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1-1.S&P BSESENSX.BSE - 29/05/15 Trend7

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Month Gone By The Benchmark indices ended on a positive note in the month of May 2015. BSE Sensex rose by 3.03% and Nifty closed up by

3.08% for the month. The benchmark Sensex notched up its biggest single-day gain on Friday 29th May as investors built up fresh long positions on expectations that the Reserve Bank of India (RBI) would slash the repo rate, at which it lends to banks, in its credit policy. On a month-on-month basis, the Sensex registered its first monthly gain in May after two months of losses. In previous two months (March & April), the index had ended 4.8 % and 3.4% lower. Benchmark indices also rose as blue chips advanced on resumption of buying by foreign investors, while forecast of a timely monsoon continued to raise hopes the central bank would lower interest rates in June.

Key Positives during the month India's forex reserves increased by $262.4 mn to touch a new life-time high of $352.131 bn in the week to May 8 due to rise in

foreign currency assets. India's merchandise trade deficit numbers fell, with April 2015 recording US$11 bn deficit (Mar'2015: US$11.8 bn, April 2014:

US$10.1 bn). Imports were down ~7.5% Y-o-Y to US$33.1 bn, while exports fell ~14% Y-o-Y to US$22.1 bn. The M-o-M improvement in trade balance was primarily driven by lower gold imports, while crude oil imports were unchanged M-o-M.

Inflation based on CPI eased to 4.87% in April from 5.25% in March following a steep reduction in food prices despite fears of a spike following unseasonal rain.

Monthly Strategy Report – June 2015

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For the sixth quarter in a row, India continued to lead the global confidence index in anticipation of improvement in the economy through reforms and stimulus announced by the central government.

Retail inflation based on consumer price index for rural laborers eased to 5.49% in March from 6.19% in previous month. The Indian economy expanded 7.3% in the year ended March, in line with the initial forecast and marginally higher than 6.9%

recorded in the previous year as economic activity expanded at a faster clip in the March quarter, led largely by services and manufacturing sectors and also pointing to a soft recovery.

Key Negatives during the month

Services sector growth eased for the second straight month amid weaker demand conditions during April and moderate inflation provides the RBI with more scope for further rate cuts. The HSBC India Services Business Activity Index, which tracks changes in activity at the service companies, fell to a three-month low of 52.4 in April from 53.0 recored in March.

Crude oil, natural gas, refinery products, fertiliser and steel have contributed to the lower growth of eight core infrastructure sectors in 2014-15. Growth of the eight sectors slowed to 3.5 per cent in 2014-15 compared with 4.2 per cent in the previous fiscal.

HSBC downgraded Indian stocks to "underweight" from "overweight", citing slowing earnings growth, little room for rate cuts and potential negative impact from an unusual weather due to El Nino.

Industrial production growth slumped to a five month low in March. The Index showed industrial growth slowed to 2.1% in March from 4.8% in February.

Government's total debt increased by 0.9 per cent in the fourth quarter ended March 31, over the previous thee-month period of the current financial year.

Global markets:

Indices May-15 Apr-15 % Chg US - Dow Jones 18011 17841 +1.0 US - Nasdaq 5070 4941 +2.6 UK - FTSE 6984 6961 +0.3 Japan - Nikkei 20563 19520 +5.3 Germany - DAX 11414 11454 -0.4 Brazil - Bovespa 52760 56229 -6.2 Singapore - Strait Times 3392 3487 -2.7 Hong Kong – Hang Seng 27424 28133 -2.5 India - Sensex 27828 27011 +3.0 India - Nifty 8434 8182 +3.1 Indonesia - Jakarta Composite 5216 5086 +2.6 Chinese - Shanghai composite 4612 4442 +3.8

World markets ended the month of May 2015 on a mixed note. Japan - Nikkei was the top performer during the month which gained 5.3%. Chinese - Shanghai composite and India - Nifty and Sensex also reported decent gains of 3.8%, 3.1% and 3.0% respectively. Some of the losers were Brazil - Bovespa, Singapore - Strait Times, & Hong Kong – Hang Seng, which fell by 6.2%, 2.7%, & 2.5% respectively.

Average daily volumes on BSE in May 2015 fell by 14.7% M-o-M. (NSE daily average volumes fell by 8.9% M-o-M). The average daily derivatives volumes on NSE fell by 13.7% to Rs. 259036.1cr in May.

