Godawari Power and Ispat
Reco price: Rs 184
Current market price: Rs 178
Broking firm: IL&FS Invest Smart

Godawari Power and Ispat the manufacturer of sponge iron and steel billets has announced the impressive Q1FY08 results. The company reported 61.5 per cent y-o-y growth in top line and 72.9 per cent y-o-y growth in bottom line. The growth has been driven primarily by higher volume and realisations.

During the same period the operating margins improved by 350 basis points to 20.0 per cent. Going forward, IL&FS expects the company to continue reporting robust growth during FY08-09.

The commissioning of phase-II capacities will drive the growth during FY08, while a significant savings from captive iron ore mines will provide fillip to revenue in FY09E. At Rs 184, the stock is valued at a P/E of 4.2 times and 2.6 times its estimated FY08 and FY09 earnings, respectively.

Orient paper & Industries
Reco price: Rs 463
Target price: Rs 560
Current market price: Rs 454
Broking firm: Emkay Share and Stock Broking

Orient Paper & Industries’ Q1FY08 net profit at Rs 44.6 crore is marginally below expectations primarily because of lower than expected profit of the paper division.

Revenues for the quarter grew by 13.4 per cent to Rs 293 crore driven by 20.5 per cent growth in revenues of cement division. The operating profit for the quarter grew by 45.6 per cent to Rs 77.7 crore driven by 55 per cent growth in EBIT of cement division.

With repayment of debt during the end of FY07 OPIL's interest charge for the quarter decline by a huge 40 per cent and hence its net profit for the quarter grew by a smart 73 per cent on y-o-y basis to Rs 44.6 crore.

The stock at recommended price trades 5.5 times its estimated FY08 earnings and 5.1 times its estimated FY09 earnings. Emkay believes the valuation for OPIL are undemanding and maintain “accumulate” rating on the stock.

ABG Shipyard
Reco price: Rs 508
Target price: Rs 600
Current market price: Rs 526
Broking firm: Angel Broking

ABG Shipyard recently secured an order from Essar Shipping & Logistics, Cyprus worth Rs 618 crore, this coupled with the acquisition of Vipul Shipyard and good financial results in Q1FY08, the Angel broking puts a buy on the stock.

For the Q1FY08 the company recorded topline growth of 23 per cent to Rs 203 crore. On the operating front, OPM increased by 97 basis point to 27 per cent. During the same period net profit grew by 24 per cent to Rs 33 crore.

ABG Shipyard has a order book of Rs 5,560 crore. The company’s existing order book is 4.9x its estimated FY08 revenues. At Rs 508 the stock traded at 13.5 times FY08E and 8.5 times FY09E on fully diluted earnings of Rs37.5 and Rs59.5, respectively.

Maruti Udyog
Reco price: Rs 841
Current market price: Rs 829
Broking firm: Edelweiss Securities

Edelweiss maintains “accumulate” on Maruti Udyog on the back of continued positive outlook on the passenger car industry. Maruti Udyog Ltd’s Q1FY08 net profit, at Rs 499 crore, was up 35.2 per cent on y-o-y basis from Rs 369 crore in Q1FY07.

During this period its EBITDA margin was steady, however up sharply on q-o-q basis by 220 basis points at 14.6 per cent, primarily due to improved product mix and a fall in other expenses by around 165 basis points.

The company is believed to benefit from the capacity ramp up at the new Manesar plant. On an estimated EPS of Rs 60.0 for FY08 and Rs 70.5 for FY09, the stock at recommended price is trading at 14.0 times FY08E and 11.9 times FY09E.

Suzlon Energy
Reco price: Rs 1,299
Current market price: Rs 1,304
Broking firm: Prabhudas Lilladher

The broking firm maintains “outperformer” on Suzlon Energy. The company for the Q1FY08, reported a consolidated net sales growth of 81.9 per cent on y-o-y basis to Rs 1,940 crore.

Operating margins were down to 7.2 per cent as compared to 17.4 per cent in the corresponding quarter last year due to various reasons such as rupee appreciation, higher employee costs and loss of 100 MW of sales.

During the same period net profit was lower by 80.3 per cent to Rs 18.9 crore. The company has an order book of Rs 13,500 crore. Prabhudas Lilladher revised earning estimates downward by 22 per cent for FY08 and by 17 per cent for FY09.

At the recommended price of Rs 1,299, the stock trades at 32.6 times FY08E and 21.0 times FY09E consolidated earnings of Rs 39.9 and Rs 61.8 respectively. The stock is expected to be under pressure for the next few months, however continue to be positive on the long-term potential of the company.

Both 4,500 and 4,550 levels are significant resistances and it would take extraordinary turnaround in sentiment to push prices up further.

A massive sell off on Friday pulled the market back from record highs. The Nifty closed at 4,445.2 losing 2.46 per cent on a week-to-week basis. The Sensex was down 2.12 per cent at 15,234.57 points.

For the record, the Nifty and Sensex achieved all time highs on Tuesday at 4,647 and 15,868 respectively.

