Monthly Strategy Report March 2015

Monthly Equity Commentary

1-1.S&P BSESENSX.BSE - 02/03/15

Trend7
30100
30 T
29900
29800
29700
29600
29500
29400
29300
29200
29100
29 T
28900
28800
28700
28600
28500
28400
28300
28200
28100
28 T
27900
27800

30

03

04

05

06

09

10

11

12

13

16

18

19

20

23

24

25

26

27

28

Daily

Month Gone By
The Benchmark indices ended on a flat/mildly positive note in the month of February 2015. BSE Sensex rose by 0.61% and Nifty
closed up by 1.06% for the month. Outcome of Delhi Assembly elections, Union Budget and Railway Budget 2015-16 and rise in
the crude oil prices were the major triggers for the market.
Key Positives during the month

In its sixth bi-monthly Monetary Policy review, the Reserve Bank of India kept policy rates unchanged after easing monetary
policy just three weeks ago. However it announced a cut in SLR by 50 bps from 22 percent to 21.5 percent of their NDTL with
effect from February 7, 2015.
Acceleration in new orders helped activity in India's services sector expand at a faster rate in January than in the previous
month. The HSBC Services Purchasing Managers' Index (PMI) rose to 52.4 points from 51.1 in December.
India's foreign exchange reserves have hit a fresh high, rising by $2.956 bn to $333.169 bn in the week to February 13, helped by
a healthy increase in foreign currency assets.

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The Central Statistics Office (CSO) said that as per new calculation method, India is set to grow 7.4 per cent and cross the $2.1trillion mark this year against 6.9 per cent in 2013-14. India grew 7.5 per cent in the October-December quarter, overtaking
Chinas 7.3 per cent growth in the same quarter, to become the fastest growing major economy in the world.
Declining fuel rates dragged down Wholesale Price Index (WPI)-based inflation to -0.39 per cent in January, the second month to
witness a fall in prices this financial year.

Key Negatives during the month

Indias manufacturing activities expanded at a three-month-low pace, as orders moderated, showed the widely-tracked HSBC
purchasing managers' index (PMI). PMI declined to 52.9 points in January, compared with 54.5 in Dec.
Consumer Price Index (CPI)-based inflation rose to 5.11 per cent in January from 4.28 per cent in December. The base year for
the CPI was revised from 2011 to 2012.
Foreign portfolio investors (FPIs) sold shares worth a net Rs 2495.45 crore into the secondary equity market during four trading
sessions from 9 February 2015 to 12 February 2015.

Global markets:
Indices
US - Dow Jones
US - Nasdaq
UK - FTSE
Japan - Nikkei
Germany - DAX
Brazil - Bovespa
Singapore - Strait Times
Hong Kong Hang Seng
India - Sensex
India - Nifty
Indonesia - Jakarta Composite
Chinese - Shanghai composite

Jan-15
17165
4635
6749
17674
10694
46908
3391
24507
29183
8809
5289
3212

Feb-15
18133
4493
6947
18798
11402
51583
3403
24823
29362
8902
5450
3310

% Chg
+5.6
-3.1
+2.9
+6.4
+6.6
+10.0
+0.3
+1.3
+0.6
+1.1
+3.0
+3.1

World markets ended the month of February 2015 on a positive note.

Brazil-Bovespa was the top performer during the month which gained
10%. Except for Nasdaq which ended on a negative note (down by 3.1%),
all other indices ended on a positive note. Nifty & Sensex also reported
decent gains of 1.1% & 0.6%. Some of the major gainers were DAX,
Nikkei, Dow Jones, Jakarta and Shanghai, which gained 6.6%, 6.4%, 5.6%,
3.1% & 3.04% respectively.

Average daily volumes on BSE in February 2015 rose by 12.0% M-o-M.

(NSE daily average volumes rose by 7.4% M-o-M). The average daily
derivatives volumes on NSE rose by 2% to Rs. 271607.01 cr in February.

Sectoral performance
The performance of the sectoral Indices were mixed. The top three major gainers were IT, Capital Goods & Metals which rose by
7.1%, 4.0% and 3.7% respectively. The top three major losers were Oil & Gas, Consumer Durable & PSU, which were down by
4.5%, 2.5% and 1.2% respectively.

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BSE Indices
Sensex
Smallcap
Midcap
BSE 500
BSE 200
BSE 100
Auto
Bankex
Capital Goods
Consumer Durables
FMCG
Healthcare
IT
Metal
Oil & Gas
Power
PSU
Realty
TECK

30-Jan-15
29,183
11,329
10,739
11,346
3,641
8,903
19,986
22,716
17,096
10,655
8,275
15,667
11,179
10,190
10,143
2,225
8,205
1,811
6,136

28-Feb-15
29,362
11,266
10,811
11,454
3,675
8,994
19,983
22,573
17,779
10,388
8,222
15,855
11,969
10,570
9,686
2,269
8,103
1,822
6,424

% chg
+0.61
-0.6
+0.7
+1.0
+0.9
+1.03
-0.0
-0.6
+4.0
-2.5
-0.6
+1.2
+7.1
+3.7
-4.5
+2.0
-1.2
+0.6
+4.7

Top Gainers
IT Index edged higher as in February, the USD was strengthening against rupee
which is beneficial for IT companies. IT shares are also gaining tracking betterthan-expected numbers in the fourth quarter as well as the accounting year
ended December 31 by IT Services Company Cognizant. It gave a robust growth
forecast for the next year.
The Capital Goods index surged as investors cheered the economic surveys
projection of India's economic growth at more than 8 percent for the next
fiscal. A good railway budget which has provided plan for 5 years had also
added support to the environment.
Metal sector gained on the back of successful coal block auction in the Phase 1
by the corporates.
Top Losers
Oil & Gas Index fell as it witnessed selling pressure after Delhi Police detained a
RIL staffer in connection with alleged official document theft in the oil
ministry. Continued softness in Crude prices also contributed.
Consumer Durable Index fell on account of profit booking by the investors.

