Monthly Strategy Report February 2015

Monthly Equity Commentary

1-1.S&P B SESENSX.BS E - 30/01/15

Trend7
30400
30200
30 T
29800
29600
29400
29200
29 T
28800
28600
28400
28200
28 T
27800
27600
27400
27200
27 T
26800
26600
26400

30

31

J15

02

05

06

07

08

09

12

13

14

15

16

19

20

21

22

23

27

28

29

30

Daily

Month Gone By
The Benchmark indices ended on a positive note in the month of January 2015. BSE Sensex rose by 6.12% and Nifty closed up by
6.35% for the month. The S&P BSE Sensex surged led by major gains in Realty, Capital goods and Consumer durable stocks. Both
Sensex and Nifty managed to hit fresh lifetime highs due to funds being pumped in by the foreign investors. Declining crude oil
prices and the unexpected rate cut by the Reserve Bank of India (RBI) before it bimonthly monetary policy meet in February
were the major triggers for the market.
Key Positives during the month

Inflows of foreign direct investment into India rose by about 25% to $17.35 bn in the April- Oct period of the current fiscal.
The HSBC Emerging Markets Index (EMI) rose to a three month high of 51.7, from Novembers six-month low of 51.2.
The Index of Industrial Production (IIP) of India for the month of November was reported at 3.8% versus (-) 4.2% in October. This
is way above estimate of 2.7%.
Foreign direct investment inflows to India increased by about 26% to $35 billion in 2014.

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The Reserve Bank of India (RBI) surprised financial markets by announcing a cut in its main lending rate viz. the repo rate by 25
basis points in an unscheduled monetary policy review.
Finance Minister Arun Jaitley stated that India's economic growth is expected to pick up in the current fiscal and will be "much
better" in 2015-16.
HSBC India Purchasing Managers' Index (PMI) climbed to a two-year high of 54.5 in December, up from 53.3 in November.

Key Negatives during the month

The Consumer Price Index (CPI) inflation in India for the month of December rose to 5%.
The International Monetary Fund (IMF) has slightly cut projections for India's economic growth to 6.3% for 2015-16 against 6.4%
made in October last year.
Governments fiscal deficit has exceeded the budget estimate for full financial year in first 9 months (April-December) of the
current fiscal.

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

Dec-14
17823
4736
6566
17451
9806
50007
3365
23605
27499
8283
5227
3234

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

% Chg
-3.7
-2.1
2.8
1.3
9.1
-6.2
0.8
3.8
6.1
6.4
1.2
-0.7

World markets ended the month of January 2015 on a mixed note.

Germany - DAX was the top performer during the month which gained
9.1% (helped by positive data on 2014 GDP growth, Swiss announcement
of scrapping its cap vs the Euro, ECB announcement of stimulus). Nifty &
Sensex also reported decent gains of 6.4% & 6.1%. Some of the losers
were Bovespa, Dow Jones, Nasdaq, & Shanghai composite, which fell by
6.2%, 3.7%, 2.1%, & 0.7% respectively.

Average daily volumes on BSE in December 2014 rose by 15.0% M-o-M.

(NSE daily average volumes rose by 13.6% M-o-M). The average daily
derivatives volumes on NSE rose by 8.9% to Rs. 266185.7 cr in December.

Sectoral performance:

The performance of the sectoral Indices was broadly positive except for Metals & PSU, which were down by 5.2%, and 0.3%
respectively. The top three major gainers were Realty, Capital Goods & Consumer Durable which rose by 16.48%, 10.71% and
10.15% 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

31-Dec-14
27,499
11,087
10,373
10,722
3,428
8,369
18,631
21,458
15,442
9,674
7,767
14,693
10,584
10,753
9,895
2,093
8,227
1,555
5,842

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

% chg
6.12
2.18
3.53
5.83
6.22
6.38
7.27
5.86
10.71
10.15
6.55
6.63
5.62
-5.23
2.51
6.31
-0.26
16.48
5.04

Top Gainers
Realty Index edged higher on reports the finance ministry has floated a draft
cabinet note to amend the Foreign Exchange Management Act to permit
overseas funds in real estate investment trusts (REITs).
The Capital Goods index surged as investors cheered data showing HSBCs India
Purchasing Managers Index (PMI), climbed to a two-year high of 54.5 in
December, up from 53.3 in the prior month, as new orders from domestic and
export markets rose.
Consumer durables sector steadily marched ahead outperforming the
benchmarks. The surprise rate cut announced by the Reserve Bank of India and
hopes of further cuts in the coming quarter have been the major contributor
towards a rally in these Index. Expectations that volumes will pick up as the
consumers' spending power increases was the trigger for the index.
Top Losers
Metal Index fell on lower demand from industrial users, heavy selling pressure
and fall in commodity prices. Prices also came under pressure after the World
Bank cut its estimate of global growth for 2015 to 3% and 3.4% for 2016