Volumes were massive on Friday – even higher than during Thursday’s F&O settlement, which in itself set records. The advance to decline ratio was exceedingly negative. There would be cold comfort for dollar-investors because the rupee lost ground and the Defty was down 2.86 per cent.

On Friday, anecdotal evidence suggests that domestic as well as foreign institutions were big net sellers.

Outlook: Chart patterns suggest that the correction is likely to continue in the timeframe of the next 3-4 weeks. The Nifty has an intermediate support at 4,300 which is likely to be tested.

However, there should be a pullback early next week when shorts are covered. The upside on a recovery is likely to be no more than about 4,550 at the maximum.

Rationale: Friday’s breakout looks like a classic. Volumes expanded as successive supports were broken and this means a strong intermediate downtrend. The next reliable support is around Nifty 4,300 and that is likely to be tested.

However, a pullback to 4,500 on short-covering is quite likely and even a pullback to 4,550 is possible. Both those levels are significant resistances and it would take an extraordinary turnaround in sentiment to generate enough volume to push price up further.

Counter-view: Friday’s trading saw extraordinary volumes – more even than in the May 2006 crash. While high volumes is usually a bad signal on sell offs, very, very high volumes can mean a selling climax – all bearishness is flushed out and no sellers are left. If that’s the case, this will be followed by small price gains on very low volumes in the subsequent 5-10 sessions.

However, resistance at 4,550 is very strong and unlikely to be broken. Hence, an intermediate downtrend is near-certainty. It remains to be seen how long that will last and how deep the correction could go.

Bulls & bears: There are no bullish pivotals except for ITC. We can however, seek stocks that will recover quickly on a pullback. And of course, we can seek stocks that look extra-weak and likely to lose more ground than the market.

Ranbaxy and Maruti moved up due to massive short-covering during the past two sessions. Bhel has hit support and Suzlon saw some investment buying. Tata Power held on solid results. The entire banking sector may see a relief rally if RBI opts for a rate cut (unlikely) on July 31.

MICRO TECHNICALS

ITC
Current Price: 172.4
Target Price: 185

The stock appears to have made a bullish breakout on high volumes. It has strong support at 170. The upside target would be between 185-190. Keep a stop at 169 and go long. Book partial profits at 180.

Maruti
Current Price: 830
Target Price: 805

Short-covering has led to a pickup in price but the scrip has been unable to penetrate resistance at 835. Keep a stop at 835 and go short. Cover at 810. The intermediate trend is likely to be range trading through a zone of 805-835.

Sail
Current Price: 148
Target Price: 137

The stock has made a downside breakout on reasonable volumes. It has support at current levels but that is likely to be broken. The next reliable support is at 135-137. Keep a stop at 151 and go short. Cover at 138.

Ranbaxy
Current Price: 374.7
Target Price: 355-385

Massive short-covering has led to a recovery from lows of 339-340. Ranbaxy has huge resistance at 380 but it could penetrate this on an intra-day basis.

Next week, expect trading to range through 355-385 with closes near the lower end of the range. The pattern will re-align to that of the overall market.

Reliance Industries
Current Price: 1,867.5
Target Price: 1,810

The stock has made a downside breakout on big volumes. It has reliable support between 1,795-1,820 and is likely to settle in the middle of that zone. Keep a stop at 1,875 and go short. Cover at 1,820.

Contribution of other businesses must accompany improved cigarette margins.

Hotels-to-tobacco major ITC’s cigarettes business brought about a positive surprise in the June 2007 quarter. Segment margin in cigarettes improved by nearly 150 basis points to 27.3 per cent, on the back of a 20 per cent price hike.

As a result, the stock was up 2.8 per cent on the bourses while the Sensex tumbled 3.4 per cent. The ITC stock has been an underperformer over the past year; it is at about the same levels, while the Sensex is up 42 per cent.

This was because analysts have been factoring a decline in cigarette volumes by 7-8 per cent this year because of the price hike to offset VAT, which would reduce demand.

In the June quarter, ITC’s net sales grew 16.7 per cent y-o-y, which is much lower than the 26.3 per cent growth in FY07.

However, the operating profit margin which had dipped 200 basis points y-o-y in the March 2007 quarter, improved by 700 basis points sequentially to 33.9 per cent and was marginally lower on a y-o-y basis. Net profit also improved 20 per cent y-o-y in the first quarter (Q1).

However, considering that ITC is aggressively pushing its non-cigarettes businesses, its growth at 18 per cent in Q1 is half of what it was in FY07.

Its paper revenues grew slowly by 5 per cent as one of its paperboard machine at Bhadrachalam was under planned shutdown for upgrade, but paper is not a high-growth business and revenues had grown 11.8 per cent last year.

Top line growth in hotels, FMCG-others and agri business was slower in Q1 than it was last year. Nor are these businesses turning hugely profitable - FMCG-others, which includes branded foods, lifestyle retailing, stationery & cards and safety matches, continue to be loss making.

The segment margin in hotels went up just 10 basis points y-o-y despite higher revenue per room and better F&B performance. The margin in agri business declined 40 basis points y-o-y to 3.8 per cent in Q1.

