the medium term.

Time ripe for correction?

After moving within striking distance of the 18000-mark, the Sensex fell shy of this psychological barrier and closed on a slightly weak note on Friday.

There was a sense of uneasiness that was discernible from the way the markets behaved during the week. Though the long-term trend is bullish, there is a strong case for a meaningful short-term corrective phase to materialise soon.

The index has reached an overbought region across all time-frames. Such a situation is a precursor to a significant corrective phase.

With corporate earnings season kicking-off, the market is likely to get volatile and choppy in the near term.

It would be safe to take profits and wait for the market to correct before considering fresh exposure. Though the markets have displayed the tendency to stay afloat even amidst an overbought condition, the risk-reward equation does not justify initiation of fresh long positions now.

In the event of a short-term correction materialising, the index has strong support at 17,100-17,200 and then at 16,400-16,800. As observed last week, the long term bull market is intact and the index is on course to move to the target zone of 19,500-20,000.

This target would be valid as long as the support at 15,100 is not breached.

Nifty (5,185.85):

The index has moved further into the overbought region and the price action in the past couple of days is indicative of the uncertainty and nervousness among market participants.

Considering that the recent rally has not been accompanied by any significant correction, there is a possibility that the correction this time could be sharp and swift.

On the downside, the Nifty has strong support at 4750-4800. A short-term correction would be an opportunity to buy quality stocks as the long term trend is bullish.

The journey towards the next major target zone of 5,900-6,000 would commence on the completion of the expected short-term correction.

CNX IT Index (4,868.45):

The index is ruling just below the crucial bullish trigger level of 4900. A convincing move past this level would confirm the completion of a bullish double-bottom pattern that was referred to last week.

The index could then move to the target zone of 5400-5450 range. On the contrary, a close below 4490 would have bearish implications.

Key pivotals:

Unitech (327):

This stock has been recently included in S&P CNX Nifty. The short-term outlook is bearish and a drop to Rs 295-305 range appears likely.

The long-term outlook is bullish and the stock could move to Rs 380-400 range after the completion of the expected short-term correction.

The long-term bullish view would be negated on a close below Rs 280. Long positions may be considered on weakness with a stop loss at Rs 280.

Tata Steel (Rs 833):

The stock is in a long-term uptrend and is one of the top performers in the metals space. The recent price action indicates that the stock is into a short-term corrective phase.

A drop to the short-term support zone of Rs 730-740 appears likely. Long positions may be considered on weakness with a stop loss at Rs 720.

The stock could move to the long term target of Rs 975-1000 on completion of the short-term corrective phase.

Grasim Industries (Rs 3,544):

The long-term outlook is positive and a move to Rs 3900-4000 appears likely. However, a short-term correction is expected and the stock could drop to the support zone at Rs 3300-3350 range.

A break below Rs 3300 could lead to a test of the more critical support area at Rs 3150-3200. Long term bullish view would be negated only on a close below Rs 3100.

Stock of the week:

Bartronics (Rs 228.5):

After a sharp rally, the stock has been in a corrective phase in the recent weeks. It is likely to commence the long-term uptrend after testing the crucial support zone at Rs 200-210.

A move to the initial target zone of Rs 255-260 range appears likely on the completion of the corrective phase. The long-term bullish view would be negated on a close below Rs 188.

Long positions may be considered on the evidence of support in the Rs.200-210 range, with a stop loss at Rs 188.

Krishna Kumar

Kotak Mahindra Bank

Kotak Mahindra Bank

Fallout of recession in the US on India

When Federal Reserve Chairman Ben Bernanke announced the hefty cut in interest rate in August he had also indicated that the downside risk to growth had increased considerably. Since then, the trends have worsened making recession in US almost imminent. Alan Greenspan put a date on it. It is possible we can get a recession in the later months of 2007, he said, though most forecasters expect it in 2008. The reason why Greenspan feels recession may descend early is that profit margins of US companies have begun to stabilize. Besides, in August more than 4000 employees lost their jobs. Recession will be the cumulative effect of sub-prime mortgage crisis and housing burst.

The US economy has been expanding since 2001 and is now almost at the end of the cycle. An economy is in recession when economic growth becomes negative for at least two consecutive quarters. Since the US recession will be brought about by housing burst it is likely that the drag on the economy will continue for a much longer time. Japan took nearly a decade to normalize from a similar shock. Recession in the US is a concern for the rest of the world because the US is the largest economy generating more than 28 per cent of the world GDP and absorbing 16 per cent of world imports.

BPO, mid-size companies to be strongly hit by Re impact

The country''s BPO sector will continue to face the brunt of the appreciating rupee which will hit margins by 0.2-0.5 per cent in the coming quarters, top industry players today said. ''''BPO and small companies are likely to bear the brunt of rise in rupee in comparison to bigger software firms as they are working on strategies and have additional levers to reduce the impact on profitability,'''' Nasscom Chairman and Cognizant Technology Solutions Vice Chairman Lakshmi Narayan said.

To help offset the impact, government should extend the STPI scheme to such companies just like other export oriented units, he added. The industry is continuously evaluating the impact of the rising rupee, outgoing Nasscom chief Kiran Karnik said, adding that there is no impact on Indian IT companies topline but for every one per cent change in rupee there is 20-25 basis points (bps) change in profitability. ''''The BPO industry will be strongly hit,'''' he added. The bigger companies are managing to offset the rupee impact through their operational efficiency and gain in supply, Kanrnik said. The supply side is improving and there will be a moderation in the wage structure from next year which in turn will help improve the situation, he added. ''''The government have been very supportive and has played a active role in taking IT industry to heights,'''' newly appointed Nasscom chief Som Mittal said, adding that India will become a knowledge capital of the world.

Grey Market - Reliance Power, Consolidated Construction, Kouton, Supreme Infra

Reliance Power 60 to 80 34 to 35

Dhanush Tech. 295 90 to 95 (Good comeback, IPO is now about 18 times oversubscribed, Can't guarantee the listing price though)

Koutons Retail 415 75 to 80

Consolidated Construction 510 200 to 205

Supreme Infra 108 55 to 58

Saamya Biotech 10 5 to 6

MAYTAS Infra 320 to 370 135 to 140

Circuit Systems (India) Ltd 35 5 to 6