Fund Activity
Net Buy / Sell Net Buy / Sell Open Interest Open Interest
Jan -15
Dec -14
Jan -15
Dec -14
Remarks
FII Activity (Rs. in Cr)
FII Activity (Rs. in Cr)
12374.5
-1173.7
Equities (Cash)
FIIs turned net buyers in January.
6900.9
-3563.41
22760.7
15432.8
Index Futures
FIIs were net buyers with a rise in open interest.
9109.9
+11802.1
48247.6
43936.3
Index Options
FIIs were net buyers with a rise in open interest.
-2140.4
-7206.8
57404.1
48605.6
Stock Futures
FIIs continued to be sellers with rise in open interest.
-111.6
-352.9
1482.1
1550.8
Stock Options
FIIs were net sellers along with a fall in open interest.
MF Activity (Rs. In Cr)
MF Activity (Rs. In Cr)
Equities (Cash)
819.5
+6078.8
MFs were net buyers in the month of January.
FIIs were net buyers of debt papers buying a net amount of Rs.23068.2 cr of debt papers in Jan, compared to Rs. 11059.5 cr worth debt bought in Dec.
Particulars

Bond Yields
Indian G-Sec bond yields ended lower by 17 bps at 7.69% at the end of January 2015 over December 2014. Unexpected repo rate
cut by the RBI during the month boosted bond prices and led to lower yields. On the other hand, prices of the bonds were
impacted by the reported comment from the RBI Executive Director, who stated that the supply of bonds may remain elevated

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despite the governments fiscal consolidation efforts. Risk aversion due to developments in the Euro zone area also dampened
the bond prices.

Commodities

In January 2015, the Reuters/Jefferies CRB Index of 19 raw materials ended lower by 4.84% to close at 218.84. The
Reuters/Jeffries CRB Index fell on account of a fall witnessed in commodities like Wheat (down 16.1%), Natural gas (down
14.1%), Copper (down 13.2%), Crude Oil (down 10.9%), Heating Oil (down 8.9%), Lean Hogs (down 8.7%), Cocoa (down 7.2%),
Corn (down 6.4%), Cotton (down 3.9%), Coffee (down 3.5%), Live Cattle (down 2.0%), Nickel (down1.5%) and Aluminium (down
0.7%). However, Silver, Gold, and Sugar were all up by 8.9%, 8.0% and 1.2% respectively.

Commodity
Gold
Crude Oil
Aluminium
Copper
Zinc
Nickel
Tin
Lead

30-Jan
1279
48
1846
5460
2112
14800
19175
1860

31-Dec % Chg
1184
7.97%
54
-10.86%
1858
-0.65%
6289 -13.18%
2179
-3.07%
15020 -1.46%
19375 -1.03%
1863
-0.19%

Copper futures approached a five-year low as industrial profits last year posted the
smallest gain in data that started in 2000 in China, the worlds largest metal consumer and
also as speculators reduced their positions amidst weak global cues.
The global oil benchmark settled below $50 a barrel for the first time in nearly six years
even as Goldman Sachs Group Inc. slashed its forecasts, saying lower prices are needed to
reduce global supplies.
Gold rebounded from a loss as a sharp slowing in U.S. fourth-quarter economic growth
boosted the precious metal's safe-haven value, helping it post its best monthly gain in
three years in January. Prices rose to its highest level since August as investors sought safe
places to park cash amid concerns about a continued weakening of the euro.

The Baltic Dry Index (BDI) fell 22.25% in the month to close at 608. 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

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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 US Dollar reached its highest point in nine years against the major currencies supported by further strength from the US
economys outperformance and the diverging outlook for monetary policies among major economies. The currency started the
New Year with a strong footing after closing 2014 with a 13% surge, the best annual performance for the greenback since 1997.

Given below is a table that shows the depreciation (-)/appreciation (+) of the dollar against various currencies for the month of
January 2015:
USD to:
31-Jan-15 31-Dec-14
Pakistani rupee
101.31
100.18
Hong Kong dollar
7.75
7.76
Chinese yuan
6.17
6.14
Indian rupee
61.97
63.59
Taiwan dollar
31.68
31.74
Singapore dollar
1.35
1.32
Argentine peso
8.64
8.54
Euro
0.88
0.82
Thai baht
32.79
32.87
Malaysian ringgit
3.64
3.50
Indonesian rupiah 12722.60 12406.90
Japanese yen
117.82
119.93
Brazilian real
2.64
2.68
Korean won
1100.72
1096.73

% Chg
1.13
-0.06
0.47
-2.55
-0.21
2.26
1.16
7.39
-0.25
4.05
2.54
-1.76
-1.48
0.36

European Central Bank President Mario Draghis announcement of a 60-billiona-month government-bond buying program sent the euro tumbling to multiyear
lows against its main rivals. HSBC reduced its year-end forecast for the shared
currency, which further weighed on the euros value against the dollar
Malaysias ringgit fell to the lowest level in more than five years on concern that
a protracted slump in crude prices will erode the oil-exporting nations revenue.
The rupee jumped to end at over two-month high against the greenback on good
inflows in local markets and sustained dollar sales by exporters, Heavy capital
inflows and higher equities lifted the rupee sentiment.
The yen gained against most major peers after the US economy expanded at a
slower pace than forecast in the fourth quarter, fanning speculation growth is
being dragged down by a global slowdown.