Fund Activity
Particulars

Equities (Cash)
Index Futures*
Index Options*
Stock Futures*
Stock Options*

Net Buy / Sell Net Buy / Sell Open Interest Open Interest
Feb -15
Jan -15
Feb -15
Jan -15
FII Activity (Rs. in Cr)
8892.9
12374.5
-3141.3
6900.9
20765.3
22760.7
1352.6
9109.9
47641.5
48247.6
-6040.7
-2140.4
58903.1
57404.1
-272.1
-111.6
1747.0
1482.1
MF Activity (Rs. In Cr)
4308.9
819.5

Remarks
FII Activity (Rs. in Cr)
FIIs continued to be net buyers in February.
FIIs were net sellers with a fall in open interest.
FIIs were smaller net buyers with a fall in open interest.
FIIs continued to be sellers with a rise in open interest.
FIIs were net sellers along with a rise in open interest.
MF Activity (Rs. In Cr)
MFs were net buyers in the month of February.

Equities (Cash)

*= numbers till Feb 27

FIIs were net buyers of debt papers buying a net amount of Rs.13421 cr of debt papers in Feb, compared to Rs. 23068.2 cr worth debt bought in Jan.

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Bond Yields

Indian G-Sec bond yields ended higher marginally by 3 bps at 7.72% at the end of February 2015 over January 2015. The G-Sec
market traded mostly on a bearish note amidst absence of any major trigger, weakness in the domestic currency and
apprehensions over the upcoming budget announcement.

Commodities

In February 2015, the Reuters/Jefferies CRB Index of 19 raw materials ended higher by 2.39% to close at 224.08. The
Reuters/Jeffries CRB Index rose on account of a rise witnessed in commodities like Wheat (up 4.2%), Copper (up 7%), Cocoa (up
9.8%), Cotton (up 9.8%), Corn (up 4.3%), Crude Oil (up 3.7%), Live Cattle (up 0.5%) and Natural Gas (up 0.4%). The other
commodities which fell were Coffee (down 17.8%), Sugar (down 11.1%), Lean Hogs (down 6.4%), Gold (down 5.1%), Silver (down
3.5%) and Aluminium (down 2.2%).

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Commodity
Gold
Crude Oil
Aluminium
Copper
Zinc
Nickel
Tin
Lead

27-Feb
1213
50
1806
5840
2068
14095
17925
1743

30-Jan
1279
48
1846
5460
2112
14800
19175
1860

% Chg
-5.16%
+3.67%
-2.17
6.96%
-2.08%
-4.76%
-6.52%
-6.29%

Copper prices rose supported by rising oil prices, US employment data and reduced anxiety
over the Greek economy. The three pieces of macroeconomic news helped alleviate
supply-and-demand concerns in the copper market.
Gold prices tumbled as a stronger economy has encouraged companies in US to boost
hiring, creating a virtuous cycle of growth as Americans spend newfound incomes on goods
and services. This reduced demand for safe haven assets like Gold.
A survey by US oil services firm Baker Hughes Inc showed the number of rigs drilling for oil
in the United States fell. The drop, coupled with announcements of deep cuts in capital
spending by major oil companies including BP and BG Group, suggests there will be tighter
supplies.

The Baltic Dry Index (BDI) fell 11.18% in the month to close at 540. BDI is a number issued daily by the London-based Baltic
Exchange. Not restricted to Baltic Sea countries, the index provides "an assessment of the price of moving the major raw
materials by sea. Taking in 23 shipping routes measured on a time charter basis, the index
covers Handysize, Supramax, Panamax, and Capesize dry bulk carriers carrying a range of commodities including coal, iron
ore and grain. A measure of global shipping costs for commodities fell to a 28-year low as slowing growth in Chinas demand for
cargoes compounds the effect a fleet glut. The Baltic Dry Index plunged to the lowest since Aug. 22, 1986.

Currencies

The U.S. dollar index posted a monthly gain after spending much of February in consolidation mode as investors await further
signals on the timing of the Federal Reserves next interest-rate increase move. The dollar was on a tear over much of 2014
into January, surging on expectations the Fed will move this year to tighten interest rates as other major central banks,
notably the European Central Bank and Bank of Japan, pursue ultra loose monetary policy measures.

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Given below is a table that shows the depreciation (-)/appreciation (+) of the dollar against various currencies for the month of
February 2015:
USD to:
27-Feb-15 31-Jan-15
Pakistani rupee
100.61
101.31
Hong Kong dollar
7.76
7.75
Chinese yuan
6.14
6.17
Indian rupee
61.76
61.97
Taiwan dollar
31.41
31.68
Singapore dollar
1.35
1.35
Argentine peso
8.72
8.64
Euro
0.88
0.88
Thai baht
32.36
32.79
Malaysian ringgit
3.59
3.64
Indonesian rupiah 12837.0
12722.60
Japanese yen
119.01
117.82
Brazilian real
2.87
2.64
Korean won
1097.69
1100.72

% Chg
-0.69
+0.04
-0.42
-0.33
-0.85
+0.05
+0.92
+0.05
-1.29
-1.37
+0.90
+1.01
+8.80
-0.28

The Brazilian real fell to its lowest level against the dollar in more than 10
years, as weak economic growth figures, a countrywide drought and a corruption
scandal at state-run oil firm Petrobras continued to weigh on the currency.
The ringgit ended higher against the US dollar on renewed interest following
demand from oil exporters for month-end settlements.
Thailand's baht hit a four-month high as foreign investors continued to buy local
bonds.
The dollar rose against the yen as higher U.S. Treasury yields and weaker-thanexpected Japanese growth encouraged investors to bet on the buck. Also yen
weakened against the dollar as a surge in U.S. payrolls fuelled bets the Federal
Reserve will raise interest rates sooner.

Outlook going forward

Global Market Outlook
Interest Rate hike could delay further in US
The majority of the participants at the January Federal Open Market Committee meeting leaned towards delaying the interest
rate hike, according to the FOMCs January meeting minutes released in Feb. The Fed has kept interest rate near zero for six
years in order to stimulate the economy. According to the minutes, several participants noted that if the Fed were to raise
the short-term interest rate too late, the stance of monetary policy would become accommodative, leading to excessively
high inflation. On the other hand, many participants observed a premature increase in rates might damp the apparent solid
recovery in real activity and labor market conditions. Some analysts estimate that the interest rate hike will take place in the
third quarter of 2015. The committee also repeated the forward guidance of can be patient regarding when to start raising
interest rates. The guidance was introduced in December by the FOMC.

