Market Outlook

India Research
December 16, 2011

Dealers Diary
Indian markets are expected to open flat to marginally positive taking cues from flat opening in most of the Asian markets today and positive closing in the global markets yesterday. The Indian markets edged lower yesterday as data showing selling by FIIs weighed on sentiment. However, there was a strong intraday recovery after the latest data that showed that annual food inflation fell to a nearly four-year low of 4.35% for the week ended December 3. Globally, US and European markets closed in green yesterday on the heels of the release of a batch of largely upbeat U.S. economic data, snapping a three-day losing streak, but finished off session highs after another warning about Europes sovereign-debt crisis. In US, a report from the Labor Department showed that initial jobless claims filed last week were the lowest since May 2008. Meanwhile, industrial production data of US for November 2011 unexpectedly fell to -0.2% due to a pullback in factory output. The markets today would be closely watching out RBIs monetary policy review in which RBI is expected to take a pause after 13 consecutive rate hikes over the last 18 months. Also, CPI index for November 2011 (estimate 0.1%) of US economy will be on radar.

Domestic Indices BSE Sensex Nifty MID CAP SMALL CAP BSE HC BSE PSU BANKEX AUTO METAL OIL & GAS BSE IT Global Indices Dow Jones NASDAQ FTSE Nikkei Hang Seng Straits Times Shanghai Com

Chg (%) (0.3) (0.4) (1.1) (1.5) 0.1 0.1 (1.0) (1.2) (0.3) 0.5 (0.6) Chg (%) 0.4 0.1 0.6 (1.7) (1.8) (1.4) (2.1)

(Pts) (44.7) (16.9) (60.4) (88.9) 2.9 3.6 (96.3) (102.1) (28.8) 35.9 (32.9) (Pts) 45.3 1.7 34.1 (141.8) (327.6) (37.1) (47.6)

(Close) 15,836 4,746 5,370 5,781 5,894 6,579 9,728 8,168 9,941 7,854 5,770 (Close) 11,869 2,541 5,401 8,377 18,027 2,635 2,181

Markets Today
The trend deciding level for the day is 15,957/4,784 levels. If NIFTY trades above this level during the first half-an-hour of trade then we may witness a further rally up to 16,05816,235/4,818 4,874 levels. However, if NIFTY trades below 15,957/4,784 levels for the first half-an-hour of trade then it may correct up to 15,78015,678/4,7294,695 levels.
Indices SENSEX NIFTY S2
15,678 4,695

Indian ADRs Infosys Wipro ICICI Bank HDFC Bank

Chg (%) 0.5 0.1 0.4 0.5

(Pts) 0.3 0.0 0.1 0.1

(Close) $50.1 $10.0 $25.6 $26.4

S1
15,780 4,729

R1
16,058 4,818

R2
16,235 4,874

News Analysis
RBI Monetary Policy Preview Pause in rate hikes expected Eurozone update Tata Motors global sales: November 2011
Refer detailed news analysis on the following page

Advances / Declines Advances Declines Unchanged

BSE 824 1,905 121

NSE 370 1,075 53

Net Inflows (December 14, 2011)

` cr FII MFs ` cr Index Futures Stock Futures Purch
2,303 510

Sales
2,358 307

Net
(56) 203

MTD
947 (241)

YTD
(3,077) 5,704

Volumes (` cr) BSE NSE 2,042 10,931

FII Derivatives (December 15, 2011)

Purch
1,532 1,856

Sales
2,230 1,862

Net
(698) (6)

Open Interest
12,829 25,229

Gainers / Losers
Gainers Company
Lupin Jubilant Food Chambal Fert Tata Power Apollo Tyres

Losers Company
Apollo Hosp Manappuram Fin Sintex Inds Havells India Mcleod Russel

Price (`)
435 777 83 90 63

chg (%)
5.3 4.6 4.5 4.1 3.9

Price (`)
477 46 69 401 189

chg (%)
(14.3) (9.9) (7.8) (6.6) (6.6)

