Dear Reader,

Where are the Indian stock markets headed? This question has been exercising the minds
of investors in the last two months.

Let me make a brief analysis of things in this newsletter.

At the outset, I’d like to point out what I’ve been sharing with you for long:

1. Any equity portfolio must be seen from one’s own overall asset allocation

2. Any analysis of an equity portfolio has to be done on a comprehensive basis from a

portfolio management perspective.

3. Here, one has to take into account one’s specific needs, surplus in hand and risk
appetite.

4. Any portfolio has to be diversified across all sectors. But, too many stocks will
definitely spoil the broth. An individual shall not hold more than 15 to 25 stocks in one’s
equity portfolio.

5. A staggered approach –whether in selling or buying – will help us in wealth creation

These are the golden principles in equity investments.

The structure of the Indian Economy has undergone a radical shift in the last two
decades. We’re part of the globalised world now. Any outside shocks are reaching our
shores in no time impacting our financial markets. The global risks are too complex. As
an individual, we’re not in a position to analyse them properly.

Stock markets between 2003 and 2007 and again from 2009 to 2010 have given very
good return to many investors. There are three things that have brought these tremendous
benefits:

1. Domestic consumption
2. Infrastructure development
3. Outsourcing (IT, Pharma, ITES, etc.)

Now, we’re facing some real risks from one-way rise in crude oil prices, runaway
inflation and lower estimates of corporate profits.

Broadly, there are three things that influence markets:

1. Liquidity (money flow)

2. Sentiment
3. Corporate profits
Now, liquidity in the form of FII inflow and money from LIC (which had invested
heavily in stock markets with the help of ULIP plans – now the music has stopped for
LIC and other insurance players as far as ULIP collections are concerned) is tight. RBI
too has been tightening its monetary policy. Stock indices of Developed Markets have
been on the rise, while emerging markets are showing decline in the last six months. On
this front, we can’t foresee any dramatic shift for the time being. But, the tide may turn
positive at any point of time.

On the sentiment front, Indian markets are facing a lot of headwinds in the form of
European sovereign debt crisis, MENA (Middle East-North Africa) crisis in the form of
mass revolutions including Libyan Crisis, weakening dollar, rising commodities and food
prices, political uncertainty in India, lack of governance in the UPA Government,
corruption issues, scandals, etc. Sentiment is a wild animal; nobody knows when it will
get bubbled up again.

Estimates from several brokerages indicate that corporate performance may not be as
robust in future as it has been till the December 2010 quarter. This is one of the reasons
for the steep fall in Sensex since first week of January 2011. With inflation showing no
signs of abating and with no respite from surging crude oil prices, corporate profits may
show some slackening in the next one year.

Overall, we’re going to face bumpy rides in the next one to two years as far as Sensex,
Nifty, and BSE-200 indices are concerned.

Many are scaring us with doomsday scenarios due to surging oil prices. The markets are
rife with reports that oil will touch USD 200 a barrel very soon. And they say we’re
living on cheap oil. The experts opine that oil below USD 100 is cheap from an historic
perspective. India is dependent on the world for 80% of its oil consumption. As such,
India is more vulnerable to oil price shocks.

However, I’ve a few simple questions to ask. If crude oil price goes to USD 200 a barrel,

what will Government of India (GOI) do?

will GOI increase prices of diesel, petrol, kerosene and LPG?

Let us assume GOI increases fuel prices. With increased fuel prices,

will consumers stop buying cars?

will car owners keep their cars in garage and travel in public transport?

if we start using creaking public transport, can it sustain the extra burden?

will public start taking to their feet? (This is a remote possibility since our towns, cities
and villages don’t have any pavements or sidewalks!)
will consumers bitten by high fuel prices stop eating ice cream? (If they stop eating ice
cream, it’s bad for dentists in particular and doctors in general)

will they cut down their talk on mobiles or will they talk more due to high stress?

will people stop indulging in big-fat weddings?

will they stop watching TV serials/sports/cartoons?

will any radical shift take place toward green fuels and green technologies?