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The performance of the sectoral Indices was broadly postive except for Realty, Power & Metals, which were down by 2.3%, 1.2% and 0.7% respectively. The top three major gainers were Teck, IT & Oil & Gas which rose by 5.6%, 4.8% and 4.8% respectively

BSE Indices 30-Apr-15 29-May-15 % chg Sensex 27,011 27,828 +3.03 Smallcap 10,944 11,281 +3.08 Midcap 10,416 10,716 +2.88 BSE 500 10,697 11,024 +3.06 BSE 200 3,425 3,533 +3.14 BSE 100 8,322 8,551 +2.75 Auto 18,335 19,080 +4.06 Bankex 21,031 21,512 +2.29 Capital Goods 16,519 16,802 +1.71 Consumer Durables 10,378 10,666 +2.78 FMCG 7,607 7,847 +3.15 Healthcare 16,187 16,900 +4.41 IT 10,411 10,910 +4.80 Metal 9,801 9,728 -0.74 Oil & Gas 9,203 9,643 +4.78 Power 2,095 2,070 -1.21 PSU 7,566 7,816 +3.30 Realty 1,573 1,538 -2.25 TECK 5,796 6,122 +5.63 Fund Activity

Particulars Net Buy / Sell Net Buy / Sell Open Interest Open Interest

Remarks May -15 Apr -15 May -15 Apr -15 FII Activity (Rs. in Cr)* FII Activity (Rs. in Cr)

Equities (Cash) -5812.2 11720.9 FIIs were net sellers in May. Index Futures -3171.0 -2731.1 12489.9 19174.4 FIIs were net sellers with a fall in open interest. Index Options 14686.2 6787.8 49374.8 75990.2 FIIs were net buyers with a fall in open interest. Stock Futures 7699.7 1190.7 46849.7 54993.7 FIIs were net buyers with a fall in open interest. Stock Options -7.2 624.5 43.9 3920.2 FIIs were net sellers along with a fall in open interest.

Sectoral performance:

Top Gainers Shares of information technologies (IT) companies were trading firm on the

bourses, on the back of positive corporate announcements and weakening rupee. IT index was the largest gainer among sectoral indices. Tech Mahindra spurted after the company said Ontario Ministry of Energy and the company invested in innovative Smart Grid solution powered by analytics.

In the Oil & Gas index, oil marketing companies jumped outperforming the benchmark indices, as the government raised petrol and diesel prices twice in less than a month. BPCL and HPCL surged on better-than-expected Jan-March earnings. BPCL has surged 31% so far this year, while HPCL has climbed 22%, outperforming NSE index.

Healthcare Index rose as pick up in domestic merger activities and strong demand in the overseas markets triggered massive rally in most of the pharma stocks. Dr Reddy's attracted significant buying interest.

Top Losers The BSE Realty index fell 2.3%. The major losers in the index were DLF, HDIL,

Unitech and Anant Raj which fell by 13.5%, 7.5%, 6.8% and 4.6% respectively. HDIL has posted a 72% fall in net profit for the three months ended March to Rs.31.8 crore. The developer has been trying to sell non-core land assets to pare debt and streamline operations.

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MF Activity (Rs. In Cr)* MF Activity (Rs. In Cr) Equities (Cash) 4620.2 7614.9 MFs were net buyers in the month of May. *= Data till May 28 FIIs were net sellers of debt papers selling a net amount of Rs.8760.2 cr in May (till 28th), compared to Rs. 3611.9 cr worth debt bought in April. Indian G-Sec bond yields ended lower by 22 bps at 7.64% at the end of May 2015 over April 2015. This was helped by issue of a

new series of 10 year G Secs towards the second half of the month. Initially the G sec prices ended lower as global debt sell offs dented the market’s appetite for gilts. The rupee’s weakness against the US dollar also contributed to the fall in bond prices. Bonds, witnessed a huge correction, after treasury yields in the US and Germany jumped to a year’s high (yields and prices move in opposite directions). Emerging markets such as India witnessed a sell-off, with fund managers pulling out money to invest in higher yields in developed economies. 10-year government security (G-Sec) saw one of the worst falls in a year. However the new series was issued at lower yield (7.72%) on May 22 and the street started tracking its yield.

In May 2015, the Reuters/Jefferies CRB Index of 19 raw materials ended lower by 2.75% to close at 223.18. The Reuters/Jeffries

CRB Index fell nearly a quarter per cent as the stronger dollar made raw materials denominated in the currency less affordable to holders of the euro and other denomination. Commodities which were negative were Nickel (down 8.5%), Sugar (down 8.5%), Aluminium (down 8.5%), Coffee (down 7.9%), Soybeans (down 5.1%), Corn (down 4.3%), Cotton (down 4.2%), Orange Juice (down

Bond Yields

Commodities

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3.8%) and Copper (down 2.0%). However, Lean Hogs, Cocoa, Natural Gas, Live Cattle, Silver, Crude Oil, Gold and Wheat were all up by 22.2%, 6.9%, 3.1%, 2.1%, 1.1%, 1.0%, 0.59% and 0.31% respectively.

The Baltic Dry Index (BDI) fell -0.34% in the month to close at 589. 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.

The dollar scaled a one-month high against a basket of major currencies, after comments from Federal Reserve Chair Janet Yellen reinforced a tightening bias on interest rates. A gauge of the currency against its peers was near a six-week high after data showed hedge funds and other speculators strengthening their backing for a dollar rally.