Federal Reserve vice chairman Stanley Fischer recently stated that the central bank looked most likely to raise interest rates in
June or September, but developments in the economy could alter the timing. Seven of the Fed's current 17 members have now

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said they at least want the option of a June tightening on the table, or have pushed in general for an earlier increase amid an
expectation that wages and inflation will turn higher. By contrast, there's a dwindling core of officials who say publicly that the
economy and labor markets in particular still have a long way to go, only four Fed members have in recent weeks clearly said
that rate hikes won't be appropriate until much later in the year or even into 2016.

We feel that the Fed, at its March 17th and 18th policy meeting could remove language saying the central bank will take a
"patient" approach to raising rates, taking away the final verbal constraint to a June rate hike. However, we dont see a rate
hike earlier than June. Warren Buffett, the billionaire chairman of Berkshire Hathaway Inc., said that it would be very tough
for the Federal Reserve to lift interest rates this year because of the stronger U.S. dollar. U.S. economic growth, outperforming
most industrialized counterparts, has helped push the nations currency higher than its been in more than a decade against
currencies of six trade partners. Thats making it cheaper for Americans to buy imported goods and helping to lower inflation
thats already below the Feds goal, making it harder to boost rates. Now if the US hikes the interest rate, then dollar would
strengthen further, thus making the imports more cheaper. However, the exports would become less competitive. This could
impact the export growth of the country significantly.

What does ECB stimulus plan mean for investors?

The European Central Bank ushered in a new era by launching an aggressive bond-buying program on January 22, 2015, shifting
pressure to Europes political leaders to restore prosperity in one of the global economys biggest trouble spots. Investors
cheered the ECBs commitment to flood the eurozone with more than 1 trillion ($1.16 trillion) in newly created money,
sparking a rally in stock and bond markets and sending the euro plunging. The ECB will buy a total of 60 billion a month in
assets including government bonds, debt securities issued by European institutions and private-sector bonds.

It is said that ECBs new stimulus could strengthen demand, increase capacity utilization and support money and credit growth.
This additional liquidity could also be positive for Indian equity markets. However, it has resulted in depreciating Euro to the
lowest levels which would be positive for Eurozone exporters. This can result in higher competitive intensity for Indian exporters
thereby posing a risk for their exports.

Though it is uncertain if the ECBs stimulus program will be effective in boosting euro zone inflation, we anticipate that it will
fuel significant financial market volatility this year. In anticipation of the ECBs announcement last month, the Swiss National
Bank unexpectedly removed its currency peg against the euro and cut interest rates by 50 bps to negative 0.75%, sending a
shockwave through the financial markets. The following week, the Bank of Canada also unexpectedly cut its benchmark
overnight rate by 25 bps to 0.75%, and other central banks have also been cutting their target interest rates. Looking ahead, it is
possible that the ECBs quantitative easing program (and the relative weakness of the euro) could prompt even more central
banks to make policy changes, particularly in countries that are experiencing tepid inflation and a strengthening currency
against the euro. Actions taken by the ECB could indirectly affect the timing of an interest rate hike in the U.S., as the dollars

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strength versus the euro continues to put downward pressure on U.S. inflation expectations. Any unexpected central bank policy
moves (including in the U.S.) could create significant volatility in the financial markets.

In addition, the success or failure of the ECBs plan to purchase government bonds (which will be challenging given that each
country issues bond separately) and to revive the European economy is also likely to create volatility. Sluggish growth in the
euro zone economy has been a significant headwind for the global economy and contributed to the recent plunge in oil prices. If
the ECB is able to put the euro zone economy on a path toward sustainable growth, there is likely to be a meaningful impact on
global currencies, corporate earnings (which are also impacted by currency exchange rates), energy prices, and overall global
economic growth. Even if the program is successful, the plan will take months to execute and there are likely to be bumps in
the road. Overall, we believe the markets are poised to experience significant volatility this year.

Is the recent surprising rate cut in China a positive move?

On Feb 28, 2015, China's central bank, the People's Bank of China (PBOC) unexpectedly cut the benchmark one-year lending as
well as the deposit rate rate by a quarter of one percent. This surprise rate cut, which came less than four months after the last
reductionsooner than many economists and analysts expected, underscores the increasingly aggressive measures the leadership
is relying on to rev up activity in the worlds second-largest economy. With the cut, the central bank renewed concerns about an
array of issues weighing on the economy: a slumping property market, capital flight that is squeezing banks ability to lend, and
growing risks of falling prices that, in effect, are pushing up borrowing costs for businesses.

The government is expected to prop up economic activity through several more broad cuts in interest rates and greater spending
on big-ticket infrastructure projects, but many Chinese officials and economists warn that such moves entail risks. Too much
easing, in particular, could add to already high debt levels among companies and local governments and stall plans to
deleverage, reduce industrial overcapacity and force greater efficiencies on state companies. For much of last year, the PBOC,
under long-serving Governor Zhou Xiaochuan, insisted on targeted efforts rather than broader moves like rate cuts out of
concern that broadly easing credit would worsen debt problems. But increasingly, the central bank is acceding to demands from
the Chinese leadership to reduce financing costs for businesses and bolster growth, according to officials and advisers to the
bank.
A key question now is whether Chinese consumers and companies will take advantage of the latest rate cut or hold fast amid
further signs of slowing growth. We feel that the rate cut reflects that China has much bigger problems at their end, not known
to many.

Geopolitical problems ebbing with hopes of implementation of cease fire deal in Ukraine and delay in Greek exit
The Ukraine cease fire deal and hopes of its implementation and the delay in Greece exit from Eurozone has eased the
geopolitical concerns in the near term.

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On Feb 12, Germany, France, Russia and Ukraine agreed to a deal offering a "glimmer of hope" for an end to conflict in eastern
Ukraine, but the United States and NATO said further intense fighting on Thursday ran counter to the spirit of the accord. The
White House, under pressure from Congress to provide arms to the stretched Ukrainian military, said the deal was "potentially
significant" but urged Russia to withdraw soldiers and equipment, and give Ukraine back control over its border.

While the deal cease fire deal has been signed, it has still not been implemented, but there are hopes that the same would be
implemented over the next couple of weeks.