Outlook going forward

Global Market Outlook
Falling Oil Prices
International oil prices have fallen more than 50% in the last seven months. The direct weight of oil prices in CPI basket is low,
at just 2.2%, but the indirect impact, for instance through lower transportation costs seeping into lower food prices, is larger.

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Cheap oil is a double-edged sword for diversified economies: On one hand, investment drops in the oil and gas sector, hurting
jobs and the stock market; on the other hand, consumers and companies that use a lot of hydrocarbons see their costs go down.
In the U.S. and in Europe, the two effects will probably cancel each other out - as they have in the past.
A halving of the oil price is likely to give the European Union's economy a 0.2 percent GDP boost and add 0.3 percent to U.S.
economic output. Economic research has shown that the negative effects of oil price rises are bigger than the positive effects of
commensurate price drops.
For developed economies, then, the net effects of cheap oil are close to zero - like those of moving furniture around an
apartment. Production and investment will shift, "from energy-efficient to oil-intensive" sectors, from the oil industry to the
rest of the economy. "But the aggregate impact may be smaller than suggested by the sectoral effects, the historical data and
some media fanfare."
Cheaper oil can be good for the economy it's basically the equivalent of a tax cut. Unless it's bad for the economy, which can
be the case if falling prices spur deflation and hurt countries and companies that depend on oil exports. Whether the impact is
good, bad, or a little of both, will depend on how long prices stay low.
If cheap oil is the result of a drop in demand (from an ailing Chinese economy, for example), prices will rise when the economy
picks up. If lower prices stem from increased supply (from the shale boom, say), then cheap oil is here for at least a while. Two
things are certain: There's still a finite amount of oil in the world, and the economy needs oil to function. That suggests oil
prices will increase someday, although no one is sure whether that will happen as soon as the spring or as far off as the 2050s.

US economic data mixed but corporate data good

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Markets are throwing off some very negative signals about the U.S.
economy. However, with economic data remaining relatively strong,
the overhanging question is whether investors will begin to take
those bad signs to heart.
Crude oil, typically taken as a barometer of industrial and consumer
demand, continues its incredible plunge. The critical commodity has
lost some 60 percent of its value in the past seven months, falling to
levels not seen since the depths of the financial crisis in 2009.
Meanwhile, Treasury yields plumb new lows, with the 10-year yield
falling below 1.7 percent on the last trading day of January even as
the Federal Reserve looks to hike short-term rates.
Though gross domestic product (GDP) number showing annualized
growth of 2.6 percent in the fourth quarter was a bit of a
disappointment, full-year growth came in at 2.4 percent.
6

The employment numbers have been even better, which is set to be confirmed on Friday, when the Bureau of Labor Statistics is
expected to report the 12th straight month of 200,000-plus gains in nonfarm payrolls.
When it comes to the more narrow issue of the next move for stocks, however, the tie-breaker between markets and data must
be corporate profits. After all, tracking the state of the U.S. economy is all well and good, but stocks are ultimately valued
based on their expected stream of future earnings.
Even though analyst expectations for the first quarter of 2015 have come down of late (as estimates tend to do as the actual
results draw nigh) FactSet reports that analysts expect S&P 500 companies to earn $122.05 in 2015, which would be a record
high.

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.
But in light of Europes underlying problems of stagnant growth, high debt and rigid labor
markets, ECB President Mario Draghi suggested the central banks largess alone wont be
enough to right its economy.
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. The purchases
of government bonds and those issued by European institutions such as the European
Investment Bank will start in March and are intended to run through to September 2016.
Mr. Draghi signaled the purchases could extend further if the ECB isnt meeting its
inflation target of just below 2%. In December, consumer prices fell 0.2% in December on
an annual basis in the eurozone, the first drop in over five years.
The ECBs new stimulus could strengthen demand, increase capacity utilization and
support money and credit growth.
The launching of quantitative easing, which investors and many European governments
have been pleading for, wont necessarily solve Europes problems.
An anemic economic recovery since 2013 has left joblessness too high and output and inflation too low to escape the damage of
the 2008 global financial crisis, which was compounded by the eurozones subsequent sovereign-debt crisis. Long after most
other major economies have recovered from the financial crisis era, the eurozone remains burdened by high debts, bad loans,
sickly banks, stressed households and anemic demand.