Commodity 29-May-15 30-Apr-15 % Chg

Gold 1,189 1,182 0.59%Crude Oil 60 60 1.01%Aluminium 1,742 1,904 -8.48%Copper 6,090 6,215 -2.01%Zinc 2,213 2,323 -4.74%Nickel 12,700 13,875 -8.47%Tin 15,450 15,975 -3.29%Lead 1,974 2,109 -6.40%

Currencies

Nickel, aluminium prices dropped due to stockist selling amid reduced demand from alloy industries. Copper was facing its first monthly drop since January at early trade, pressured by ample inventories of refined metal, but prospects that Chinese stimulus measures would revive demand kept floor under prices.

International gold prices hit a three-month high as the dollar came under pressure following a new batch of mixed US data that pushed back expectations of when interest rates in the world's largest economy will rise. Prices ticked higher with investors buying on recent dips and monitoring China and the U.S. on interest rates.

International crude oil prices (WTI) gained as a weak dollar lifted commodities denominated in the currency and OPEC raised slightly its forecast for world oil demand growth. Violence in Yemen also boosted crude prices, raising concerns over the security of Middle East supplies. Prices also rose as the dollar weakened against the euro amid signs the Federal Reserve will hold interest rates at zero for the time being.

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Given below is a table that shows the depreciation (-)/appreciation (+) of the dollar against various currencies for the month of May 2015: USD to: 30-May-15 30-Apr-15 % Chg

Pakistani rupee 100.56 100.88 -0.32 Hong Kong dollar 7.75 7.75 +0.03 Chinese yuan 6.09 6.09 +0.07 Indian rupee 63.71 63.25 +0.74 Taiwan dollar 30.66 30.43 +0.77 Singapore dollar 1.35 1.32 +2.14 Argentine peso 8.99 8.90 +1.02 Euro 0.91 0.91 +0.55 Thai baht 33.66 32.69 +2.97 Malaysian ringgit 3.65 3.55 +2.98 Indonesian rupiah 13192.60 12919.90 +2.11 Japanese yen 123.87 118.65 +4.40 Brazilian real 3.16 2.94 +7.75 Korean won 1109.14 1067.12 +3.94

Global Market Outlook US likely to hike interest rate in 2015, however, the timing would depend upon the economic data Recently, Federal Reserve chair Janet Yellen said she expected the central bank to raise interest rates this year, as the US

economy was on course to bounce back from a sluggish first quarter and headwinds at home and abroad waned. Ms Yellen spoke amid growing concern at the Fed about possible market volatility once it begins to raise rates, and a desire to begin coaxing skeptical investors towards accepting the inevitable: ending a six-and-a-half-year stretch of near-zero interest rates.

While saying the outlook for the economy is always highly uncertain and citing persistently low inflation, Ms Yellen said delaying a monetary policy tightening until employment and inflation hit the central bank's targets risked overheating the economy. For this reason, if the economy continues to improve, it would be appropriate at some point this year to take the initial step to raise the federal funds rate target.

Brazil’s real fell to an eight-week low as Goldman Sachs Group Inc. reiterated that a weaker currency is needed to narrow trade deficit. The currency suffered after the government announced plans to freeze nearly R$70bn ($22.6bn) in discretionary expenditure in its proposed budget for this year. The real tumbled the biggest drop among 31 major currencies tracked by Bloomberg.

The Japanese yen declined against the other major currencies after the Bank of Japan governor Haruhiko Kuroda said that its quantitative and qualitative easing program is having desired effect on the economy, while noting that it is open to more easing when needed.

The euro dropped to its lowest level in almost four weeks versus the dollar as Greece told its international creditors they needed to ease conditions for releasing bailout funds to the Mediterranean country. The euro tumbled to a one-month low with investors unable to shake-off concerns surrounding Greece's ability to meet its upcoming loan repayments.

The rupee fell against the dollar as dealers accumulated the US currency noting the weak sentiment in the local stock market and amid nervousness ahead of the Reserve Bank of India’s (RBI’s) monetary policy review on 2 June.

Outlook going forward

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In a speech in March, Ms Yellen signaled that the Fed would likely raise rates this year, although she cited concern that a downturn in core inflation or wage growth could delay the central bank's plans. However, this time around, Ms Yellen's tone on when the rate lift-off would begin appeared stronger, as she and other Fed policymakers try to close the gap between the central bank's view and that of the market. However, Ms Yellen repeated a view she shared in March that once the Fed begins to raise rates, the process is likely to be gradual. She also said the timing of a rate hike will depend on incoming economic data.

From Ms Yellen’s speech, it seems that the rate hike is unlikely to take place in June this year. We expect the hike to take place in the month of September or December. While the rate hike could lead to outflows from the emerging markets (including India), it is likely to be temporary and the damage is likely to be limited, as the process of hike is likely to be gradual. Ms Yellen has already stated that they have no intentions of embarking on a pre-set course of increases in the federal funds rate after the initial increase.