Analysts have now revised the cigarette volume decline to be lower at around 4 per cent this year. The turnaround in cigarettes margins may indicate that the worst is over for ITC, but its other businesses need to improve profitability. The stock trades at 21 times estimated FY08 earnings and 19 times FY09 earnings, and is unlikely to be an outperformer.

The upturn in the power capex cycle continued to remain strong in the June 2007 quarter and it helped ABB report an improved quarterly performance.

As a result, the company’s operating profit grew an impressive 60.6 per cent y-o-y to Rs 163.8 crore in the last quarter, while its income from operations grew 43.7 per cent to Rs 1,401 crore.

Its operating profit margin also grew 120 basis points y-o-y to 11.7 per cent in Q2 CY07. The stock price was unchanged on Thursday. Other large players such as Larsen & Toubro’s operating profit margin also improved by 240 basis points y-o-y to 9.4 per cent in the last quarter.

Meanwhile, ABB’s order intake grew 38 per cent y-o-y to Rs 1,996.3 crore in the last quarter, helped by a Rs 289-crore order from the Delhi Metro Rail Corporation.

Also, the company has offset higher input costs such as steel and non-ferrous metals in the last quarter, thanks to recent contracts which allow passing on of rising material costs. Its adjusted raw material costs as a percentage of income from operations declined 265 basis points y-o-y to 71.4 per cent in Q2 CY07.

Going forward, ABB’s performance is expected to remain strong. Of crucial importance also is its ability to manage rising input costs. At Rs 1,079, the stock gets a discounting of 45 times estimated CY07 earnings, given the growth potential of this sector.

The discount to spot is marked across the entire index futures segment.

While the July settlement went off smoothly with record volumes in excess of Rs 1,00,000 crore-plus, the crash on Friday has left the market in turmoil. There was over Rs 65,000 crore of trading on Friday with a high generation of Open Interest (OI).

Index Strategies
There was a fair amount of carryover and the current OI situation makes it likely that much of that volume remains in the market. The Nifty closed at 4,445 in spot with the August series settled at 4402.2 and September at 4,390.35.

The Junior was held at 8,722 in spot with August settled at 8,648.9 and September at 8,836. The CNX IT was at 5,091 in spot and at 5,061 in spot. The BankNifty was at 7,086.5 in spot and at 6,719.25 in the August series.

Apart from the Nifty, the other index futures did not see too much liquidity generated in September series. The BankNifty was the only index that saw a drop in OI as many traders closed out positions after a huge drop. All other indices saw healthy OI expansion in the August series.

Obviously, the discount to spot is marked across the entire index futures segment. Theoretically the difference should bring in arbitrageurs who sell Nifty stocks on spot and go long on the index. This is cumbersome but there may be enough big players in the market to make it possible.

In itself, the differences make long futures positions tempting because the differentials are likely to get narrower regardless of market direction. However massive discounts to spot also suggest that expectations remain bearish. There isn't enough differential in the August-September Nifty contracts to make calendar spreads worthwhile.

In the index options market, there is not enough liquidity in anything except the Nifty segment. There OI has expanded across both puts and calls and the August put-call ratio (in terms of OI) is running at about 1.5.

The overall PCR (OI) is at about 1.45. More calls were opened in the past two sessions compared to puts. I think a fair amount of this is hedging volume – the stock and index futures segment suggests that bearishness is expected.

Technically speaking, the market is likely to see drop further with however, the likelihood of a temporary pullback in the next week. In the perspective of the next 5 sessions, we're most interested in the range between Nifty 4,300-4,550. There's a strong support at 4,300 and powerful resistances between 4,500-4,550. Volatility is very likely to remain high.

There's also ample liquidity in the option chain across this entire range. However premiums on the near-money calls are higher than comfort levels because the market has fallen so fast.

Assuming Monday remains weak one would expect a drastic drop in call premiums. Using the converse logic, puts are somewhat under-priced and premiums may rise.

Working on current premiums, bullspreads with long 4,450c (115) versus short 4,500c (91.5) or short 4,550c (71.65) cost 24 and 44 respectively with the maximum payoffs being 26 and 56. These are not very favourable risk-reward ratios. The bullspread with long 4,500c versus short 4,550c offers a better risk-reward ratio with a cost of about 20 and a maximum payoff of 30.

Again, on current premiums, bearspreads with long 4,450p (164) versus short 4,400p (140) or short 4,350p (120) cost 24 or 44 respectively, with maximum payoffs of 26 and 56. Exactly the same risk-reward ratios as bullspreads. Again a long 4,400p versus short 4,350p costs 20 and pays a maximum of 30 and seems like a better position than the on-the-money spread.

Spreads in either direction could work but ceteris paribus, a downwards move seems more likely. So if premiums don't change that much, one would advice taking bearspreads. A long straddle at 4,450 costs about 280. The breakeven would come at 4,170 or 4,730.

Both seem unlikely prices to pop up in the context of next week. A long straddle with long 4,550c and long 4,350p costs about 192 and breaks even only in a market that goes beyond 4,160-4,740.

We could try the short straddle at 4,450 coupled to a long strangle. The premium inflow is about 88 and the maximum loss is very low - because the breakeven points are so close.