ECB stimulus

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It is yet to be seen whether quantitative easing will work within Europes fragmented economy and banking system, particularly
in stagnant economies such as France and Italy that have been slow to reform their labor markets to make them more flexible.

Greek Crisis
Greece has never been a leader in Europes power institutions NATO and the European Union. German, French, and British
leaders alike considered it too small, poor, and geographically remote to be a major player. But all that changed with the
landslide victory of the radical left-wing Syriza party in the most important Greek national election in four decades.
Syrizas young, strong-willed leader, Alexis Tsipras, has been sworn in as prime minister. Within hours, his new government
challenged the EU to renegotiate the terms of Greeces massive bailout package. Tsipras then threatened to block stronger EU
sanctions against Russia over Ukraine. Suddenly, a new and very different government in Athens is back on the radar screen of
Berlin, Paris, and London.
Greece has suffered a calamitous economic depression with a massive loss in output, youth unemployment near 50 percent, and
little capital investment. Six years of crisis have rocked the country and reshaped its politics. When the Greek economy was on
the ropes in 2010, Athens appealed to the European Union, European Central Bank, and the International Monetary Fund for a
massive bailout totaling over 240 billion euro to avoid bankruptcy. In return, the creditors demanded fundamental budget,
fiscal, and legal reforms to fix Greeces notoriously lax and profligate spending habits. That was the deal the Europeans would
save the Greek economy in return for tough, even brutal, economic reforms. Greece was rescued from default on its massive
debt and from being booted from the eurozone. But the Draconian budget cuts and resulting loss of jobs infuriated millions of
Greeks, who eventually lost confidence in the EU and their own government.
Syriza told Greek voters it would demand a fundamental renegotiation of the EU package and return to a major public spending
program to create jobs and stimulate growth. It has made a big bet that by threatening to walk away, the Europeans will blink
first. The stage is thus set for a looming collision between two immoveable forces the stolid German attachment to austerity
against Greeces new, left-wing governing ideology.
Greece has instigated a second crisis this week with Europe and the United States by threatening to block new EU sanctions
against Russia in opposition to its escalating military intervention in Eastern Ukraine. Many of the new Greek cabinet ministers
have been outright apologists for Russian aggression in Ukraine. Given the stakes involved, the EU and United States will put
substantial pressure on Greece to back off.
The issue is crucial too for Europe, which has to weigh accommodating Greek concerns with its countries domestic aversion to
providing debt relief, and the future of the Euro and of the European Union. And also crucial for the world, because a new crisis
in Europe will have negative repercussions for the global economy.

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Indian Market Outlook

Oil prices Impact on India
There is some linkage between oil prices and inflation, but the correlation is lower because of the manner in which successive
governments have intervened in the domestic oil market. When oil prices were rising, government intervention did not allow
this to feed into domestic rates and as a result, inflation didnt directly respond to oil prices. In recent months, oil prices have
halved while the prices of petroleum products in India hasnt. Inflation has responded more to structural measures undertaken
by the government to contain the prices of agricultural products, lower non-oil commodity prices and subdued economic
activity. This has coincided with lower oil prices primarily because the prices of other commodities have also fallen at the same
time.
This leads to a piquant situation. On one hand, if oil prices were to remain low and government revenue needs to decrease over
a period of time, we may see domestic prices falling meaningfully. However, if oil prices were to rise again, which is possible
given that we are at multi-year lows, domestic prices may increase in lockstep, undoing much of the benefits of the measures
mentioned earlier. The Reserve Bank of India [RBI] would be concerned about this while deciding on interest rates going
forward.
RBI Credit Policy Outcome Status Quo
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).
The Reserve Bank of India (RBI) in its sixth bi-monthly monetary policy review on Tuesday decided to keep policy rates
unchanged at 7.75%, even as it moved to ease liquidity conditions by cutting the proportion of government bonds banks must
hold.
Given that there have been no substantial new developments on the disinflationary process or on the fiscal outlook since 15
January, it is appropriate for the Reserve Bank to await them and maintain the current interest rate stance, the central bank
said in its statement.
Continuing with the practice of reducing banks mandatory bond holding ratio to infuse more liquidity in the system, the
statutory liquidity ratio (SLR) was cut to 21.5% from 22% earlier. The cash reserve ratio (CRR), or the portion of a banks money
maintained with the central bank, was held steady at 4%.
Expectations from Union Budget
While the market worries about acute fiscal stress in FY15, the government can raise capex by at least 1.2% of GDP in FY16E. It
is pocketing a large part of the gains from the oil price decline, and can spend to generate growth: countercyclical pumppriming. A further 0.9% of GDP can come from GDP base increase in the new series and a moderate push-out of fiscal deficit
targets.