Recovery in Europe strengthening, though gradually and with significant risk Economic growth across Europe has picked up over the last two years. The GDP growth has improved from zero in 2013 to 1.3%

in 2014. The new World Bank EU Regular Economic Report launched in Brussels stated that the growth is expected to improve to 1.8% in 2015 and 2% in 2016 with Central and eastern European countries (EU-CEE) likely to continue to grow above the European average, with growth expanding over 2.4% in 2015, based on robust consumer demand, the gradual return of investment, and continued export growth.

The pick-up in 2014 was particularly strong in Germany, Hungary, Ireland, Poland, and the United Kingdom, while southern European countries finally returned to growth following significant financial and economic restructuring, and despite growing concerns about financial strains in Greece and generally weak global trade.

Exports have been the main driver of growth in many EU-CEE countries, such as Poland, Bulgaria, and Romania. That has been partly due to foreign direct investment (FDI) helping countries integrate into global value chains and ‘push’ exports. However, as FDI has declined following the crisis, there is greater need for countries to focus on improving business environments, developing skills, encouraging innovation, investing in infrastructure, and reducing regulatory barriers to encourage renewed FDI and export growth.

Going forward economic recovery and reduction in unemployment rates, along with increased fiscal space for social expenditures in some EU-CEE countries, will lead to the gradual decline in poverty.

While the recovery in Europe is clearly strengthening and is estimated to improve further fueled by the one-off fall in oil prices and ECB quantitative easing, it is likely to be gradual and with significant risks. Several risks need to be carefully managed, including: (i) the potential increase in financial market volatility as the US and EU implement divergent monetary policy; (ii) fresh pressure on public finances from the combination of low inflation and modest growth; (iii) the limited availability of new lending for investment, due to low returns and incomplete bank reforms; and (iv) the potentially negative impact on confidence stemming from ongoing financial strains in Greece or ongoing geopolitical tensions in Ukraine.

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Greece debt crisis still unresolved; liquidity problems could cause unplanned Grexit The four-month wrangle to clinch a new deal between Greece and its international creditors remains unresolved. Greek

optimism has been rejected as unsubstantiated by EU officials, the IMF and Germany. Group of Seven finance ministers began a summit in Dresden on May 28, Thursday. A Greek government source quoted by the news agency AFP had said technical experts were close to starting the drafting of the long-awaited agreement in Brussels. From June 5, Greece has to repay loans back to the IMF. A deal would unlock 7.2 bn euros ($7.8 bn) in fresh bailout loan monies. However, IMF Managing Director Christine Lagarde told that the talks had not yet produced substantial results. Things have moved, but the progress is slow and still there is lot of work to do. European Commission's Vice-President Valdis Dombrovskis said that there are still a number of important areas to be discussed, in terms of fiscal targets, primary surplus targets, fiscal measures, issues related to pension reform, the labor market etc.

As Greece moves from one repayment deadline to another, it is becoming more challenging for the economy to find the money to pay its public sector workers and meet its debt servicing obligations. While this remains an important challenge, the greatest risk for Greece emanates from the deteriorating liquidity situation of its banks. This could unintentionally trigger the nightmare scenario of Grexit, the situation that all the key players in the unfolding Greek drama are working hard to avoid. In times of crisis, a country’s banks are reliant on the lender of last resort, the central bank, for liquidity. They can borrow from the central bank under normal monetary policy operations but this requires pledging high-quality assets, such as investment grade bonds, as collateral. But these assets can be scarce, especially in crisis-stricken countries like Greece. In these extreme circumstances, central banks supply emergency loans known as Emergency Liquidity Assistance (ELA) to banks that are solvent and can pledge other good-quality collateral such as performing loans and government securities. Central banks know that if they refuse to supply ELA, a liquidity problem in one bank can easily turn into a systemic crisis involving widespread bank panics.

Frequent talk of a Grexit during the crisis has eroded confidence in Greek banks. Depositors suspect that Grexit would automatically lead to their deposits being re-denominated into drachmas that would quickly lose value. To avoid this risk, depositors have been transferring their money to banks outside Greece or hoarding cash.

With banks’ liquidity buffers close to being exhausted, access to additional ELA restricted and deposit outflows not abating, the Greek authorities may soon be forced to take extraordinary measures to protect bank liquidity: they may be forced to impose restrictions on the banking system including capital controls. In their mildest form, capital controls will prevent transfers of money abroad for investment purposes and withdrawals of large amounts of cash. At their most severe, such restrictions would only allow depositors minimal access to their money that would only allow them to buy everyday essentials. This would significantly disrupt economic activity and further damage confidence. They are also likely to create additional uncertainty, unless they are credibly considered to be temporary.

