1st Aug 2008

Hi,
I am back with another analysis. This time it’s more about a qualitative approach, as my
‘analytical’ area of brain is busy with other analysis.

US recession- As expected, the US is under mild recession. The housing market is

continuing its southward journey, caused by the subprime meltdown. The rate-cuts by
Fed have triggered inflation and further rate-cut is ruled out. Equally, it seems that the
Fed is in no hurry to increase rate, at least for now.
Food inflation- Up to July, the monsoon has been good, except few pockets of drought.
If this continues for Aug-Sept also, then the food inflation will be contained by Oct-
Dec’08.
Non-food inflation (mainly metals) - They continue to add worries. Although the govt.
is arm twisting individual industries (cement, steel, sugar etc.) to pause on price rise. Also
this kind of inflation is inversely proportional to the US recession. A moderate to severe
recession can even trigger a price crash.
Oil inflation- Nothing can be said, except that the oil prices has reached a local
maxima@147 dollar a barrel, in pure mathematical context (whether this translates into
global maxima, remains to be seen.). And once speculators are convinced that further rise
is limited, they offload contracts and withdraw money, cooling the price. This has indeed
happened and oil is at 120-126 dollar. I think 100-125 band is genuine, but anything can
happen- it may breach 160 mark, or it may fall to double digits. Or, it may touch both
values within a time-span of few months!
The ‘P’-factor- Politically speaking, after the Left was replaced by Samajwadi Party, and
the Manmohan Singh led UPA govt proved majority on the floor of House, it was clear
that reforms will get out from cold storage. Starting the 123 deal, the Lok Sabha is
expected to debate and pass (hopefully) some market/ industry friendly bills in Sept
session. But since BJP will oppose, along with the usual party-pooper Left, it remains to
be seen how bold a Congress govt can behave in esp. election year!
Regarding the election itself, the govt is tweaking with LS proceedings to ensure that BJP
is unable to bring a fresh ‘No-confidence motion’ during Sept session. As, any two
consecutive can have a maximum of 6 months, the govt has no compulsion to commence
LS session before March’09. The president is an ex-Congress person will only smooth
the process. However this does not guarantee that the UPA govt will not fall before
March’09; it only ensures that the Congress has up to March to find most opportune time
to let the UPA govt fall.
The nuke deal/ vote of confidence has made few good things for Congress, cash-on-
camera notwithstanding-
a) It showed that Manmohan Singh is not a weak PM; it is his strategy to maintain a
low profile image to push his agenda.
b) The Congess leadership is reformist, and it can even sacrifice govt if it is in the
nation’s interest. (Particularly in the 5th year of governance!!)
c) Only Congress has guts to take bold decisions.
d) Inflation, if contained, will not work against the incumbent Congress govt.
Interest rate- The recent monetary policy by RBI re-emphasizes the RBI’s view that
inflation is bigger issue than growth, and political uncertainty has increased the pace of
measures (both rates repo and CRR) to contain inflation. However I feel that rate
increases are nearing to end and not more than 1-3 are expected.
Growth rate- The GDP growth rate is slowing down to 7.5-8%. But even 7% plus rate in
these hard times is an achievement in itself. The industry is roughly expected to grow
twice the rate of GDP growth rate. I.e. 15-16% seems realistic.
The market- The tug of war between bulls and bears is at its max as the volatility index
of Nifty suggests. Bears are repeatedly unable to beak the 12000 mark on the Sensex,
while bulls can’t take and sustain it to above 14500. Fall in inflation and/ or oil prices
will favour the bulls.
My strategy- It will remain same- staggered buy. I will buy at every substantial slide,
without fear that the market may further fall. And, I am in no hurry to sale, except in case
of violent bounce back. As I am busy these days, I may not research and send price-bands
etc. Regarding sectors, I feel that time has come to accumulate banking stocks. Yes Bank
and Axis Bank (erstwhile UTI Bank) looks promising. Reliance Capital at 900-1050
looks good. Capital goods will suite to aggressive investors, and real estate will have a
gestation period of 1.5-2 years. Averaging can be done in power sector, e.g. R-Power at
130-140 is good bet. IT sector is for short duration, as severe US recession will batter it.
Oil upstream (RIL, RPL, Cairn etc.) is good, but refinery margins are expected to
squeeze, caused by over capacity (in case of RIL/ RPL). Telecom will continue to
deliver, although 3G license and spectrum issues will have to be watched.
Lastly, I must accept that bear market (mid-term) has finally arrived. So tight fielding is
the mantra. Have patience, let the price fall, then invest and wait for the market to
recover.
Let 2008 be the year of investment, and have courage to use it accordingly!
Happy investment!