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Spend on roads, railways, housing is likely. The Govt would prefer projects that (1) are "shovel ready", (2) have larger growth
multipliers; (3) are short-cycle (i.e., it doesnt need to commit funds for several years); and (4) have institutional capacity. This
implies a large jump in spending on national highways, rural roads, railways, and rural and urban housing.
This will be the third year in a row, when the government will be compelled to cut capital expenditure aggressively to meet the
fiscal deficit target. Cutting capital expenditure to meet headline fiscal deficit targets cannot continue indefinitely and there is
a limit to which savings can be generated from subsidy rationalization. The need of the hour is to usher in bold tax reforms,
especially the long-awaited Goods and Services Tax (GST), which has the potential to boost revenue and growth over the
medium term.
Some relief is expected from the recent excise duty hikes (three hikes since November) on petroleum products, which are
expected to reduce the slippage by INR170bn, but even then tax revenue slippages are likely to be about INR830bn, larger than
last years shortfall (INR680bn). Disinvestment targets (INR634bn), which looked very ambitious from the beginning, are likely to
fall short by about INR250-300bn (the risk is in fact to the upside, if some big ticket disinvestments do not go through), which
together with the tax slippages will likely lead to a combined shortfall of INR1.08trilion.

GST to be introduced as early as 2016

Goods and Services Tax (GST) is arguably the most talked about fiscal reform in recent times and India appears set to transition
into a GST regime in the coming year. The government is expected to implement a common Goods and Services Tax (GST) across
the country in the course of next year.
Indian lawmakers have proposed a dual GST structure in terms of which, every supply of goods and services is expected to
attract a Central GST as well as State GST.
Jaitley presented the GST bill to parliament in December, which needs the support of two-thirds of its members as well as
ratification by state legislatures. A closer look of the Amendment Bill reveals that it not only seeks to empower the Centre and
State with the concurrent taxing jurisdiction over 'transaction of supply of goods or services or both' but it also provides a prima
facie broad framework as to what the Indian GST would be in terms of its coverage, its operating mechanism, implementation
and dispute resolution.
Investors and manufacturers have long coveted the GST as a game-changer that would simplify taxes while broadening the tax
base, adding as much as 2 percentage points to the size of Asia's third-largest economy.
Even if the Government is able to get the Bill passed in the coming Budget Session, it will be an uphill task to secure its
ratification from half of the State Legislatures, not to mention the drafting of the numerous regulations/laws which shall govern
the entire framework of GST.
Q3FY15 Result Review
The companies that have announced results thus far show muted earnings performance. Earnings grew at a slower pace of 2% yo-y with high growth from Private banks, NBFCs and IT. Earnings grew by 10% y-o-y (as expected) highlighting the impact of

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10

falling crude and resultant inventory losses. However, Q4FY15 is expected to be better due to lower inventory losses even as
crude prices remain muted. Markets have been quick to reward earnings performance while underperformance has been
punished.
Despite an uptick in consumer sentiments, spends have not increased as anticipated. Further, festive demand was lackluster
across categories (both staples and discretionary) with delayed winter impacting offtake in personal care. Even cigarette
segment witnessed steep volume decline of 12% y-o-y in Q3 on consistent sharp price hikes. Going ahead, we expect a gradual
uptick in demand along with margin gains for most consumer companies, driven by a fall in crude oil price.
Bank credit demand continues to remain weak with corporate credit demand growing by ~8% y-o-y (capex cycle still weak) and
retail loan growth marginally better at ~15% y-o-y. NBFCs too did not witness any significant improvement in CV demand;
however, collection efficiencies have improved with better cash flow of truck operators (due to lower fuel prices and festive
season demand). PSU banks reported weak performance due to deterioration in asset quality and one-off expenses.

Markets likely to remain range bound between 8,400-9,000 levels in the month of February
Improvement on macro factors, such as fiscal deficit, inflation, current account deficit and interest rates will boost investment
climate in India. We believe that the government at the centre could meaningfully improve 'business confidence' and boost
investment cycle, leading to higher GDP growth in FY16 onwards.
India is in a sweet spot. Global liquidity inflows will continue to remain strong as investors prefer growth. With China and most
commodity-driven economies slowing, India will be a preferred choice for global investors.
There is a lot of expectation from the Union Budget. Cutting pre-planned expenditure or raising resources through large scale
disinvestment of PSUs or natural resources may yield the desired numbers but market will not draw any confidence from that.
A disappointing Budget (compared to the sky-high expectations from the first full Budget from the new Govt) could be one of
the factors that could trigger a correction. Even if the budget is in line with market expectations, there may not be much upside
in the markets.
Markets could get excited by a roadmap to make setting up and running businesses simpler, facilitating easier trade (within and
outside India) and bringing more accountability on all the wings of the Government while it could get disappointed if the
populist measures (aka UPA) are continued or presented in new formats.
In the wake of the government's 'Make in India' push, infrastructure and manufacturing/industrial sectors are most likely to get
investor interest in 2015 and could see run up ahead of Budget.
In the run up to the budget, we expect the markets to be in a consolidation phase with some volatility thrown in. We expect the
Nifty to trade in the range of 8,400-9,000 in the month of February.