Is quantitative easing in China needed? This are speculations going on that the Chinese government was considering unconventional methods to try to get the nation's

slowing economy back on track, leading to much speculation that quantitative easing was a likely outcome and that the central

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bank would directly purchase local government bonds. However, China's central bank recently vowed not to resort to quantitative easing to inject liquidity into the market, despite downward pressures on the nation's economy. In a report on monetary policy for Q1, the People's Bank of China (PBOC) deemed quantitative easing unnecessary, saying that it would instead focus on anticipatory adjustments and fine-tuning, It would continue to pursue prudent policies aimed at maintaining stability and continuity. PBOC said in its report that it would adjust its policy in line with supply and demand for liquidity, inflationary pressure and economic development. It stated that there is no need to opt for QE to inject a large amount of liquidity into the market, since the economy has the ability to use various monetary tools to effectively manage and supply liquidity. If necessary, it would also take precautions against the risk of excess liquidity which could increase debt and leverage in the economy.

Meanwhile, on May 10, 2015, the central bank continued to try to take steps to boost the world's second largest economy, announcing its third interest rate cut since November. The Central Bank cut the benchmark deposit and loan interest rates by 25 bps. The PBOC also upped the upper limit of the floating band of deposit rates to 1.5x the benchmark, raising it from 1.3 times the benchmark. In announcing the changes, the PBOC acknowledged the downward pressure on the economy but nonetheless said that the domestic prices were still low and real interest rates remained higher than the historical average.

With China's growth having slowed to 7% in the first quarter, representing a six-year low in the economy's growth rate, observers are watching to see what impact the interest rate cut will have and what further measures the PBOC will likely need to take to try to support the economy and keep it from dropping further.

Can oil price slump stem the flow of US oil The crude oil prices have fallen sharply by over 50% since August 2013. The prices have dropped dramatically from highs of $115

a barrel in June 2014 to less than $44 a barrel in January 2015 and thereafter have risen a bit. The lower prices emerged amid a boom in shale oil from the US and a decision by Opec last November to maintain its levels of production rather than cutting output to try to bring the global oil glut under control.

Despite a sharp fall in the prices, the world's biggest oil producers say that global glut is likely to continue for another two years despite lower oil prices, as the North American oil boom shows no signs of abating. Organisation of Petroleum Exporting Countries (Opec) is going to meet in Vienna to discuss its long-term strategy. A draft report seen by Reuters predicts that rather than contracting, oil production will continue to increase over the next two years as rival non-Opec producers – especially those in the US, expand their operations.

Opec chose to increase its supply in a bid to win back market share and slow higher-cost competing producers. However, so far the strategy has not appeared to work. The Opec report stated that for non-Opec fields already in production, even a severe low-price environment will not result in production cuts, since high-cost producers will always seek to cover a part of their operating costs. It also hinted that its strategy would be to continue to drive down the price still further. For future non-Opec production, only expectations of an oil price environment in the long-term below the marginal cost of production may deter substantial non-Opec developments.

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Opec publishes details of its long-term strategy every five years. When it presented its last report in 2010, the cartel did not mention shale oil as a competitor, which "highlights the dramatic change the oil markets have undergone in the past few years”. According to Opec's report global demand for oil will only start to pick up after 2018-2019.

Indian Market Outlook March quarter 2015 results so far have not been encouraging for India Inc – earnings cut process has already begun For India's leading companies, the quarter ended March has been a washout. The combined net profit of the 43 companies in the

benchmark NSE Nifty index (which has 50 companies) that have declared their results so far has halved during the quarter compared to the corresponding period a year earlier (data as on May 29, 2015). This makes it the worst quarter for Nifty companies since the September 2008 Lehman collapse, when there was a sudden drop in revenues and profits of commodity producers, automobile makers and banks, as credit markets were squeezed.

In the March 2015 quarter, the combined (reported) net profit of the 43 companies fell 51.6% to Rs 33,854.30 cr from Rs 68,979.4 cr in the year-ago quarter. The performance was led by tepid growth in demand, both in India and abroad, a fall in metal and energy prices, adverse exchange rate movement and large write-downs in the value of assets (in case of Vedanta and Tata Steel) due to global commodity headwinds. Excluding the impact of exceptional gains and losses, the combined net profit of the 43 companies was down 13.6% on a Y-o-Y basis, while operating profit was lower by 14.8%, indicating the operational headwinds faced by India Inc. As many as 23 Nifty companies reported an annual decline in reported net profit.

As per the data on May 11, the combined net sales of 443 companies across sectors was down 2.9% on Y-o-Y basis, while their net profit (adjusted for exceptional items) declined 0.6% in the March 2015 quarter. Excluding financial, information technology and oil & gas companies, net sales in the fourth quarter were up 4.7%, while net profit rose 5.8%.

EPS misses have been far in excess of EPS beats. Most misses have been in Consumer discretionary, IT and Healthcare sectors while Industrials have seen the most beats. All sectors have seen downward revision in their EPS. Even within numbers, Topline beats have been fewer than EBITDA beats.

The poor performance makes it evident that the investment and Capex demand is yet to take off. The earnings cut process has already begun. We expect an improvement in the coming quarters; however, it is likely to happen at a gradual pace and after 1-2 quarters. Meaningful pick up could be visible largely from Q3FY16 onwards partly because of the low base effect.