STOCK FUTURES/ OPTIONS

The stock F&O segment is likely to see significant arbitrage action. For example, GMR Infra (Future 876.6, Spot: 870), Reliance Energy (Future: 769.5, Spot: 762.65) Rel Caps (futures: 1,206, Spot: 1,194 ) and RIL (Future: 1,882, Spot: 1,867) all present potential arbitrage opportunities.

In each case, the normal action for an arbitrageur would be to sell the future and buy the spot. This is another reason to expect a temporary recovery. In each case, the retail trader could try to "piggyback" either market.

On Tuesday, there is likely to be action across the financial sector stocks as the RBI comes through with its policy update. The BankNifty has already been hit harder than the rest of the market in anticipation of harsh measures.

If the central bank does not hike rates or squeeze money supply, there will be a relief rally. If it raises rates sharply, the rally could be quite strong.If you have the nerve, pick a basket of bank stocks – SBI, ICICI and PNB for instance, and go long.

As for long positions, ITC is obviously rallying on stock-specific news and rumours. The other potential long position that seems very stock-specific could be BILT. The stock has jumped and a long futures position at 132 could be worthwhile. Keep a stop at 129.

The Sensex is likely to continue the downslide with near support around 14,930 levels, below which the index may slip to 14,650, and eventually test its major support at 13,800.

The index, last week, after a solid start zoomed to a fresh all-time intra-day high of 15,869, but heavy selling on Friday saw the index tumble to a low of 15,160 - down 709 points from the peak. The Sensex eventually broke its six-week rally and finished with a loss of 331 points at 15,234.

This week, the Sensex is likely to face resistance around 15,505-15,590-15,675, while the index may find support around 14,960-14,880-14,795.

The Nifty, which, zoomed to a fresh high of 4,648, witnessed a steep fall and touched a low of 4,424 - down 224 points from the all-time high. The index finally ended with a loss of 121 points at 4,445.

The Nifty is close to its short-term support of 4,420. If this support level holds, then the index may attempt a small pull-back up to 4,480. However, a break of 4,420, could see the index test the support zone of 4,285-4,320 in the coming days.

This week, the index is likely to find support around 4,360-4,335-4,305, while on the upside the index may face resistance around 4,530-4,550-4,585.

The CNX 100, tumbled 124 points to 4,357 and may find support around 4,250, while on the upside the index is likely to face resistance around 4,400-4,440.

The CNXIT, which dropped 100 points last week, is likely to find support around the 5,000-level. The index, real test would come around 4,935 level which would be crucial for the future trend.

With global economy still firmly on the growth path, equity markets do not seem to be in any serious danger.

The stock market fall of 541 points last Friday has once again bewildered investors. And the predominant question on investors’ minds is how deep can this correction get?

Although this fall was touted to be in line with the global meltdown triggered by the US markets decline on fears of the potential impact of rising borrowing costs and credit risk on US corporates and stock market, the real reason perhaps lies within.

Considering that the Indian economy is not highly correlated with the US economy given the limited trade relationship, the behaviour of the US consumer should not affect India as much as other economies such as China.

Thus, it is rather inconceivable that the problem in the US credit market could lead to investors pulling out funds from India due to risk aversion.

However, there are implications for overall money flows into global markets, but there is reason to believe that inflows into India would be better on a relative scale.

Just to recall, global interest rates and tightening liquidity have been inflicting pain on the market in some form or the other for a large part of this rally. But then, the global flows have only increased all through.

The first respite for global markets came from the fact that fundamentals are still strong for most of the world, US being an exception. Last week, the International Monetary Fund raised its global growth estimates to 5.2 per cent this year and the next, up 0.3 per cent from its last estimate.

More significantly, market experts believe that that the US economic growth would moderate and that the Federal Reserve could possibly look at a rate reduction, come September.

Besides, money flows from Japan should continue to be strong as those investors can still make a better return for their buck in market such as India even after the recent rate hike there.

Since the beginning of this year, India has seen the maximum fund flows ($9.6 billion) among key Asian markets this year. Despite this it has been among the worst performers in the emerging markets pack.

FUND FLOWS YTD net purchases in $bn
India	9.60
Indonesia	1.74
Philippines	1.91
S. Korea	-4.00
Taiwan	9.31
Thailand	4.11
Vietnam	0.69

Measured in the local currency, the MSCI India index gave a return of 10 per cent compared to 29 per cent by MSCI China, year-to-date. But thanks to the steep appreciation in the rupee, the dollar returns delivered by MSCI India stood at 20 per cent.

One key reason why money flows into emerging markets would continue is the dollar itself. The experience this year has demonstrated the extent to which currency movements can change total investor returns.

RETURNS Absolute YTD returns
China	29.1
India	10.2
Indonesia	21.2
Korea	28.1
Malaysia	24.5
Pakistan	33.8
Philippines	18.4
Sri Lanka	-14.5
Taiwan	10.6
Thailand	28.7

If we go by the premise that the dollar would indeed continue to weaken, investors would continue to favour destinations other than the US. Higher allocations to emerging markets would be positive for India as well.