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11

Technical Commentary:

Daily timeframe: After showing a smart recovery from the immediate support of 8860 levels on Thursday, Nifty witnessed sharp
sell off on Jan 30 by around 143 points. After opening with the positive note on Friday, Nifty made a new all time high of around
8996 levels and slipped into intraday decline during early part of session.We observe a formation of negative candlestick pattern
of bearish engulfing around the overhead hurdles of around 9000 levels, which has engulfed the previous four sessions high low
range. The upward sloping resistance line (brown-ascending line) has showed false upside breakout. Daily momentum oscillator
like 14 period RSI has dipped down from the peak of 76 levels. From the current reading of 65 levels the daily RSI could halt
temporally around 60 levels, before slipping down further.

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Weekly Timeframe: Sharp selling pressure has emerged from the strong hurdle of around 9000 levels in Nifty as per weekly
timeframe chart, which is indicating a short term high formation. The small body of negative candlestick pattern has been
formed last week with long upper shadow, around the up sloping blue resistance line. This is hinting at the formation of a part
of shooting star type of pattern, but not classical. The bullish sequence of higher tops and bottoms is intact (as per daily as well
as weekly timeframe chart) and last weeks high of around 8996 levels could be considered as a new higher top of the sequence.
Now one may expect weakness for next couple of weeks to form a new higher bottom. Weekly 14 period RSI has turned down
from the peak of 70 levels and we notice a formation of negative divergence pattern in weekly RSI and in Nifty (higher high
formation in Nifty and lower high formation in RSI). This suggests that any decline from here is going to be a future higher
bottom formation as per weekly timeframe chart. The weekly RSI has a possibility of reaching down to key levels of 60 in coming
weeks.

Monthly Timeframe: We observe an excellent upmove in Nifty as per monthly timeframe chart over the last many months. This
month too saw a sharp upmove and all time high formation around 8996 levels. The negative candlestick pattern of bearish
engulfing of Dec-14 month has been negated completely during the month of Jan as Nifty not only have surpassed the high of
that pattern around 8626 levels, but also closed above it. This is significant with regards to a larger term trend of Nifty and this
negation could possibly have positive impact on the market ahead. Monthly momentum oscillator like 14 period RSI has dipped
down and is now showing negative divergence pattern (higher high formation in Nifty and lower high formation in RSI). This is a
confirmation of uptrend and this suggests that Nifty could make further new highs, after showing initial minor corrections.

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Month Gone by:

Nifty started the month of Jan-2015 with a minor upmove for initial few sessions, and slipped into sharp declines during early
part of Jan month. A significant bottom formation was made around the low of 8065-7th Jan and that bottom led to a sharp
upmove by Nifty of around 900 points (around 11.5%) in the next 16 sessions. The sharp upmove of Jan-15 has led to the surpass
of some of the key hurdles like previous high of around 8626 levels and Nifty continued to move up with many opening upside
gaps. Currently we observe a sharp dip in Nifty on Friday from the all time swing high of around 8996 levels, which is from near
the important overhead resistance of 9000 level. This is indicating a short term correction for the market for near term.

Summing Up:
A detailed study of Nifty as per smaller timeframe like daily and weekly is indicating weak bias and is signaling a short term top
reversal pattern. The expected decline could possibly form a new higher bottom (as per the ongoing HT & HB sequence of
daily/weekly timeframe). This weakness could likely be a healthy correction after a sharp uptrend, rather than any significant
top formation, post buying euphoria or bubble creation.
The display of strength of monthly timeframe and the negation of previous negative candlestick pattern formation could
ultimately have a positive impact on the market later. Hence the maximum lower level for Nifty is expected around 8500-8400
levels for the month of Feb-15. Strong overhead hurdle is placed around 9000 levels.

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Learning Technical Analysis

Types of Stock Charts
Technical analysis is the study of charts with the goal of forecasting future price actions. While this method may appear
straightforward, the obvious question is what types of charts are available? There are four main types of charts used.
Daily bar chart This is the most widely used chart. Each bar shows four pieces of information: opening price, closing price,
high of the day, and low of the day. Looking at each days history, a vertical line shows the days range while a horizontal line
pointing left marks the opening price and a horizontal line pointing right marks the closing price.

Candlestick chart This chart presents the same data as a bar chart, but in a slightly different format. The chart has two
main parts. The first is the thin line, known as the shadow, which shows the price range from high to low. The wider area,
known as the real body, measures the difference between the opening price and the closing price. If the close is higher
than the open, the real body is Blue. It is Red vice versa. A candlestick is merely a different form of graphic representation of
the days stock price action. Patterns are easier to spot on candlestick charts than bar charts.