RBI monetary policy on June 02 to be closely watched; aggressive rate cuts unlikely, future outlook would set direction Interest rate cut is one of the crucial factors that could revive corporate investments, earnings, credit growth and thereby the

equity markets over the next few quarters. As the Reserve Bank of India gears up to review the monetary policy on June 2, all eyes will now be on Governor Raghuram Rajan. With inflation within the RBI’s comfort level and corporate earnings and investment not taking off, the clamour for a rate cut have grown louder over the last few weeks. In its previous monetary policy review on April 7, the RBI had kept policy rate unchanged, saying it was assessing the impact of unseasonal rains and hailstorms on food prices, even though it hoped that normal monsoon in the coming months would bring down retail inflation to about 4%

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by August. The call this time around has come not only from industry bodies but also from the chief economic adviser Arvind Subramanian, who recently hinted at the need of a rate cut soon to boost growth.

Consumer Price Index (CPI)-based inflation for April eased to 4.86%, the lowest in four months, on the back of another month of declining food prices, data by the Central Statistics Office showed. Deflationary pressure continued for the sixth month in a row with WPI based inflation dropping to a new low of -2.65% in April, mainly on account of decline in prices of fuel and manufactured items even as food prices increased. March industrial growth was at a 5-month low of 2.1%. These data reinforce our expectation of a high probability of rate cut in June 2 RBI policy. The move will not only lift banks and interest-sensitive sectors fundamentally, but is also likely to drive consumption which may provide a much-needed thrust to the manufacturing sector. A rate cut will provide an assurance to long-term investors that the environment is turning conducive.

While there is a high probability of rate cut on June 02, we feel it is unlikely to be aggressive on the back of near term concerns like uncertainty in monsoon and fear of hike in the interest rate in US. We expect 25 bps rate cut to take place. We feel this is unlikely to drive the markets higher significantly from the current levels, as 25 bps cut has been largely factored in. What is more important is the RBI commentary on the outlook of rate cuts over the next few months. Dovish commentary from RBI could improve the market sentiments in the near term.

Progress on monsoon - a crucial factor; below normal monsoon could result in high inflation & limit extent of rate cuts in 2015 The Indian agriculture is largely dependent on the monsoon with almost 60% of total net sown area under rain-fed agriculture.

The rain-fed crops account for around 45% of sown area of foodgrains and 68% of overall non-foodgrain crops. The four-month (June-September) south-west monsoon season accounts for nearly 75% of the country's total rainfall thus plays a crucial part in India's agriculture. This year, the water storage level in 91 important reservoirs of the country has declined by 13.5% Y-o-Y as on April 16, 2015. Hence progress on monsoon this season, especially the South-west monsoon would be a very crucial factor.

While the India Meteorological Department (IMD) has come out with the ‘below normal’ rainfall forecast during the upcoming SW-Monsoon season, Skymet, the private weather forecasting agency in India, is quite confident that SW-Monsoon is likely to be normal with 80% probability this year (102% of the long-term average with model error of plus / minus 4%). Skymet has taken into account the El Niño factor in its forecast; it has also considered other meteorological factors that impact the SW-Monsoon. Moreover, Skymet expects El Niño to taper off post May- Jun’15, and therefore, expects Monsoon to be normal this year.

While the two weather forecasting agencies have contradictory views, we feel the second round of monsoon forecast (due on June 04 by IMD) would provide better clarity on the progress of monsoon.

Below normal monsoon this fiscal could spoil the party, as it would result in higher inflation and leave limited scope for RBI to undertake rate cuts in the coming months.

Challenges still remain across GDP growth, earnings growth & investment activity – improvement to be gradual India still continues to face challenges across the GDP growth, earnings growth and investment activity. Relative to historical

levels & and market and stock expectations, India does face growth challenges. The GDP growth is not showing any meaningful signs of recovery, though it seems to have bottomed out. The Indian economy expanded 7.3% in FY15, in line with the initial

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forecast and marginally higher than 6.9% recorded in the previous year, pointing to a soft recovery. For Q4FY15, GDP growth stood at 7.5% in January-March 2015 compared with 6.7% after a downward revision from 7.5% in Q3, signaling a marginal pickup. The IIP growth in March 2015 was below expectations. Earnings growth still continues to remain in single digits (with Q4 being one of the worst quarters post Lehman crisis) and is yet to show a meaningful recovery and match with consensus expectations of double digit growth. Subdued performance has started resulting in downgrading the earnings estimates for FY16.

There have also been challenges in Investment activity, as evidenced in modest investment pipelines, orders or apparent investment commitments / guidance from businesses. Given high expectations from the new government, recognition of the need for spends and the near-bottoming of the corporate cycle, growth recovery seems to be getting delayed.