FIIs have been underweight on India this year and that itself increases the chances of a favourable rebalancing.

Concerns regarding domestic interest and inflation have already eased, which again means that growth should remain unaffected back home. As we are already close to the second half of this year, it is only a matter of months that analysts would be factoring in next year’s growth estimates.

Corporate earnings are intact. This quarter, too, earnings have been pretty much in line with market expectations with positive surprises from automobiles and banks.

Analysts are expecting this year to end with earnings growth of around 18-20 per cent. Though earnings growth is coming off from the highs of the past four years, they are expected to grow at a reasonable pace of around 15 per cent. India looks reasonably priced compared to other markets too going by estimates of global analysts.

VALUATIONS
Indices	PE (x)	CY07E	CY08E
Sensex	21.08	19.33	16.82
Shanghai Composite	45.34	36.92	29.77
Taiwan Taiex	21.30	19.73	17.03
Straits Times	14.12	17.47	15.17
Kospi	17.44	16.96	14.15
Jakarta Composite	22.99	17.38	14.80
Hang Seng	17.25	16.56	15.66

The real reason for the fall on Friday is that the market had run up too much too soon and the bears were just waiting for an excuse to pull the plug. The US subprime woes came as a timely excuse.

The correction seems to have served a good cause -- to cut the excesses from the system. Though a further downside cannot be ruled out, it is reasonable to expect that the market would not correct beyond 10 per cent at the worst.

The current valuation of around 18 times earnings current earnings looks somewhat stretched but not terribly expensive looking at the long term potential.

One way or the other, be it the domestic growth story or the outsourcing theme, the market will have opportunities to make money, may be alternatively.

Ahead of the RBI quarterly review of credit policy on Tuesday, there seems to be a consensus among economists that policy rates would be left untouched, and the apex bank would adopt a wait-and-watch policy on inflation.

They, however, expect some action on liquidity management with capital inflows still remaining significant.

"With inflationary expectations strong and global oil prices moving upward, the RBI will definitely keep an eye on inflation. However, presently, I feel RBI can afford to wait and watch and may not take any preemptive action," D K Joshi, principal economist and director, Crisil said today.

Inflation has increased to 4.41% as on July 14 as against the week-ago figure of 4.27%.

A week-on-week rise in inflation should not be a matter of concern, said Kolkata-based United Bank's Chairman and Managing Director P K Gupta. "Even with a slight increase, inflation is still within the RBI's comfort zone and below the 4.5% mark," he said.

Economists warned that if money supply continued to expand and global oil prices move up, inflation could become a factor to contend with around October-November.

"International crude oil prices are firm and any increase could pose challenges, going forward," Yes Bank's chief economist Shubhada Rao said, adding "if there are fuel price hikes in the domestic market, inflation could touch the 5% mark. I will certainly not say that inflationary pressures are behind us," she said.

The global meltdown on Thursday (July 26) gave bears an upper hand on Friday with the Sensex and the S&P Nifty witnessing its fourth biggest fall. Healthy rollover on Thursday with discount of 45 points to the Nifty August futures had indicated short positions.

The Friday fall was on account of global weakness and huge short positions. The Nifty has retraced from higher levels and settled near 4,445. Loss of support at these levels may induce further weakness in the markets.

According to derivatives analyst Zeal Mehta of Emkay Shares, the Friday fall was a correction of the rally witnessed in the past couple of months.

A huge build-up of short positions was seen in the Nifty as the markets fell sharply on Friday. Implied volatility also shot up to 25-26 per cent on Friday compared with 20-22 per cent during the week, indicating that the markets may remain highly volatile in the coming days.

The derivatives players should now maintain appropriate and strict stop-loss on all positions. However, the PCR (OI) of Nifty is at a comfortable levels of 1.42.

Rising concern over a worsening US housing market might hit growth in the US market, and in turn could impact the economy of the countries exporting to the US.

Friday's frenzy saw the Sensex correcting itself by over 500 points. Is the gold rush over for stock market investors? The Indian investor has seldom had it this good. The prolonged bull rally, which has gone on for over four years, has ensured that the value of their investments have risen by over 40 per cent every year.

Sample these for numbers: The Sensex was at 10,040 points on June 21, 2006 and it rose to 15,776 on July 26, 2007. That is, within 277 trading days, the Sensex gained over 5,500 points. In other words, Rs 10,000 invested in a index fund last June would be Rs 15,000 today.

Says Arun Kejriwal, investment consultant, "The markets have been technically overbought for a while now and were waiting for a trigger to correct." Adds Shankar Sharma, managing director, First Global, "During the last four years, the bull run was fuelled by cheap credit and huge risk-taking in markets all over the world."

He believes that this dip was overdue. And the trigger came when the Dow Jones Industrial index fell on Thursday by 312 points. The Sensex followed on Friday with a 541 point dip.

There's a clear signal that the Indian markets are bonding strongly with the world markets. If one considers data from January 2005, one can see a clear correlation of .92 between the Dow and Sensex on a daily basis. As the graph clearly indicates, a small dip/rise in the Dow leads to a similar movement in the Sensex but at a much larger scale.