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 Line chart A line chart takes into account only the closing price and connects each days close into a line. Many technical
analysts believe closing price is the only point that matters. For them, a line chart may be the most appropriate study.

Point and figure A point and figure chart is concerned only with price, not time or volume. The chart uses an X to mark
increases in price and an O to mark lower prices. With this approach it is easier to spot trends and reversals. However, since
time is not used as an input, P&Fs offer little guidance on how long it will take for profit objectives to be met.

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Derivatives Commentary:

The month of Jan 2015 saw the markets rallying to new life highs after touching a low of 8065 early in the month. The Nifty
gained 6.35% during the month of Jan 2015.
In the F&O space, the FIIs were net buyers in the Index Futures segment of Rs.6901 cr (vs net sellers of Rs.3563 cr in Dec 2014).
Along with the increase in the open interest, it indicates long positions were undertaken by FIIs in index futures segment. In the
index Options segment, the FIIs were net buyers of Rs.9110 cr (vs net buyers of Rs.11802 cr in Dec 2014), which was
accompanied with a higher open interest. In the Stock Futures segment, FIIs were small net sellers, while open interest rose
over Dec.
The Feb 2015 series has started on a heavier note compared to the previous series. In terms of value, the Feb 2015 series has
begun with market wide Fut OI at Rs.90,400crs. Vs. Rs.76,900crs. at the beginning of the Jan 2015 series. It was Rs.87,218crs. at
the beginning of the Dec 2014 series.
This increase in OI indicates that traders have turned aggressive ahead of the Union Budget. Traders rolled over long positions in
Nifty Fut, Banking, Capital Goods, Oil and Gas and Power stocks on hopes the Government may announce pro market measures
in the Budget and the RBI may cut rates further in its meeting this week. Nifty Fut OI in fact hit a one year high and Bank Nifty
OI is at an all time high.
Looking at the rollover data, we observe that Nifty rollover figures too were higher at 77% Vs. the three month average of 69%.
Market wide rollover was higher at 83% Vs the three month average of 78%.
Reflecting the increasing volatility expectations, the Nifty IV rose to 19.16% at the start of the Feb series from 14.13% at the
beginning of the Jan series. The Nifty OI PCR slid to 0.9 at the start of the Feb series from 1.05 at the start of the Jan 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 downtrend after breaking the recent lows of 8861. Index option activity is
suggesting a trading range of 8500-9200 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 8500-8600 puts, suggesting this is the maximum risk on the downside for the near term.

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Learning Derivatives Analysis

Put/Call Parity
Put-Call Parity the relationship between the prices of a European put option and a European call option when they have the
same maturity date and strike price. The European options can only be exercised at maturity.
Put-Call Parity of European Options
c + KerT = p + S0
c the European call option price,
p the European put option price,
S0 the current stock price,
K the strike price at maturity,
e the mathematical constant number with value of approximately 2.71828,
r the risk-free interest rate,
T the time to maturity,
erT the discount rate for the strike price K,
KerT the present value of the strike price today, which is expressed sometimes as KB or PV(K).

The formula above shows that the value of a European put option with a certain strike price and exercise date can be deduced
from the value of a European call option with the same exercise date and strike price. It is equally valid for the European call
option derived from the European put option. The above equation can also be used to calculate the present value of the strike
price KerT and the current stock price S0. Please note that this formula holds for a non-dividend-paying stock only.
In theory and in practice, the risk/return relationship between puts and calls on the same security should be identical. For
example, a long call (i.e., an option purchase that assumes that the price will go up) has the same risk/return (and therefore,
price) as a short put (i.e., an option purchase that assumes that the price will go down).
Put-call parity is a common test for option spread strategies, assuming that the long and short positions will provide a hedge
against risk. If an option does not show parity, then it provides the opportunity for gains.
The easiest way to see how this works is to go back to the definition of the options, to look at their basic payoffs at expiration
and compare this to trades in the underlying. Lets work through a simple example. Imagine the underlying product is trading at
Rs. 100. Now lets suppose the Rs.100 strike call options are available to purchase for Rs. 0.50. Suppose we buy 1 lot of these
options.
Now, at expiration what is our profit and loss from having bought these calls for Rs. 0.50 ? With the spot trading below Rs. 100,
we wont be exercising our calls (who wants to buy the spot product for Rs. 100 when it is trading below this price?). So below
Rs. 100, we just lose our Rs. 0.50. If the spot is above Rs. 100 at expiration, the calls are worth exercising. So we will break