Further, Greece concerns of its exit from Eurozone seem to have eased in the near term. Towards the end of Feb, Greece finally
reached a deal with the countrys creditors in the eurozone after a month of intense negotiations. The agreed extension of
Greeces bailout by four months from the end of February is contingent on a positive response to the reforms by its creditors. It
looks like Greeces creditors will accept its new governments reform proposals and thus give it access to the next slice of
bailout funds.

The International Monetary Fund and the European Central Bank, the other two organizations making up the troika of lenders
squeezing Greece, have expressed doubts about the viability of the deal reached. In four months, the fears could reignite but it
has certainly provided a much needed relief to the investors in the near term. Therell be plenty of opportunity to come up with
new ways of playing the extend-and-pretend game between now and four months.

Japanese stock market at a new high. Will the rally sustain?

A steady regimen of structural reforms during long years of deflation, a strong yen, and the global financial crisis have made
Japanese companies strong again. The stock market is now starting to price in their greater earnings potential. The Nikkei index
has climbed to a 15 yr high, which is impressive. But the big question now is that whether this rally could sustain going forward.
We feel for this rally to sustain, it would require cutting red tape and other government efforts to empower the corporate
sector.

Listed companies' profits are expected to reach a record high in the fiscal year ending March 31. Encouraged by solid results for
the nine months through December, investors have ploughed money into the stock market. Foreign investors now constitute the
biggest bloc of shareholders in Japan Inc., holding 30% of the pie. Their demands for management reforms have not been
without effect.

Emboldened by their own improved earnings, Japanese companies have begun venturing in search of new growth. Big names in
autos, electronics and other industries are moving to raise wages. And shareholder giveaways are becoming more generous. The
ingredients for a recipe that whets global investors' appetites are coming together.

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While the Nikkei average has climbed back to where it stood in May 2000, it remains more than halfway below its 1989 peak,
even as U.S. and European blue chip indexes are testing all-time highs. And it bears mentioning that BOJ money is underpinning
Japanese equities to some extent, either indirectly or through the bank's exchange-traded fund purchases. The disparities in
strength between Japanese companies and their foreign peers are apparent in their share prices.

While the corporate sector languished, the government borrowed ever more in hopes of stimulating the economy. Japan's public
debt has swelled from 1.4 times its gross domestic product in 2000 to more than double GDP today. The government needs to
take deregulation further to open up new fields of growth so that companies can become even more dynamic. By relying on
private innovation, not fiscal stimulus, to stir up fresh demand, Japan can have both a bigger economy and healthier public
finances

Indian Market Outlook

Union Budget 2015-16 was neither populist nor reformist, but a prudent one
The recent Union Budget (presented on Feb 28) seems a pale comparison to the Rail Budget (on Feb), although the two are not
strictly comparable. What one was expecting was a similar analysis of key problems faced by the country and ways and means to
tackle them by short and medium term targets. The FM fell into the trap of introducing more schemes rather than rationalizing
the existing ones and seriously tackling expenditure reforms (though he has kept the food and Fertiliser subsidy flat and cut
Petroleum subsidies by 50% - aided by fall in crude prices). Agriculture as a sector seems to have got very little attention in the
Budget.

Income tax collections are assumed to rise 17.2%, Excise by 12.2% and Customs by 9%. Service tax collections are to rise by a
whopping 24.8% (it could further rise as and when the proposal to levy 2% Swachh Bharat cess is implemented). Nominal GDP is
expected to grow @12% in FY16. Overall Plan expenditure has been projected flat to marginally down though capex plan
expenditure is expected to rise 34%. Recapitalisation funds for Public sector Banks of Rs.7900 cr seem clearly insufficient. The
spending power of the consumer will not improve because of Increase in Income tax surcharge to 12% from 10% (for high tax
payers) and on distribution of dividends/buybacks by companies/mutual funds, Increase in Service tax and cess and no relief in
direct taxes.

The FM however needs to be commended for steps to attract foreign inflows, deferring the applicability of GAAR by two years
and apply it prospectively to investments made on or after 01.04.2017, allowing foreign investments in Alternate Investment
Funds, doing away with the distinction between different types of foreign investments, especially between foreign portfolio
investments and foreign direct investments and replace them with composite caps and explicitly clarifying that FIIs operating
from within India will not be deemed to be creating permanent establishment risk. He also needs to be commended for laying
out plans to tackle the black money, introducing Gold monetization scheme, proposing to reduce the rate of Corporate Tax from

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10

30% to 25% over the next 4 years accompanied by rationalisation and removal of various kinds of tax exemptions and incentives
for corporate taxpayers, taking leeway in aiming for fiscal deficit target of 3% in one extra year (i.e. by FY18), etc, allocating
more funds for Agri Research/education, Atomic Energy/space, Telecom, Defence, Law & Justice, Road Transport, Rural
Development, Science and Technology, Skill Development & Entrepreneurship (first time allocation), etc.

Though one appreciates the limitations on FM in doing many things in one Budget, it remains a typical budget, amidst unrealistic
market expectations (partly fueled by the Govt functionaries). If the Govt was looking at kick starting the economy through
government capex, the amounts provided are clearly insufficient. Further the slippage in fiscal deficit targets in a year when
the expenditure by the Govt is not rising sharply also remains a puzzle.

The Budget was neither Populist nor Path Breaking, while one may argue that it was prudent. Though this seems like a case of
missed opportunity, all is not lost and reform process can continue throughout the year. From the perspective of the incipient of
economic recovery, we see the budget as being a relatively neutral event. Dependence on monsoon and global growth remains
for reaching the GDP growth rate of 8-8.5%. However the budget could be received favourably in most quarters of the FII
community though they may have different views on select sectors and stocks.

Dec 2014 quarter was a disappointing one for India inc and much below the consensus expectations
Net sales of Indian companies expanded at the slowest pace in four quarters in the three months ended 31 December,
illustrating the challenges local companies are facing as the economy takes longer than expected to recover from a growth
slump. Lower raw material costs because of a global slump in commodity prices, however, boosted operating profits, providing
the only silver lining in the otherwise dismal scenario. Numbers (earnings and sales) have been disappointing, and have turned
out to be a lot worse than consensus expectations.