Like in the heady bull market of 1999 and 2000, when the previous day's Nasdaq closing indicated the trend that tech stocks would take the next day in India, this time the Dow is providing direction. So, it is prudent for equity investors to have a look at global markets as well.

But the million dollar question is where is the market headed? The consensus is that another round of selling is just around the corner. Says Kejriwal, "I expect the market to correct by around 2,000 points (13-14 per cent) over one month. But it will be interspersed with small rallies."

Sharma fears worse and believes that it will be a 25 per cent correction. The argument here is that there is no particular reason for the rally to have gone on for so long. Corporate results that have come out till now, have been subdued, interest rates are at peak levels and oil prices continue to go up (over $76 a barrel).

So what should you be doing as an investor? Kejriwal says that if you did not book profit then there is no need to panic and go on a selling spree. On the other hand, if you are sitting on idle cash and waiting for an opportunity, the advice is to simply keep sitting on it for some more time.

"There is no need to enter the market tomorrow or even the day after. Wait for ten days before you take a call," he adds. The reasoning here is that it does not take long for the market to move from being overbought to oversold. And when the market falls by another 500-plus points, you will get opportunities to invest.

Sharma feels that investing in debt is a good option during these times because it is expected to perform well over the next three months.

Agrees financial planner Govind Pathak, "Investors could diversify into short term liquid instruments now but only for a period of three months." For the risk-averse, he recommends Nabard bonds which have a 10-year lock-in period but are offering yields of 8.7 per cent to 9.2 per cent.

As far as stocks go, Pathak says one should have a minimum horizon of three years as one can profit from the cycles that occur in the market. Also, one should keep a target price of a stock in mind.

Once the scrip is available below that price, one should start purchasing without even looking at the market.

Also, if you have earmarked Rs 10,000 as your investible funds per month, then you should keep on investing that amount in stocks you like. Regular buying, therefore helps. In fact one could even get more aggressive if the market falls fast. "Do not look at the market, just look at your stocks," he advises.

The writing is clear, expect some more bloodbath in the bourses like it was in May-June 2006. As the selling pressure increases, there could be good news for value investors. Scrips, that were expensive will now dip sharply and become cheaper for potential investors.

As Kejriwal puts it, "The market, at present, only has traders and not many investors." Therefore, some correction will definitely make it more attractive for potential investors.

The markets opened with a gap down pattern and the weakness persisted on the back of negative overseas cues as the August derivatives series commenced on a nervous note. Traded volumes spiked higher which is a negative indicator on a downtick session.

The market breadth was expectedly negative as the BSE & NSE combined figures were 711 : 2919. The capitalisation of the breadth was also negative as the combined exchange figures were Rs 2698 crs : Rs 19368 crs.

The F&O data for the previous session marked one of the highest rollover of short positions in recent times as the bears held their positions.

The indices have closed at the lower end of the intraday range and that too with weak market internals. The warning signals of continued "gravestone dojis" on the July 17, July 20 and July 24 were warnings of weakness as I have been advocating upsides facing resistance from the profit sales from short term players.

The ferocity of the fall on July 27 was exacerbated by the overseas cues which acted as a catalyst. The intraday range indicated for Friday was violated convincingly on the downsides as the NIfty closed sharply lower.

The coming few sessions will see support at the 4376 levels which is a 50 per cent retracement of the current upmove. Traders should watch whether this support is violated and on what volumes for signs of immediate trend determination.

The outlook for the market on Monday is that of some more weakness as the bulls attempt to fund their long positions. The overseas cues too will play a significant role in determining the immediate outlook. The possibility of higher volatility remains fair and I continue to advocate abstinence from aggressive fresh positions in either direction as has been advised in the last few days.

After the Friday meltdown, the correction is likely to continue into the next week. The upcoming Reserve Bank of India’s (RBI) quarterly review of the credit policy and global cues, including the Bank of Japan’s stance on interest rates, will determine the future course. But in the short term, the market seems to have no respite from global developments.

The Indian market paid a heavy price as it kept rising, taking everything for granted. Till Thursday, the market seemed to ignore a slowdown in corporate earnings. Investors felt that the slowdown was already discounted when the Sensex fell below the 12,500 mark on April 2.

The market felt that new shares and indices added to the futures and options (F&O) trade were driving up the open interest in derivatives to historic levels. Investors failed to understand that the market-wide leverage was on the rise.

The Sensex lost more than 600 points on April 2, when the RBI raised the cash reserve ratio. Since then, it had been rising without any meaningful correction, with foreign institutional investors (FIIs) on a buying spree.

When the Sensex first touched the 15,000 mark, FIIs argued that market valuations were lower than what they were when the market had reached the 14,000 mark for the first time last December. The Sensex journey continued uninterrupted till it reached the 15,800 level.

The buoyant mood is all because of the confidence in India’s growth story. India certainly is a long-term growth story. Economic fundamentals, however, work differently when compared to market fundamentals. The Friday’s fall has provided an opportunity for a correction. In that sense, the black Friday is actually a good Friday for the market.