We feel the businesses are now focusing on the quality of growth and investments as a result of which the investments / growth could be slower than anticipated. However, it would also mean higher returns for businesses, and eventually higher earnings. We expect the growth uptick to be in a measure way with some early signs (though very slow) of pick up in investment activity and with new investments and stalled projects starting. Despite the near term weakness in earnings, we believe FY16 EPS growth to be better than FY15 on the back of impact of reforms already undertaken over the past one year.

Modi Government Reforms Report card indicates slow, but steady reforms; reform acceleration key to maintain the faith in the government It has been nearly a year since the Modi Government came into power and the stock market seems to be losing faith in the

ability of the Modi Government to accelerate reforms. However, this could be due to very high expectations of investors. The improvements as regards the reform implementation have taken place, though at a gradual pace. We have to appreciate some of the reform implementation measures taken by the government like faster clearance of projects, diesel deregulation, passing out coal & mining bills, insurance bill, regional rural banks bills, Motor Vehicles Act in both houses (Lok Sabha & Rajya Sabha), land ordinance & liberalization in FDI and easing the way of doing business. This would certainly help in earnings recovery in the coming 1-2 years. Also, the Government has managed to pass crucial bills in Lok Sabha like GST Constitutional Amendment Bill, Land Acquisition Bill, Companies Amendment Bill, Amendments to Real Estate Bill. However, these bills are yet to be passed in Rajya Sabha, which would be a challenging tasks, since the Government does not have majority in Rajya Sabha. While progress has been made towards implementing GST, the government is still in a race against time for the April 2016 rollout deadline. There is still reasonable hope that crucial bills will be passed via the Joint Parliament session during the monsoon session.

We are encouraged with the administrative reforms that the government has started with the key ones including i) initiatives to streamline various government approvals, (ii) moves towards a stable and simplified tax regime, (iii) tapping foreign flows for defence through FDI, railways and construction, (iv) stable policy for gas price determination, (v) easier financing via a 5/25 structure for banks, (vi) favourable norms and contingencies for road development, (vii) strong moves towards financial inclusion, (viii) inflation management, and (ix) new foreign trade policy to spur exports. Despite firm opposition, parliamentary productivity has improved sharply in the last one year of NDA’s regime with average hours at 98% vs. UPA2’s 62%, average bills considered at 113% vs. UPA2’s 55% and 94% of the bills passed vs. 38% during UPA (plan v actual). Parliamentary efficiency is important to reduce the downtime while effecting legislations.

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We feel the Government has been successful in streamlining smaller issues & increasing its focus on efficiency & easing the way of doing businesses. The government has tried to stick to its promise of ‘maximum governance’ and has tried to cut red tape and bring about ease of doing business through a plethora of measures. While it has not matched the way the street anticipated at the start of the Government term (big bang changes), we feel the Government has strengthened the roots, which would bear the fruits in future. Based on the past one year, we can say that the intent of reforms is here to stay and we will see significant steps towards labour and direct taxes reform in the coming years. At the same time, the government will continue indulging different thinking to clear administrative hurdles, which do not require parliamentary approval.

The equity markets have rallied significantly over the last one year. The re-rating has been largely due to expectations of turnaround in the earnings growth on the back of reform implementation. Now the focus would shift largely towards actual implementation of reforms and the earnings growth every quarter.

FII ownership at all time high, but inflows moderating over the past few months India has seen nine consecutive quarters of positive inflows from the FIIs. Strong inflows from the FIIs have resulted in all-time

high foreign ownership for Indian markets. The ownership has increased from 15% in March 2009 to 24% of the overall market cap of India. GEM funds have a 12.8% weight in India vs. the index weight of 7.7%, a massive 510 bps higher.

While high FII ownership is a reflection of faith they have in India’s long term growth story, this is also a key risk. A part of the higher weightage of GEM funds in India is due to low foreign room in few companies. Such a high weightage would cap the future participation of FIIs under the backdrop of currently ongoing slow earnings growth. It is interesting to note that the FII inflows have slowed down over the past four to five months due to slowdown in the growth. If the earnings recovery delays or the reform implementation process slows down due to hurdles in passing crucial bills in Rajya Sabha (where the Government does not have majority), then FII inflows could moderate further. If the slowdown persists, then there could be FII outflows, which could result in further rupee depreciation (rupee has already depreciated by more than 5% over the last 9-12 months). This could impact the equity markets significantly.

With no major positive triggers, market upsides to remain capped, Sensex to trade in range of 26800-28500 in month of June The Indian Equity markets has had a dream run in the past 15-16 months with the BSE Sensex registering robust gains of 40%

since the start of the Feb 2014. Expectations of a quick turnaround in the growth with the New NDA Government coming to power, hopes of quick reform implementation, strategic & long term growth oriented budget improved the market sentiments significantly, thus resulting into PE re-rating. Surplus global liquidity (supported by Stimulus in Europe, China, Japan) also resulted in continued FII inflows in India, their most preferred investment destination.