It’ll be very interesting to watch the tectonic changes in consumer behaviour and
government regulation if fuel prices go up substantially in India. Unless we are able to
predict the future consumer behaviour, all our scary analysis will not help us in anyway
as far as picking stocks is concerned. I think no expert can predict the future consumer
behaviour under the above circumstances. Our past models will not be useful to predict
the future trends.

One thing is sure, steep and sudden rise in oil prices will have a deleterious effect on the
profits of several Indian companies due to rise in input costs.

If we are not able to predict the future, what shall one do in stock markets? To buy, hold
or do nothing except watching the volatile prices like Himalayan monks?

At last, everything boils down to one’s risk appetite, cash surplus in hand, asset allocation
and specific needs.

However, in general, I’m optimistic about the long-term prospects of Indian companies
and ‘India Story’ even though several hiccups will be on the way. If we are serious about
wealth creation, we have to invest certain percentage of our assets in equities depending
on our risk appetite and cash surplus.

You can consider the following stocks for long-term investment. In the short-term, I’m
not in a position to tell the prospects in the stock market.

(Name of the company followed by current market price in Indian rupees as on March 8,
2011)

1. Bharti Airtel – 335

Good fundamentals – good biz model – to watch its African operations closely

2. HCL Tech – 464

Good biz model – has shown good traction in earnings of late – forex losses are behind
3. Axis Bank – 1,316

Good growth though valuations are rich – vulnerable to interest rate risks

4. ICICI Bk – 1,022

Its problems are behind – came out of the shocks of 2008 well – bad debts were cleaned
up

5. SAIL – 151

Good opportunities domestically – cash rich company – reasonable valuations – to watch

international trends closely

6. Cairn India – 351

Oil price rise will be cushioned with this stock – to watch the Government of India’s
response to Cairn-Vedanta deal closely

7. Federal Bank – 377

8. Corporation Bank – 565

Strong fundamentals

9. Bank of Baroda – 910

Good earnings of late with clean balance sheet

10. Exide Inds – 138

11. Thermax – 609

(beaten down recently due to slowdown in infrastructure)

12. Biocon – 322

(beaten down recently due to failure of the cholesterol drug)

13. Gujarat Gas – 410

(Strong earnings growth - you can pick it up if it comes down to 370 or 380)

14. NMDC – 270

(If you are already having MOIL and Coal India in your portfolio, I’m not sure whether
you’d want to pick it up)

15. Maharashtra Seamless – 335

It may test your patience with its boring stock performance– strong balance sheet

16. Bluestar – 330

(beaten down recently due to weakness in earnings)
17. Praj Industries – 67.35
May benefit from oil rise – it was darling of the markets till 2007

18. HDIL – 160

Though real estate stocks are shunned like plague, this company is having a low debt-
equity ratio of 0.71 only (March 2010) among realty stocks. Weak cash flows. Worst may
be over for the company. To watch interest rates closely for volatility in stock price.
Make sure you don’t have any other realty stocks in your portfolio.

19. Fortis Healthcare – 152

The ‘misery’ tax imposed in the Budget will be passed on to the patients – there are
rumours that this impost may be withdrawn

20. Financial Technologies – 785

(promoter of MCX Limited-the commodity and currency exchange)

21. Allcargo Global Logistics – 148

Logistics in India has great potential – but stock price may be volatile

22. Unichem Laboratories Limited – 175

You can pick up these stocks at different price and time levels over a period of three to
six months. If you visualise any possibility of scary scenarios that analysts are predicting,
then you should consider exiting stocks depending on your view of the stock market.

Watch the following high-risk and volatile stocks though they are having some corporate
governance issues:

Sesa Goa – 277 (beaten down after excise duty hiked steeply in recent Budget)
Suzlon Energy – 47.95 (buried in debt – rumour is that promoter may sell stake)
Reliance Power – 122 (It is fashionable to treat Anil Ambani as a pariah these days)

Happy investing,

Rama Krishna Vadlamudi

Hyderabad
March 8, 2011
Disclaimer: I’ve a vested interest in the stock market going up. It’s safe to assume that I
own some of the stocks mentioned above. The views are personal. Please consult your
certified financial advisor before taking any investment decision.