Vibhav Kapoor, group chief investment officer, IL&FS, explains the situation thus: “The market has now entered the phase of intermediate correction and is expected to continue for the next three to five weeks.”

He cites the following reasons for this. Valuations were stretched. Though corporate earnings in the first quarter showed growth of 18-20 per cent, they were largely in line with the expectations and not better.

Valuations of companies and sectors affected by the rupee appreciation were already discounted by the market earlier. Many companies are now saying that they have benefited from the rupee rise and this is reflected in their first-quarter earnings. Their valuations are still lower as the benefit is not an operational earning.

He expects the Sensex to settle between 14,500 and 14,200 points. His veiw is shared by many marketmen, who see that a deeper correction is yet to come.

The Asian markets are expected to open weak on Monday as a reaction to the US market, which slid on Friday despite the better-than-expected US economic growth data.

A day later, on Monday, the RBI will announce the quarterly review of the monetary policy. This again will be very crucial as the domestic liquidity is rising and forex reserves are also increasing fast, adding to the surplus liquidity in the market. The RBI will now have to take a call on the FII inflow.

Leading bankers expect a fall in interest rates. The RBI, meanwhile, will have to maintain a fine balance between controlling inflation and supporting growth.

On the global front, the fear of unwinding of the Yen carry trade looms large. The Bank of Japan will be meeting on August 8 to review interest rates. If it raises the rates, the selloff sentiment may spread to other markets.

The domestic mutual funds, which are sitting on a cashpile, may provide support to the market at the lower level. The fund houses have raised about $2 billion in the domestic market last month. Foreign investors generally go on a holiday in August. It seems that they may not enjoy their holiday this time around.

Investors with at least a three-year perspective can consider subscribing to the initial public offer of Puravankara Projects. While the asking price of Rs 500-525 appears stiff now, the high earnings visibility from its current and planned projects may well provide an upside in the long term. Further, a strong track record of real-estate development, low-cost land bank, more transparent transactions and steady growth in revenue over the last five years are positives to this offer.

At the offer price, the price-earnings multiple is likely to be about 20 times the company’s expected earnings for FY-09. This is assuming there is no undue delay in its ongoing and planned projects. With a track record of having developed a sizeable area (without having to depend solely on the land bank to discover valuations), we believe the P/E multiple is an acceptable valuation metric in this case.

The company and offer

Puravankara is a real-estate developer with a majority of projects executed in Bangalore. The company’s core business lies in the residential segment with diversification into commercial projects. The company plans to raise about Rs 1,000 crore through this IPO. It plans to deploy the proceeds towards acquisition of land in Tamil Nadu and repayment of debt. Post-issue, Puravankara’s market capitalisation at the offer price would be over Rs 10,000 crore. While the company would be competing with bigger (in terms of turnover) players in this market-cap segment, there appears considerable scope for quickly ramping up revenue.

Comfortable past

Puravankara’s track record of executing 14 residential projects and a commercial one, spanning 3.93 million sq ft of developable area, is proof of its execution capability.

Further, it appears that the company has been benefiting from identifying low-cost land, ahead of the property market. That its land cost, as a proportion of total expenditure, has fallen from 24 per cent in 2004 to 6.4 per cent in 2007, reflects that the company has benefited from the boom in land prices over the last couple of years. Such a sharp decline in land cost also indicates that the company has been able to identify land at the right location and at the right time.

Going by its history and the current land holding, the company appears to prefer locations in cities and their peripheries. We believe that this strategy is relatively less risky as the demand for residential and commercial space is likely to remain robust in such areas. Corrections, if any, are also likely to be less sharp compared to smaller towns. Puravankara, therefore, appears to have a lower risk profile than similar-size peers which are aggressively moving to Tier-II and III cities.

Clean structure

Puravankara’s land holding appears to be structurally superior to a number of real-estate companies. The holding pattern also appears less complex and reflects better clarity in ownership. Of the developable area of 116 million sq ft, 14 million sq ft has ongoing projects in them.

Of the total land, 65 per cent is owned by the company; only 6 per cent of the land is on sole development rights where the title lies with the owner and the company gets only the development rights. The above proportion reduces the risk of any stalling of projects by landowners, who retain the title to the land. Even in the case of joint development projects, the company has stated that its economic interest in the same would be in the 60-77.5 per cent range. This percentage appears to be land owner-(who is typically the joint developer)friendly, striking mutual benefit.

The consideration for the above-mentioned land at Rs 795 crore is mostly paid, about 11 per cent remains outstanding.

Given that it has locked into land costs, the company may benefit from appreciation, as the land bank, going by its size, may last six-eight years.

Strength in joint venture

In 2005, Puravankara entered into a joint venture with a subsidiary of the Singapore-based Keppel Land, in which the Singapore Government’s investment arm, Temasek Holdings, has an indirect holding. Keppel Land has a presence across Singapore, China, Indonesia and Vietnam. While this joint venture is likely to improve the company’s execution capability, Puravankara has also been cautious in not exposing more than 7 per cent of its total developable area through this strategy. This venture may give Puravankara a presence in the overseas markets as well. Besides, the company has an ongoing project in Sri Lanka and an office in West Asia. Nevertheless, the venture has its risks, as the agreement does not preclude the venture partners from competing with each other.