Please refer to important disclosures at the end of this report

Sebi Registration No: INB 010996539

Market Outlook | India Research

RBI Monetary Policy Preview Pause in rate hikes expected

The Reserve Bank of India (RBI) will be conducting the 3QFY2012 mid-quarter review of the monetary policy today. Almost the entire street is expecting the RBI to take a pause after 13 consecutive rate hikes over the last 18 months. The RBI had already hinted at a rate pause for the current monetary policy during the policy review on October 25, 2011, and considering the slowing economic growth trends, as highlighted by the lowest GDP growth in the past nine quarters (6.9% for 2QFY2012) and industrial output growth slipping into the negative territory for the first time since June 2009 (contraction of 5.1% in October), a hike in policy rates seems highly unlikely. While there has been a buzz on the street relating to a cut in Cash Reserve Ratio (CRR) lately, we feel the RBI will continue resorting to open market operations (OMO) for easing liquidity in the system rather than going ahead with a CRR cut. So, while there is a possibility of a CRR cut, we would attribute a low probability to the same in this policy. The RBI with its OMO has headroom to infuse `60,000cr-70,000cr over the next few months in our view (QTD average LAF borrowings at ~`75,000cr), which we believe should be sufficient in managing near-term liquidity concerns. Wholesale price-based inflation (WPI) for November 2011 eased to 9.11%, falling significantly from the 9.73% level registered in October 2011; however, it was still above the psychological mark of 9%. Numbers were also higher than Bloomberg estimate of 9.02%. Core (non-food manufacturing) inflation which the RBI tracks closely for its monetary policy decisions continued to be high at 7.8% (average of 5.8% over the last two years). Hence, we do not expect any immediate cut in policy rates by the RBI. With the RBI already having clearly indicated that it would like to see a definite downward trend in inflation figures before resorting to a rate cut and inflation expected to moderate to 8-9% only post CY2012, we expect the RBI to remain in the pause mode for a few more months, before starting the rate cut cycle. Rate cuts earlier than that are likely only if the next reading on quarterly GDP growth comes in alarmingly low at below 6-6.5%. To summarize, for the upcoming policy, we expect the RBI to maintain status quo on repo rate and CRR, while indicating infusion of adequate liquidity through OMO this outcome is already factored in by the markets and any cut in rates would be taken positively.

December 16, 2011

Market Outlook | India Research

Eurozone update
The much awaited EU summit ended on a relatively positive note, where a major step was taken towards building a fiscal pact. The proposed reforms were not as a result of popular demand by Europeans, but rather due to the belief that the Eurozone needs to recover and austerity measure was the only rescue ship. However, unless these measures are accompanied by ECB enhancing its role significantly, it will not materially alter the debt crisis situation in the near term. Major events of the week include: Spanish bonds gather unexpectedly strong demand Aided by strong demand, Spain sold nearly twice as many bonds yesterday than planned at its final auction this year. The Spanish Treasury sold 6.03bn (US$7.83bn) bonds, against a target range of 2.5bn-3.5bn. It received total bids worth 11.2bn, implying a comfortable coverage of the amount sold and enabling the treasury raise more cash than planned. As per traders, higher-thanestimated response to the sale was driven by banks that sought collateral ahead of the ECBs three-year liquidity tender next week. However, the strong auction does not alter the challenging economic conditions for the government. Borrowing cost, however, remained at elevated levels, even though Spanish debt has been outperforming its Eurozone peer, Italy, since the end of November. Spain paid an average yield of 4.02% on the January 2016 bond compared to 5.28% at its previous auction on December 1, 2011. Average yield on the April 2020 bond was 5.20%, up from 5.0% at the previous sale on September 15, 2011. EU summit ends on a positive note, however fails to calm markets The much awaited EU summit ended last Friday last week, with a silver lining for Eurozone. The new treaty, referred to as fiscal compact proposed to implement stricter economic governance received almost cent percent unanimity 26 out of 27 EU member states backed for the tax and budget pact to tackle the Eurozone debt crisis. Only UK refused to go along, as the provisions pertaining to tougher regulation of the financial transactions were perceived detrimental to the countrys interest. However, the agreements and finalizations did little to restore confidence among the investor community. On Monday, stocks slid and borrowing costs for Italy and Spain rose as worried sentiments weighed on the outcome of the summit that split the European Union, with UK blocking the treaty change and forcing Eurozone countries to negotiate a fiscal accord outside the Union. ECB stepped to rescue; it bought short-term Italian bonds after yields on Italian and Spanish debt spiked. But ECB sources clarified that purchases would remain limited with a maximum ceiling of 20bn per week. European banks downgraded; pressure mounts Moody's downgraded France's three main listed banks last week amid deteriorating funding conditions and their exposure to sovereign debt. It slashed BNP Paribas SA and Credit Agricole SA long-term debt ratings to Aa3 and Societe Generale SA to A1, and affirmed the negative outlook of these banks. In addition,
December 16, 2011

