1st Aug 2008 Hi, I am back with another analysis.

This time its more about a qualitative approach, as my analytical area of brain is busy with other analysis. US recession- As expected, the US is under mild recession. The housing market is continuing its southward journey, caused by the subprime meltdown. The rate-cuts by Fed have triggered inflation and further rate-cut is ruled out. Equally, it seems that the Fed is in no hurry to increase rate, at least for now. Food inflation- Up to July, the monsoon has been good, except few pockets of drought. If this continues for Aug-Sept also, then the food inflation will be contained by Oct-Dec08. Non-food inflation (mainly metals) - They continue to add worries. Although the govt. is arm twisting individual industries (cement, steel, sugar etc.) to pause on price rise. Also this kind of inflation is inversely proportional to the US recession. A moderate to severe recession can even trigger a price crash. Oil inflation- Nothing can be said, except that the oil prices has reached a local maxima@147 dollar a barrel, in pure mathematical context (whether this translates into global maxima, remains to be seen.). And once speculators are convinced that further rise is limited, they offload contracts and withdraw money, cooling the price. This has indeed happened and oil is at 120-126 dollar. I think 100-125 band is genuine, but anything can happen- it may breach 160 mark, or it may fall to double digits. Or, it may touch both values within a time-span of few months! The P-factor- Politically speaking, after the Left was replaced by Samajwadi Party, and the Manmohan Singh led UPA govt proved majority on the floor of House, it was clear that reforms will get out from cold storage. Starting the 123 deal, the Lok Sabha is expected to debate and pass (hopefully) some market/ industry friendly bills in Sept session. But since BJP will oppose, along with the usual party-pooper Left, it remains to be seen how bold a Congress govt can behave in esp. election year! Regarding the election itself, the govt is tweaking with LS proceedings to ensure that BJP is unable to bring a fresh No-confidence motion during Sept session. As, any two consecutive can have a maximum of 6 months, the govt has no compulsion to commence LS session before March09. The president is an ex-Congress person will only smooth the process. However this does not guarantee that the UPA govt will not fall before March09; it only ensures that the Congress has up to March to find most opportune time to let the UPA govt fall. The nuke deal/ vote of confidence has made few good things for Congress, cash-on-camera notwithstandinga) It showed that Manmohan Singh is not a weak PM; it is his strategy to maintain a low profile image to push his agenda. b) The Congess leadership is reformist, and it can even sacrifice govt if it is in the nations interest. (Particularly in the 5th year of governance!!) c) Only Congress has guts to take bold decisions. d) Inflation, if contained, will not work against the incumbent Congress govt. Interest rate- The recent monetary policy by RBI re-emphasizes the RBIs view that inflation is bigger issue than growth, and political uncertainty has increased the pace of

measures (both rates repo and CRR) to contain inflation. However I feel that rate increases are nearing to end and not more than 1-3 are expected. Growth rate- The GDP growth rate is slowing down to 7.5-8%. But even 7% plus rate in these hard times is an achievement in itself. The industry is roughly expected to grow twice the rate of GDP growth rate. I.e. 15-16% seems realistic. The market- The tug of war between bulls and bears is at its max as the volatility index of Nifty suggests. Bears are repeatedly unable to beak the 12000 mark on the Sensex, while bulls cant take and sustain it to above 14500. Fall in inflation and/ or oil prices will favour the bulls. My strategy- It will remain same- staggered buy. I will buy at every substantial slide, without fear that the market may further fall. And, I am in no hurry to sale, except in case of violent bounce back. As I am busy these days, I may not research and send price-bands etc. Regarding sectors, I feel that time has come to accumulate banking stocks. Yes Bank and Axis Bank (erstwhile UTI Bank) looks promising. Reliance Capital at 900-1050 looks good. Capital goods will suite to aggressive investors, and real estate will have a gestation period of 1.5-2 years. Averaging can be done in power sector, e.g. R-Power at 130-140 is good bet. IT sector is for short duration, as severe US recession will batter it. Oil upstream (RIL, RPL, Cairn etc.) is good, but refinery margins are expected to squeeze, caused by over capacity (in case of RIL/ RPL). Telecom will continue to deliver, although 3G license and spectrum issues will have to be watched. Lastly, I must accept that bear market (mid-term) has finally arrived. So tight fielding is the mantra. Have patience, let the price fall, then invest and wait for the market to recover. Let 2008 be the year of investment, and have courage to use it accordingly! Happy investment! -Ayush 6th Aug 08 Hi, As I said in the last mail, this time I think betting on banking stocks will pay. We can view this sector from two anglesIn short term, the sectors profitability is linked with the interest rate (which itself relies on RBIs monetary policy, and the policy is influenced by the inflation and inflationary expectation) and credit offtake. The market is now-a-days being guided by this logic, and banking stocks has been battered in July. However, as the pendulum swung to the height of pessimism, valuations looked well, and in many cases at mouth watering level. A typical scenario of bear market! On the slight change of little lower inflation, the banking sector bounced back. They are trading at 10-20% above of their recent lows. (I also bought Reliance Capital (although an NBFC to be precise) and Yes Bank, at around 900-1050 and 115-130 respectively. Now, after change in political equation at the center, RCAP bounced back violently, making me luckier by few bucks.) Another view says that banking sector mirrors the health of the economy and the degree of its integration from the global market. And I am following this logic, for medium to long term views. India will be one of the least effected countries, and will come out much stronger from the subprime crisis. The Indian banking sector is poised for another decent