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even if the spot trades up to Rs. 100.50. At that price, our calls make 50 Paisa in realisation which covers the cost to us of
buying them. Above Rs. 100.50, we make a penny of real profit for every penny the spot product rallies. So if the spot rallies to
Rs. 102, we will make Rs. 1.50 in profit.
Lets look at the Rs. 100 strike puts. Imagine these too are trading at Rs. 0.50 Paisa. If we buy these, what is our payoff profile?
Its the mirror image of the calls we just looked at. The puts give us the option to sell the underlying at Rs. 100; clearly we are
not going to exercise this option if the spot is trading higher than Rs. 100. So above that price, we just lose our Rs. 0.50 Paisa
paid for the puts. Below Rs. 100, our puts are worth exercising. We make a penny for every penny below Rs. 100 that the spot
falls to. At Rs. 99.50, we have made back the amount we paid for the puts, so this is a break-even point. Again, this is just the
opposite of the situation with the Rs. 100 calls. At Rs. 98, we have Rs. 1.50 of net profit, exactly as we had with the calls Rs.2
above Rs. 100.
So we can see how similar these two profiles are. They are essentially the same but with a minus sign added! Now to make these
payoffs look exactly the same, we can just trade the underlying product at the same time. Lets suppose that when we buy the
Rs. 100 calls for Rs. 0.50 paisa, we also sell 100 lots of the spot product. In other words, we are going to hedge our calls 100%;
we sell short 1 lot of the underlying for every 1 lot of the calls we own. What does this do to the payoff profile? Recall that our
call options lost Rs. 0.50 Paisa no matter what if the spot was trading below Rs. 100 when the options expired. But now we are
short the spot product from a price of Rs. 100. So our short spot position will make a profit below Rs. 100. At Rs. 99.50, our call
options still lose their usual Rs. 0.50 paisa, but the short spot position makes Rs. 0.50 Paisa back. We break-even. Below
Rs.99.50, the short spot position makes a penny for every penny the spot falls. The calls just lose their Rs. 0.50 paisa. Notice
something about this long call-short spot profile? Its identical to the long put position. Lets check above the Rs. 100 strike to
be sure. Remember above Rs. 100, the long put option position just loses Rs. 0.50 paisa. How about the long call-short spot? The
long calls make a penny for every penny the spot rises above Rs. 100. But the short spot position cancels this out exactly; it
loses a penny for every penny the spot rises above Rs. 100. Plus, we still lose the Rs. 0.50 paisa we paid for the call. Net result?
The long call-short spot position is synthetically identical to a long put position. And that is put-call parity!
In above example if the difference between Call price and Put Price increases on single side without considering spot price then
we have arbitrage opportunity. The opportunity to profit arises from price variances on one security in call Price or Put price. If
an investor can buy XYZ in call of the same share and simultaneously sell XYZ on put of same share for a higher price, the trade
would result in a profit with little risk.

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Gainers & Losers January 2015

Top Gainers From F&O
Price

Top Losers From F&O

Price

Price

31-Dec-14 30-Jan-15 % chg

HDIL

Top Losers From CNX 500

Top Gainers From CNX 500

Price

Price

31-Dec-14 30-Jan-15 % chg

Price

Price

31-Dec-14 30-Jan-15 % chg

68.2

110.1

61.4

M&MFIN

329.6

255.3

-22.6

SPARC

IBULHSGFIN

440.3

588.7

33.7

ORIENTBANK

339.6

265.7

-21.8

ERAINFRA

ADANIENT

486.3

627.3

29.0

PETRONET

208.6

179.9

-13.8

ASHOKLEY

51.4

65.7

27.8

PNB

219.1

189.7

INDIACEM

85.5

107.5

25.8

MCLEODRUSS

236.1

DLF

137.4

169.9

23.7

ALBK

HINDUNILVR

760.1

932.6

22.7

UNIONBANK

BOSCHLTD

19459.6

23824.3

22.4

IBREALEST

68.9

83.5

HINDPETRO

547.5

658.0

Price

31-Dec-14 30-Jan-15 % chg

186.7

328.1

75.8

RASOYPR

1.6

0.6

-61.3

5.1

8.2

62.4

ESSDEE

345.2

266.2

-22.9

HDIL

68.2

110.1

61.4

M&MFIN

329.6

255.3

-22.6

-13.4

MANINFRA

30.3

45.3

49.5

ORIENTBANK

339.6

265.7

-21.8

205.9

-12.8

JUBILANT

121.3

172.7

42.4

JSL

42.4

33.5

-21.0

132.8

116.0

-12.7

GEOJITBNPP

239.4

209.2

-12.6

CANFINHOME

35.5

48.9

37.6

DEN

134.0

108.2

-19.2

459.4

618.1

34.6

FSL

34.7

28.5

-18.0

BANKINDIA

301.8

266.3

-11.8

IBULHSGFIN

440.3

588.7

33.7

NATIONALUM

53.7

45.3

-15.6

21.1

HINDALCO

157.6

139.7

-11.3

VAIBHAVGBL

627.8

825.5

31.5

TDPOWERSYS

450.8

383.5

-14.9

20.2

SYNDIBANK

131.6

117.2

-10.9

IBSEC

22.2

29.1

31.0

GAMMONIND

27.3

23.2

-14.9

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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