The spread

With Bangalore being Puravankara’s strong point, the company continues to have 72 per cent of its developable area in this city. The company has also cautiously taken smaller exposure to land in Kochi and Chennai, Mysore and Hyderabad among other locations.

The demand from the middle- and upper middle-income group, to which Puravankara primarily caters to, is fairly robust in the above locations. Any correction in the now infrastructure constrained Bangalore is unlikely to dent the company’s profitability margins much, as the land is spread across the city and its outer limits. Further, the volume in the above income group segment is likely to provide some insulation to margins.

Strong financials

Puravankara’s revenue has grown at an annual rate of 75 per cent over the past three years, to Rs 417 crore in 2006-07. Operating profit margin at 32 per cent have remained stable over the past four years.

While there was scope for improvement in OPMs, with the land cost having reduced over the years, increasing construction costs appears to have prevented further growth. The margins are nevertheless above industry average.

The company is heavily geared and has a debt-equity ratio of over three. However, the proceeds of the issue are likely to bring this ratio to a comfortable level of less than 1.

DSP Merrill Lynch and Citigroup are the book running lead managers. The offer is open from July 31 to August 03.

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BLUE STAR

Britannia Industries

Net profit for the quarter ended June 30, 2007 up 28% to Rs 3,264cr.

Reliance Industries, India’s largest company by market value, today announced a 28.2 per cent rise in its net profit in the first quarter due to robust refining margins and higher exports.

The net profit for the quarter ended June 30, 2007, went up to Rs 3,264 crore against Rs 2,547 crore in the corresponding period a year ago. The company’s gross margins on refining, which contribute 77 per cent to its total revenues, increased to $15.4 a barrel, the highest ever. The figure was $13 a barrel in the preceding quarter and $12.4 a year ago.

Analysts said the better margin was a result of the company’s ability to buy cheap and sell premium products. Its highly complex refinery also allows the company to buy and process some of the heaviest and sour crude oil in the world.

The company’s exports in the first quarter rose 30 per cent to over Rs 16,000 crore.

Reliance, which produces polyester fibre, yarn and paraxylene as well, posted a 12.7 per cent rise in turnover at Rs 29,493 crore (Rs 26,166 crore). The rise in revenue was due to 3 per cent growth in prices and a 10 per cent hike in volume.

Aanalysts said rising cotton prices may lead to even better profitability in the near future. “Polyester margins are likely to go up as high cotton prices will divert demand to synthetic fibres. Reliance, being the world’s largest yarn producer, will stand to gain from this,” they added.

Cash profit increased by 23.7 per cent to Rs 4,527 crore while operating profit went up by 22 per cent to Rs 5,177 crore. Net operating margin was 18.5 per cent against 17.3 per cent a year ago. Earnings per share stood at Rs 23.4 against Rs 18.3 a year ago.

Interest costs were higher by 8 per cent to Rs 288 crore due to increased borrowings. The company capitalised Rs 163 crore on interest against Rs 149 crore a year ago. Interest cost included Rs 23 crore on account of exchange rate difference.

Reliance Industries reported an impressive performance in April-June 2007 helped by strong growth in its two main divisions -- refining and petrochemicals.

As a result, the company’s operating profit grew 22.2 per cent to Rs 5,177 crore in the last quarter, compared with the previous corresponding quarter, while its net turnover grew 14.4 per cent to Rs 28,056 crore. Its operating profit margin also improved 115 basis points to 18.45 per cent in Q1 FY 08.

In its key refinery division, the company processed 8.01 million tonnes in the April-June this year, a growth of 6.7 per cent. Of crucial importance is that RIL’s gross refining margin (GRMs) was $15.4 per barrel in the last quarter as compared to $ 12.4 per barrel in the same quarter a year ago.

RIL’s GRM was $13 per barrel in January-March 2007. The regional benchmark, the Singapore refining margin, was $ 9.5 per barrel in the June 2007 quarter, a rise of 7 per cent.

Clearly, Reliance has once again been able to do better than the growth in the regional benchmark in the last quarter, thanks to its ability to process heavy and sour crude, coupled with average international crude oil prices that were lower on a y-o-y basis in the first quarter of this financial year. As a result, segment profit of the refining division grew 25.7 per cent to Rs 2,558 crore.

In RIL’s petrochemical division, production was 3.64 million tonnes, growth of 15.3 per cent. The company highlighted higher product prices for its petrochemical product chain, coupled with enhanced production which led to a 36.2 per cent growth in segment profit of petrochemicals division to Rs 1481 crore in Q1 FY08.

Reliance had earlier acquired IPCL and it is still subject to completion of the necessary legal facilities to enable consolidation of quarterly results with itself. In the interim, IPCL has reported a 7.6 per cent y-o-y growth in its operating profit (including other income) in Q1 FY08.

Going forward, Reliance is expected to continue leveraging strong GRMs on a y-o-y basis, given signs of a global shortage of refining capacity.