A CARE study of the performance of 2,934 companies showed that net sales declined by -0.2% in Q3FY15 as against 6.5% increase
in the previous year while net profits declined significantly by 28.3% over a positive growth of 2.5% last year. The lower growth
in sales volumes could be largely attributed to the weakness in the global and domestic demand conditions. Also despite the
softening inflation in the past few months the gains from the same remain invisible indicated by the declining profitability. The
large sized firms have performed relatively better with positive growth in sales and increased profitability when compared with
the smaller ones. The smaller sized firms continue to underperform incurring huge losses and lower sales. Outperforming sectors
among in Nifty 50 were power, banks and IT, with companies in these sectors performing comparatively better in a quarter that
was muted in terms of corporate earnings. FMCG, pharma, power and steel companies disappointed, especially on the revenue
front.

The poor performance in Q3FY15 may lead to a cut in earnings estimates for FY16, which, in turn, could make valuations appear
stretched. A significant recovery is likely only in the second half of 2015-16. According to Bloomberg estimates, the Sensex is

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11

trading at ~18 times 1-year forward earnings, at 50%+ premium to the MSCI EM (emerging markets) Index which trades at under
12 times. The index also trades at a 15% premium to its five-year average of 16 times.

Going forward, we believe investors will have to reconcile to an earnings recovery that could, early cycle, be anemic and gather
momentum only with a 4-6 quarter lag the market looks expensive, as Indias improved macro position is yet to translate into
earnings. We do not dispute the medium-term potential of investment in India but suspect that revenues will continue to be
weak for the next few quarters. Incrementally, potential depreciation in INR/USD and stabilization in commodity prices can
prevent incremental weakening in earnings.

FII holding hits new high in Q3; inflows could continue on quick reform implementation & pickup in growth
Foreign institutional investors' holdings in 30 Sensex companies have reached an all-time high of over 23% of the total market
cap, as per data collated by Bank of America Merrill Lynch. In March 2009, the same stood at 15% of the total market cap and
36% of free float, which rose to 23% and 47% respectively at the end of December. The steep rise was driven by the optimism
about Narendra Modi Government unleashing reforms, BofA-ML Global Research said in its report.

Foreign investors continued to pump money in Indian equities with the December quarter witnessing FII flows of more than USD
2 bn. This was the 9th consecutive quarter of positive inflows from FIIs. Financials continue to remain the highest overweight
(OW) sector for FIIs at 14.3%.

The FIIs have been very bullish on the Indian equity markets over the last one to two years. While the FII holding is at a new
high, we feel the inflows could continue (though at a gradual and steady pace) if the reform implementation process accelerates
and the economic growth starts picking up.

Ratings upgrades could get postponed due to higher fiscal deficit projected
As per the credit rating firms, India's new budget is unlikely to have an impact on the country's sovereign credit given the
absence of meaningful fiscal reform. Standard & Poor's has ruled out a rating upgrade for at least a year after Mr. Arun Jaitley
set next fiscal year's deficit target at 3.9% of GDP - higher than analyst estimates - and said the deficit is likely to fall to 3% of
GDP in 2017/18, one year later than expectations. Standard & Poor's Ratings Services (S&P) said the budget highlighted a
commitment to keep the deficit low, but lacked structural reform. S&P and major peers Moody's Investors Service and Fitch
Ratings rate Indian credit at the lowest investment grade with a "Stable" outlook. Fitch said the government's medium-term
fiscal consolidation strategy was "less aspiring than in the past," terming it negative for India's credit rating. Moody's said the
budget was "unlikely to materially change" a rating constrained by "weak fiscal metrics", though it would be supported by the
focus on growth.

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S&P stated that India must boost growth, cut its fiscal deficit and fulfill promises of financial and fiscal reforms in order to
justify an upgrade in a credit rating. It stated that crucial factors include higher growth in real per capita GDP, stronger fiscal
and debt metrics, and a stronger external position or improved monetary policy setting & government's ability to fulfill its
promises on key reforms is critical to country's success.

Stability in oil prices, speedy disinvestment could help in achieving fiscal deficit targets
After a sharp decline over the last few months (more than 50%) and a minor bounce from the lows ($47.26 per barrel on closing
basis), the oil prices finally seem to have found some stability at around have finally around 60-62 levels. With no major rise in
the oil prices expected over the next few months, we feel Y-o-Y subsidy burden for the Government would reduce significantly
this fiscal. This would enable it to improve its fiscal situation.

The 2015-16 Union Budget announced a divestment target of Rs 69,500 cr, higher than the previous fiscal's target of Rs 58,425
cr. The government has so far managed to raise only a small fraction of its ambitious divestment target. The break-up envisaged
was thus: To raise Rs 36,925 crore from PSU disinvestments, Rs 15,000 crore from residual stake sale in Hindustan Zinc and
Balco, and Rs 6500 crore from the stake it held in Axis Bank, Larsen & Toubro and ITC through SUUTI. Positive market
sentiments could enable the government to speed up its disinvestment process during the year. Though challenging, if
Government is able to achieve its disinvestment target, it could further help in reducing the countrys fiscal deficit and
government would be able to achieve its targets set in this Union Budget over the next 3 yrs without more delay. This would be
a big positive trigger for the economy & the stock market.

Oil prices & Inflation to guide RBIs next move on interest rates
The Reserve Bank of India (RBI), in a surprising and beyond-policy-meeting announcement, cut the repo rate by 25 basis points
from 8% to 7.75% on January 15, 2015. Consequently, the reverse repo adjusted to 6.75% and the marginal standing facility to
8.75%. The cash reserve ratio (CRR) was kept unchanged at 4% of net demand and time liabilities (NDTL). However, in its bimonthly monetary policy meeting on February 3, 2015, it kept the rates unchanged, but cut the Statutory Liquidity Ratio (SLR)
by 50 bps, thus ensuring more liquidity into the system. Talking about the path of inflation in 2015-16, Rajan said that the RBI
will keenly monitor the revision in CPI, which will rebase the index to 2012 and incorporate a more representative consumption
basket along with methodological improvements. He said inflation was likely to be around the target level of 6% by January 2016
but flagged monsoon, oil prices and the unlikely possibility of significant fiscal slippage as upside risks.

Recently, Finance Ministry inks pact with RBI to target CPI inflation at 4%, with a band of plus or minus 2% points by FY17. The
central bank will first aim to have consumer inflation fall below 6% by January 2016. This clearly indicates RBIs increasing focus
on containing the inflation, which is encouraging.