-Ayush

6th Aug 08
Hi,
As I said in the last mail, this time I think betting on banking stocks will pay.
We can view this sector from two angles-
In short term, the sector’s profitability is linked with the interest rate (which itself relies
on RBI’s monetary policy, and the policy is influenced by the inflation and inflationary
expectation) and credit offtake. The market is now-a-days being guided by this logic, and
banking stocks has been battered in July. However, as the pendulum swung to the height
of pessimism, valuations looked well, and in many cases at mouth watering level. A
typical scenario of bear market! On the slight change of little lower inflation, the banking
sector bounced back. They are trading at 10-20% above of their recent lows.
(I also bought Reliance Capital (although an NBFC to be precise) and Yes Bank, at
around 900-1050 and 115-130 respectively. Now, after change in political equation at the
center, RCAP bounced back violently, making me luckier by few bucks.)
Another view says that banking sector mirrors the health of the economy and the degree
of its integration from the global market. And I am following this logic, for medium to
long term views. India will be one of the least effected countries, and will come out much
stronger from the subprime crisis. The Indian banking sector is poised for another decent
growth. India’s capital market are one of the most well regulated and sophisticated
market of the world. It is also highly competitive market.
The NPA (non performing assets- bad loans in common parlance) are continuously
declining from ’95-96 levels. They may increase for a little while, as increase in interest
rate causes chances of default to rise, but they will very soon resume their downwards
journey. The NIM (Net Interest Margin) is stable at around 3%. This shows that long
term profitability is intact, short term losses notwithstanding. In fact, in many cases these
short term losses are notional; they have to be shown in the profit-loss statement, as per
the RBI diktat, although if bonds are held till maturity, they won’t have any impact on the
profitability. I am not going into the nitty-gritty of accounting.
The years 2004-07 were exponential for this sector. This has been paused and reversed in
2007(later half) and 2008, with the worst happening in June-July. Now this has bounced
back, but I think that although the worst may be over, it is not out of woods yet, as
inflation is still a concern, particularly for the RBI. And I expect 1-2 further rate hikes.
This will be the time to enter/ enhance the portfolio with banking and financial stocks
(excluding the pure broking firms).
As I mentioned in the last mail, I am tracking RCAP, Axis Bank, and Yes Bank; and
to certain extent HDFC and HDFC Bank.
RCAP is great company, and after Anil Ambani took its charge, it has reoriented itself.
Now it is aspiring to become a financial conglomerate. Its business ranges from mutual
fund, share trading, personal finance, life insurance and general insurance. RCAP is the
holding company for these ventures. The lifetime high for this sock is around 2900 levels.
After the Jan 08 market slide, it tumbled to 1600, then 1200-1300, and finally in July to
below 900. I was convinced that once it went below 1100, it was nearing its bottom, as
900-1000 is a very long term strong support for this stock. After the change in political
equation at the center, it went up to 1300-1400 range, which seems its genuine band.
Axis Bank, erstwhile UTI Bank, is one of the pioneer private banks. During the last 3-4
years, it has expanded aggressively into tier 2 cities. The customers from these cities form
a low costing deposit base- an advantage in increasing interest rate scenario. This is
clearly being reflected in the latest quarterly results. If I am not wrong, it reported around
50% rise in net profit for the latest quarter. But major negative for this stock is its price
variation, its gyration ranges from 500 to 800. My strategy for this stock is to enter when
it batters most. Tight fielding! I have not yet started buying this stock, but will think so if
it tumbles once again. 570-600 will be my price band for buy.
And regarding Yes Bank, I am tracking its development since its birth. It is the latest
entrant in private banks. As its size is small, it has plenty of options to grow
exponentially, even in these turbulent times. Its result was also above 50% growth in net
profits for the last quarter. During the plunge in banking stocks, it went back to 106.
However since then it trades 120-140 range, which I think its genuine range. And I have
bought it in 115-135 range. Mid-term scenario for this stock is very positive. RBI is
planning to further open the banking sector for foreign banks in 2010-2011, depending
upon the govt in power. If this happens, Yes Bank will be one of the most suitable
candidates for acquisition, as its promoters are new and will not hesitate to avail the
lucrative exit offers. And if this fails, this bank is in anyway growing at a high pace.
HDFC/ HDFC Bank- It is the second largest private bank, and is the most profitable
bank in India. It is also one of the most profitable banks in world. That’s why it
commanded high valuations consistently. And its high valuations deterred me to buy it.
But I think it may be one of the gems in the portfolio. For HDFC, 2200 is its first support
and 1800 is very strong support. For HDFC Bank, 1100 is first support and 900 is the
strong support. First support may suite to aggressive investors to start buying, and strong
support can be used for heavy buying (aggressive) or start buying (moderate, like me).
Regarding the general market conditions, I think it is going to fall in near term. But will
bounce bank in mid to long term. So I am ready to ‘avail’ this near term fall, if it
happens. If it does not happens, I will sit on cash, wating for it to happen. I am in no
hurry to purchase.

Happy investing!

-Ayush