Market Outlook | India Research

European banks are under pressure from regulators to shore up their capital base. To make up for this, banks are in the run to dispose some of their fastest growing businesses outside their domestic territories to competitors at the cost of future profit and growth. Spains Banco Santander SA, Belgiums KBC Groep NV and Germanys Deutsche Bank AG are readying plans to exit profitable operations outside their home markets. Banco Santander, who required to bridge 5.2bn capital gap, sold its Colombian unit last week to Chiles Corpbanca for US$1.16bn (0.9bn). Likewise, Deutsche Bank is too weighing options, including sale of most of its assetmanagement unit, while KBC may dispose of businesses in Poland. Economists are of the view that a second credit crunch is about to grip the European banking system and repeat the problems that triggered the 2008 financial crisis. IMF seeks funds from the world UK limits pocket, US refrains to participate European leaders also agreed during the summit to provide 200bn to the IMF to help augment the reservoir of bailout funds distressed nations, although no breakdown was specified on member countries contribution. In preparatory talks ahead of the summit, Eurozone ministers reportedly had expected around 30bn from UK. However, UKs PM David Cameron clearly ruled out injecting extra 30bn into IMF, thereby sending negative signals to the Eurozone. David Cameron clarified that UK did not expect to stretch beyond the 10bn (11.8bn) permissible limit allowed under a parliamentary vote to increase Britains commitments to the IMF on top of the 29bn (34bn) already committed. Any increase above 10bn would necessitate another Commons vote, which could be problematic given the resistance of Labour and MPs. On the other hand, US chose to be a bystander to IMFs needs. This was contrary to its move in 2009, where it fronted a global drive to augment the IMFs ability to help pull the world out of recession by pitching in US$100bn. US is of the view that crisis in the Eurozone should be tackled by European nations IMF should only play a supportive role and avoid taking a center stage, thereby pointing out greater commitment from European countries.

Tata Motors global sales: November 2011

Tata Motors reported better-than-expected global volumes for November 2011, driven by robust growth across its product segments. Total global volumes registered strong growth of 35.1% yoy (12.8% mom) to 108,028 units. Global commercial vehicle volumes jumped strongly by 23.6% yoy (15.1% mom), driven mainly by domestic sales; while global passenger volumes grew by an impressive 46.8% yoy (10.8% mom) on the back of robust domestic and Jaguar and Land Rover (JLR) performance. Wholesale volumes of JLR posted better-than-expected 27.1% yoy (11.6% mom) growth in volumes to 29,183 units, primarily led by 37.7% yoy (robust 14.1% mom) growth in Land Rover volumes. Jaguar volumes, on the other hand, posted a 5.4% yoy decline; however, volumes improved by 1.6% on mom basis. JLR sales continue to defy global slowdown as they continue to be benefitted by strong demand momentum in China and Russia. We

December 16, 2011

Market Outlook | India Research

expect JLR to sustain its volume performance, backed by the positive response to its recently introduced models. At the CMP of `173, the stock is trading at 5.9x and 3.9x FY2013E earnings and EV/EBITDA, respectively. Owing to the recent correction in the stock price, we recommend Accumulate on the stock with an SOTP target price of `187.

Economic and Political News

Confident of tabling Lok Pal Bill in the winter session: Government Credit offtake up 17.8% as of early December Services exports up 2% in October, imports rise 0.3% Weekly food inflation at 4.35%, lowest in four years

Corporate News
M&M to hike prices by up to 3% from January 2012 NTPC to set up 50MW solar plant in Madhya Pradesh Reliance Capital in talks to buy majority stake in Bloomberg UTV RIL's D6 block gas output falls to all-time low Strides Arcolab gets USFDA nod for cancer drug
Source: Economic Times, Business Standard, Business Line, Financial Express, Mint

December 16, 2011

Market Outlook | India Research

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December 16, 2011