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Since inflation is currently within the comfort zone of RBI (CPI stood at 5.11% in Feb 2015), the chances of rate cut in RBIs next
monetary policy meeting (in April) are high. Also oil prices have stabilized at lower levels and are unlikely to rise significantly in
the coming months. This would further provide cushion to RBI in deciding on interest rates. However, for longer term, oil prices
and inflationary situation would guide RBIs next move on the interest rates. We expect a cautious approach from RBI going
forward, but at the same time dont rule out 50-75 bps cut interest rates this fiscal.

Though not so cheap, market upside could continue in near term due to good budget, hopes of speedy reform implementation
& lack of negatives
According to Bloomberg estimates, the Sensex is trading at ~18 times 1-year forward earnings, at 50%+ premium to the MSCI EM
(emerging markets) Index which trades at under 12 times. The index also trades at a 15%+ premium to its five-year average of
16 times. In that sense, we feel that the Indian equity market is not cheap at current levels.

Despite the absence of earnings improvement, the market is continuing to outperform and the valuations improving further,
supported by factors like improved macro position (low CAD, declining GFD/GDP and reasonable inflation), supportive global
liquidity and ongoing reforms and expectations of further reforms. Further, the FY16 Union Budget delivered despite very high
expectations.

We feel that the above macro factors could continue to support the market valuations. The market upside could continue in
near term with absence of negatives. Further, high valuations of stocks reflect the markets confidence in a recovery in
revenues and profits in the medium term. The BSE Sensex could trade in the range of 28500-30500 in the month of March, with
an upward bias.

While the near term upside is intact, for longer term, the outcome of bills pending in the current budget session of Parliament
(which commenced on Feb 23 and would continue till May) is crucial for improving the economic sentiments. It was a rough
sailing for the government in the Rajya Sabha in the winter session as it does not have a majority in the House of Elders because
of which it could not push through some of the key bills like Insurance Bill and Coal Mining Allocation Bill. The passing of these
bills is crucial. If the Government fails to clear the pending or it gets postponed, then the equity markets could react negatively
and Indias premium valuations could start reducing.

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Technical Commentary:

Daily timeframe: Nifty witnessed high volatility on the day of the presentation of union budget 2015 and finally closed with the
smart gains of 57 points. We observe a formation of high wave type candle on Feb 28 with long lower shadow, which is
suggesting a smart recovery from the lower levels. The symmetrical triangle type pattern (green converging trend lines) has
been broken on the upside and Nifty closed above it. This could further have positive impact on the market ahead.

The recent bottom reversal formation around 8669 of 26th Feb could be considered as a recent higher bottom of the new
positive sequence (sequence of HT & HB) and currently Nifty is moving up to form a new higher top. The opening upside gap
(body gap, not a western gap) of 27th Feb is intact and unchallenged and currently Nifty has placed on the edge of moving
above another hurdle of 8915 (previous swing high of 19th Feb).

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Weekly Timeframe: After a sharp bounce back during mid of Feb-15, Nifty shifted into sideways consolidation for the next
couple of weeks. Despite showing sharp weakness during this intraweek, Nifty showed smart recovery but was not able to move
above the resistance of around 8915 levels.

The bullish sequence of higher tops and bottoms is intact in Nifty as per larger timeframe and we observe a formation of long
lower shadows during intraweek dips. This is indicating an emergence of buying interest from the lows, which displays the
strength of bulls to hold on the defence.

If Nifty manages to move above 9000 levels by next week, then that is going to be an upside breakout of the sideways
consolidation as per larger timeframe. Such upmove could negate the previous bearish top reversal pattern of shooting star of
30th Jan 15. This expected upside breakout could have a sharp positive impact on the market ahead. Weekly momentum
oscillator like 14 period RSI has turned flat around 65 levels, which is signaling the ongoing sideways consolidation of Nifty. If
weekly RSI turns up from the current region, it could mean more upmove for the market, as per the theory of momentum
oscillator.

Monthly Timeframe: We observe a sustained uptrend in Nifty as per monthly timeframe chart over the last many months. After
shifting into sideways consolidation for 3-4 months (green line) Nifty staged upside breakouts and moved higher. Recently, Nifty
staged upside breakout of the similar type of consolidation in last month and witnessed recovery during intra month weakness.

The small body candles has been formed with long lower shadow last month, which is similar to the negative pattern of hanging
man. Over the last 8-10 months some of such negative reversal type candles have been formed, but they have not been
impactful so far.

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Month Gone by:

Nifty has started the month of February-15 on a weak note (blue vertical line-from the previous close of 8808 levels) as it
shifted into sharp downtrend up to the early/mid part of month. The important bottom reversal occurred around 8470 levels
and that led to a sharp upside bounce back up to 8913 levels during 19th Feb, before showing further weakness.

The decline, which has started from the high of 8913 levels halted at the support of 8670 levels and Nifty formed a higher
bottom around that region. Key economic events during later part of Feb month added the high volatility to the market and
Nifty finally closed at 8901 levels on the last day of Feb-15 (with the gains of around 91 points).

Historical union budget impact:

Nifty weekly timeframe

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Union budget for 2015 was announced on 28th February and we study previous few union budgets (green vertical lines on Nifty
weekly timeframe chart) to draw the conclusion of this budget impact ahead.

Historically Nifty has witnessed volatile and sharp moves during this economic event and the event has witnessed significant
trend formations before, during and after the events.

The historical study of market volatility during Union Budget is as follows; 2014 interim Union Budgets of BJP and UPA govts
(11th July-14 and 14th Feb-14 respectively) and that moreover resulted in a significant bottom reversal patterns. In both the
occasions Nifty formed higher bottoms and witnessed important intermediate term bottom reversal patterns. A new uptrend was
witnessed post budget.

The 2013 Union Budget (UPA) was held on 28th Feb and that has turned out to be a non-significant event, as the market
continued its down trend after a minor pullback rally. The 2012 Union Budget (UPA) was held on 16th March and this budget was
also a non-event for the market. Nifty has formed a top, couple of weeks before the budget and the downtrend continued for
next few months post budget.

In most of the instances the underlying trend (of pre-budget) has been continued in the market post budget. Hence the current
upmove as per weekly timeframe is likely to continue for some more time.

Summing Up:
The detailed study of Nifty from smaller to larger timeframe is showing positive trend and there is no formation of any top
reversal patterns yet in the market.