growth. Indias capital market are one of the most well regulated and sophisticated market of the world. It is also highly competitive market. The NPA (non performing assets- bad loans in common parlance) are continuously declining from 95-96 levels. They may increase for a little while, as increase in interest rate causes chances of default to rise, but they will very soon resume their downwards journey. The NIM (Net Interest Margin) is stable at around 3%. This shows that long term profitability is intact, short term losses notwithstanding. In fact, in many cases these short term losses are notional; they have to be shown in the profit-loss statement, as per the RBI diktat, although if bonds are held till maturity, they wont have any impact on the profitability. I am not going into the nitty-gritty of accounting. The years 2004-07 were exponential for this sector. This has been paused and reversed in 2007(later half) and 2008, with the worst happening in June-July. Now this has bounced back, but I think that although the worst may be over, it is not out of woods yet, as inflation is still a concern, particularly for the RBI. And I expect 1-2 further rate hikes. This will be the time to enter/ enhance the portfolio with banking and financial stocks (excluding the pure broking firms). As I mentioned in the last mail, I am tracking RCAP, Axis Bank, and Yes Bank; and to certain extent HDFC and HDFC Bank. RCAP is great company, and after Anil Ambani took its charge, it has reoriented itself. Now it is aspiring to become a financial conglomerate. Its business ranges from mutual fund, share trading, personal finance, life insurance and general insurance. RCAP is the holding company for these ventures. The lifetime high for this sock is around 2900 levels. After the Jan 08 market slide, it tumbled to 1600, then 1200-1300, and finally in July to below 900. I was convinced that once it went below 1100, it was nearing its bottom, as 900-1000 is a very long term strong support for this stock. After the change in political equation at the center, it went up to 1300-1400 range, which seems its genuine band. Axis Bank, erstwhile UTI Bank, is one of the pioneer private banks. During the last 3-4 years, it has expanded aggressively into tier 2 cities. The customers from these cities form a low costing deposit base- an advantage in increasing interest rate scenario. This is clearly being reflected in the latest quarterly results. If I am not wrong, it reported around 50% rise in net profit for the latest quarter. But major negative for this stock is its price variation, its gyration ranges from 500 to 800. My strategy for this stock is to enter when it batters most. Tight fielding! I have not yet started buying this stock, but will think so if it tumbles once again. 570-600 will be my price band for buy. And regarding Yes Bank, I am tracking its development since its birth. It is the latest entrant in private banks. As its size is small, it has plenty of options to grow exponentially, even in these turbulent times. Its result was also above 50% growth in net profits for the last quarter. During the plunge in banking stocks, it went back to 106. However since then it trades 120-140 range, which I think its genuine range. And I have bought it in 115-135 range. Mid-term scenario for this stock is very positive. RBI is planning to further open the banking sector for foreign banks in 2010-2011, depending upon the govt in power. If this happens, Yes Bank will be one of the most suitable candidates for acquisition, as its promoters are new and will not hesitate to avail the lucrative exit offers. And if this fails, this bank is in anyway growing at a high pace. HDFC/ HDFC Bank- It is the second largest private bank, and is the most profitable bank in India. It is also one of the most profitable banks in world. Thats why it commanded

high valuations consistently. And its high valuations deterred me to buy it. But I think it may be one of the gems in the portfolio. For HDFC, 2200 is its first support and 1800 is very strong support. For HDFC Bank, 1100 is first support and 900 is the strong support. First support may suite to aggressive investors to start buying, and strong support can be used for heavy buying (aggressive) or start buying (moderate, like me). Regarding the general market conditions, I think it is going to fall in near term. But will bounce bank in mid to long term. So I am ready to avail this near term fall, if it happens. If it does not happens, I will sit on cash, wating for it to happen. I am in no hurry to purchase. Happy investing! -Ayush