The upside breakouts of consolidation/pattern or hurdle of around 8950-9000 levels could have a sharp positive impact on Nifty
and one may expect Nifty to reach the upside levels of around 9320 (1.618% extension taken from the swing high of 8906 to the
swing low of 8470) for next month.

Immediate supports to be watched for a buy on dips for the month of March-15 is around 8650-8700 levels.

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Learning Technical Analysis

Importance of Volumes in Technical Analysis:
What is Volume?
Volume means the number of shares or contracts that trade over a given period of time, usually a day. The higher the volume,
the more active the security. To determine the movement of the volume (up or down), chartists look at the volume bars that
can usually be found at the bottom of any chart which illustrate how many shares have traded per period and show trends in the
same way that prices do.
Why Volume is Important
Volume is an important aspect of technical analysis because it is used to confirm trends and chart patterns. Any price movement
up or down with relatively high volume is seen as a stronger, more relevant move than a similar move with weak volume.
Say, for example, that a stock jumps 10% in one trading day after being in a long downtrend. Is this a sign of a trend reversal?
This is where volume helps traders.
Volume should move with the trend. If prices are moving in an upward trend, volume should increase (and vice versa). If the
previous relationship between volume and price movements starts to deteriorate, it is usually a sign of weakness in the trend.
Volume and Chart Patterns
The other use of volume is to confirm chart patterns. Patterns such as head and shoulders, triangles, flags and other price
patterns can be confirmed with volume. Basically, if the volume is not there to confirm the pivotal moments of a chart pattern,
the quality of the signal formed by the pattern is weakened.
Volume Precedes Price
Another important idea in technical analysis is that price is preceded by volume. Volume is closely monitored by technicians and
chartists to form ideas on upcoming trend reversals.
Volume as a Liquidity Criterion
Volume is an excellent indicator of a stocks liquidity. Thats because a higher number of transactions means that buyers and
sellers are able to agree on a transaction price, and the bid/ask spread is minimized
Why is liquidity such a big deal? Low liquidity means that its more difficult to enter and exit positions. Since all transactions
require a buyer and a seller, traders who need to buy or liquidate a position get stuck paying market prices for their shares.

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Derivatives Commentary:

The month of Feb 2015 saw the markets witnessing a roller coaster ride. After declining in the early part of the month and
touching a low of 8470, the Nifty rallied to close above the 8900 levels at the end of the month. The Nifty gained 1.06% during
the month of Feb 2015.
In the F&O space, the FIIs were net sellers in the Index Futures segment of Rs.3141 cr (vs net sellers of Rs.6901crs. in Jan 2015).
Along with the decrease in the open interest, it indicates earlier long positions were being wound up by FIIs in index futures
segment. In the Index Options segment, the FIIs were net buyers of Rs.1353 crs. (vs net buyers of Rs.9110 cr in Jan 2015), which
was accompanied with a lower open interest. In the Stock Futures segment, FIIs were net sellers, while open interest rose over
Feb.
The March 2015 series has started on a lighter note compared to the previous series. In terms of value, the March 2015 series
has begun with market wide Fut OI at Rs.88,600crs. Vs. Rs.90,400crs. at the beginning of the Feb 2015 series. It was
Rs.76,900crs. at the beginning of the Jan 2015 series.
This decrease in OI indicates that traders had turned cautious ahead of the Union Budget as they let a chunk of their bullish bets
in Feb series expire.
The decline in rollover costs in the Feb expiry also indicates that traders were less willing to carry forward their long positions
to the March series. Nifty Fut rollover costs for March series fell to 45-48 basis points, from 56-57 basis points in Feb series.
Looking at the rollover data, we observe that Nifty rollover figures were higher at 81% Vs. the three month average of 73%.
Market wide rollover was higher at 82% Vs the three month average of 81%.
Traders rolled over short positions in Cement, Metal and Banking stocks. Long rollovers were seen in defensive sectors like IT
and FMCG.

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Reflecting the increasing volatility expectations, the Nifty IV rose to 19.65% at the start of the March series from 19.16% at the
beginning of the Feb series. The Nifty OI PCR slid to 0.85 at the start of the March series from 0.9 at the start of the Feb series.
The fall in the OI PCR indicates a greater buildup of calls in the market.
Technically, the Nifty is now in a short term uptrend after breaking out of the resistances of 8900. Index option activity is
suggesting a trading range of 8800-9200 in the near term. This is because the maximum Call OI is currently being seen in the
9000-9200 strikes indicating this is the maximum expected upside for the Nifty in the near term. In the put segment, maximum
OI is currently being seen in the 8500-8800 puts, suggesting this is the maximum risk on the downside for the near term.

Learning Derivatives Analysis

Delta Hedge or delta neutral strategy:
A delta hedge is a simple type of hedge that is widely used by derivative dealers to reduce or eliminate a portfolios exposure to
an underlier. The dealer calculates the portfolios delta with respect to the underlier and then adds an offsetting position in the
underlier to make the portfolios delta zero. The offsetting position may take various forms, but a spot, forward or futures
position in the underlier is typical. All that is really required is that the positions delta offset that of the original portfolio.
Delta hedging means trading something somewhere such that the portfolios overall delta is zero (or neutral). This would be
desirable if we did not want any exposure to changes in the price of the underlying security. So if we own a put option, typically
we might expect its value to rise and fall with falls and rises (respectively) in the price of the underlying product. To eliminate
these fluctuations, we need to delta hedge. Specifically, when owning a put option, to delta hedge we need to buy a quantity of
the underyling product. As the underlying product price rises, our put falls in value, therefore owning some of the underyling
product is a hedge against this risk. Even more specifically, the delta tells us how much of the underlying product to buy; for a
put with a 20% delta, this represents the hedge ratio and suggests that for every put contract we own, we need to buy one fifth
of a lot of the underlying. If we own 100 lots of 20% delta puts, we need to buy 20 lots of the underlying to delta hedge the
puts.
Mathematically represented as:

This can be read as the partial derivative of the options value with respect to changes in the underlying stocks price
Delta (V- = S) must be between 0 and 1 for call options and -1 to 0 for put options. This previous statement can be thought
of quite intuitively as: a call option gives you the right to buy a stock at a predetermined price (called the strike price)
therefore, as the price of the stock moves up the value of the option moves up and as the value of the stock moves down the
value of the option moves down. In other words, for call options the value of the option will move in the same direction as the
value of the stock. Now, intuitively thinking about a put option which gives one the right to sell a stock at a predetermined
price, as the price of the stock goes up the value of the option goes down

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For example, a dealer might sell a call option on ICICI Bank, resulting in a negative ICICI BANK delta. To mitigate this exposure,
he then purchases enough ICICI BANK futures to offset the short options negative delta. Together, the short option and long
futures have a combined ICICI BANK delta of zero.
There are 2 forms of delta neutral hedging, known as Static Delta Hedging and Dynamic Delta Hedging. Static Delta Hedging
means setting a position to zero delta and then leave it to unwind on its own. Dynamic Delta Hedging is to continuously resetting
the delta of a position to zero.

Risks
The underlying stock move strongly in one direction. In other-words the stock does not fluctuate around a given price, but
instead trends up or down. Delta neutral strategies tend to work best if the stock moves equally up and down in a Markov like
process.
The volatility suddenly changes (or really the Implied Volatility changes)- Delta neutral strategies are not typically protecting
against this type of change. However, the volatility can be a much more significant term in the value of an option than delta.
Counter party risk. You will be buying an option from a counter party. If, at expiry, the option is in the money you will need to
exercise the option. This will require the counter party which sold you the option to be solvent and able to service their
obligations.
How to make profit from Delta Neutral Strategy:
1. By the bid ask spread of the option. This is a technique only option trading market makers can execute, which is simply
buying at the bid price and simultaneously selling at the ask price, creating a net delta zero transaction and profiting from the
bid/ask spread with no directional risk at all. This is also known as "Scalping".
2. By time decay. When a position is delta neutral, having 0 delta value, it is not affected by small movements made by the
underlying stock, but it is still affected by time decay as the premium value of the options involved continue to decay. An
option trading position can be set up to take advantage of this time decay and one such example is the Short Straddle which
profits if the underlying stock remains stagnant or moves up and down insignificantly.
3. By Volatility. By executing a delta neutral position, one can profit from a change in volatility with no directional risk when
the underlying stock moves insignificantly. This option trading strategy is extremely useful when implied volatility is expected to
change drastically soon.
4. By creating volatile option trading strategies. Even though delta neutral positions are not affected by small changes in the
underlying stock, it can still profit from large, significant moves. One example of such an option trading strategy is the Long
Straddle which we mentioned above. This is because a typical delta neutral position is still Gamma positive, which increases
position delta in the direction of the move, allowing the position to profit in either direction.

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Gainers & Losers February 2015

Top Gainers From F&O
Price

Top Losers From F&O

Price

Price

30-Jan-15 28-Feb-15 % chg

Price

Price

30-Jan-15 28-Feb-15 % chg

1207.9

1583.7

31.1

APOLLOTYRE

242.6

175.0

-27.8

ROLTA

SIEMENS

1042.2

1337.2

28.3

CESC

731.3

594.0

-18.8

158.7

195.8

23.4

UNIONBANK

209.2

171.5

1034.5

1254.4

21.3

RCOM

79.6

HEXAWARE

225.7

270.6

19.9

IOB

JUBLFOOD

1390.1

1647.9

18.5

JUSTDIAL

368.4

415.8

12.9

PTC

HCLTECH

1791.8

2020.7

12.8

ADANIENT

627.3

697.5

UNITECH

18.7

20.7

BHARATFORG

UPL

Price

Price

30-Jan-15 28-Feb-15 % chg

WOCKPHARMA

JINDALSTEL

Top Losers From CNX 500

Top Gainers From CNX 500

Price

30-Jan-15 28-Feb-15 % chg

110.0

191.0

73.7

RASOYPR

0.6

0.4

-33.3

IL&FSENGG

59.8

100.7

68.4

ESSDEE

266.2

190.7

-28.4

-18.0

SUZLON

16.2

27.3

68.2

APOLLOTYRE

242.6

175.0

-27.8

68.5

-13.9

PIPAVAVDOC

49.2

74.6

51.6

J&KBANK

152.5

113.6

-25.5

56.9

49.1

-13.7

TATAELXSI

763.9

1113.0

45.7

GODFRYPHLP

590.6

469.5

-20.5

1555.4

1346.5

-13.4

HINDOILEXP

99.9

87.0

-13.0

INFINITE

PNB

189.7

165.6

-12.7

PARSVNATH

11.2

BANKINDIA

266.3

234.3

-12.0

FORTIS

10.7

AUROPHARMA

1230.6

1083.5

-12.0

IBSEC

32.9

47.8

45.5

ERAINFRA

8.2

6.6

-20.1

144.7

208.9

44.4

MAHSCOOTER

993.1

804.0

-19.0

18.0

25.9

43.6

BIRLACORPN

531.3

430.3

-19.0

114.0

162.2

42.2

CESC

731.3

594.0

-18.8

29.1

39.6

36.3

UNIONBANK

209.2

171.5

-18.0

RETAIL RESEARCH Tel: (022) 3075 3400 Fax: (022) 2496 5066 Corporate Office
HDFC securities Limited, I Think Techno Campus, Building - B, "Alpha", Office Floor 8, Near Kanjurmarg Station, Opp. Crompton Greaves, Kanjurmarg (East), Mumbai 400 042 Phone: (022) 3075 3400
Fax: (022) 2496 5066 Website: www.hdfcsec.com Email: hdfcsecretailresearch@hdfcsec.com
Disclaimer: This document has been prepared by HDFC Securities Limited and is meant for sole use by the recipient and not for circulation. This document is not to be reported or copied or made
available to others. It should not be considered to be taken as an offer to sell or a solicitation to buy any security. The information contained herein is from sources believed reliable. We do not represent
that it is accurate or complete and it should not be relied upon as such. We may have from time to time positions or options on, and buy and sell securities referred to herein. We may from time to time
solicit from, or perform investment banking, or other services for, any company mentioned in this document. This report is intended for non-Institutional Clients
This report has been prepared by the Retail Research team of HDFC Securities Ltd. The views, opinions, estimates, ratings, target price, entry prices and/or other parameters mentioned in this document
may or may not match or may be contrary with those of the other Research teams (Institutional, PCG) of HDFC Securities Ltd.

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