However, things have changed slightly over the past three to four months. A large part of re-rating in markets was on hopes & expectations. However, the focus has now shifted to actual reported numbers. The growth has not picked up as per the expectations of market participants. Reform process has been steady, but slower than anticipated. Further, in the near term, the Indian market is surrounded by fears of below normal monsoon, earnings downgrades and interest rate hike in US (which could result in outflows from emerging markets). This has clearly led to moderation in the FII inflows.

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June has been the worst month of the year for US stocks over the past decade. With no major positive triggers in near term locally or globally, the upsides seem to be capped. Progress on monsoon, acceleration in reform implementation, outlook on rate cuts in RBI’s upcoming monetary policy and global sentiments would set the market direction in near term. We expect the markets to consolidate in the range of 26800-28500 levels in the month of June.

Technical Commentary:

Daily Timeframe: After showing hesitation to move up on Thursday, Nifty witnessed hefty up move on Friday by gaining of around 114 points, with expansion of volume. The formation of consolidation type pattern of the last couple of sessions seems to have converted into a formation of new higher bottom around 8270 levels. Now one may expect further upmove towards the formation of new higher top of the sequence.

Currently, Nifty is once again approaching the key overhead hurdles of previous broken area ascending trend line (green up trend line) and also the down sloping brown dotted trend line around 8490-8500 levels. This is going to be an important resistance cluster for the market to for next week to maintain upside momentum.

Daily momentum oscillator like 14 period RSI has turned up and is now heading towards the upper 60 levels. Currently, the daily

RSI is moving within a high low range of 30-60 levels and further upmove above 60 levels could result in increase in the upside momentum in Nifty, as per the formulation of RSI.

The key economic event of RBI’s mid quarter policy review meet is scheduled on 2nd June and the outcome of the meet could

set direction for the market ahead.

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Weekly Timeframe: After showing a sharp upmove in previous week, Nifty declined last week but, recovered smartly towards the week end. Sharp upside recovery of last week with rise in volumes is indicating the possibility of long build up in the market.

Nifty as per weekly timeframe chart is now heading upwards to the important cluster hurdles of H&S neck line (green line) and also the down sloping trend line (brown dotted line, connecting the lower top) around 8520-30 levels.

The above mentioned hurdle area could be a crucial resistance zone for Nifty on the way up. A decisive upside breakout of that

area could invalidate the bearish H&S pattern and also a resistance line of the last couple of months. Normally, such negation of negative patterns leads to a sharp up trended moves.

In the last one month, though Nifty moved up from the low of 7997 (7th May), we observe formation of more no of long lower

shadows. This is echoing an emergence of strong buying interest from the lower levels.

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Monthly Timeframe: Nifty has recovered smartly in the month of May from the low of 7997 levels, after showing a sharp decline

in the previous couple of months. Small bullish candlestick pattern has been formed in last month with long lower shadow, which seems to be a near term bottom reversal pattern for the market.

Currently, Nifty is placed near the strong resistance of ascending brown trend line (as per the concept of change in polarity) for June around 8600-8700 levels. The long upper shadow of the candle of April-15 has placed around 8800 levels.

After the sharp decline in the previous couple of months (with the formation of negative patterns of hanging man and bearish

engulfing) and the downside breakout of ascending trend line, the upside recovery or bottom reversal of the month of May was minimal. This pattern could raise concern on the sustainability of any upside bounce back and indicates the possibility of emergence of selling pressure from the highs.

Monthly momentum oscillator like 14 period RSI has turned up slightly from near 60 levels, but the slope of uptick is shallow.

This is hinting at the insufficient strength of upside momentum.

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Month Gone by:

Nifty started the month of May 2015 (blue vertical line) on a sharp upside note and was not able to continue with upside momentum going forward. A sharp decline witnessed during early May and Nifty formed a new swing low of around 7997 levels. A minor recovery seen for the next few sessions and yet another sharp one day drop witnessed during mid of May.

The upside bounce back begun during mid of May and that bounce back formed a new swing high of 8489 on 22nd May. After showing minor declines in the previous few sessions, Nifty moved up sharply during later part of May. Moreover, the month of May gone with the formation of swing low and then upside recovery till the end.

Summing Up: The underlying near term trend of Nifty is positive and the continuation of upmove is likely for the next 1-2 weeks. The chart

formation of larger timeframe like monthly and the presence of strong overhead hurdles around 8600-8700 levels could possibly dampen the effort of bulls to show strong upside bounce back for this month.

There is a possibility of Nifty showing a significant top reversal pattern after the bounce back (maximum up to 8600-8700 levels) and it would be prudent to take profits from the long positions at the higher levels. Downward reversal pattern from the above mentioned hurdles could probably result in a sharp decline and re-visit the lows of 8000 and further.

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Learning Technical Analysis How can we use Fibonacci Numbers Fibonacci numbers are a sequence discovered by Italian mathematician Leonardo Fibonacci in the 13th century. The sequence is

0, 1, 1, 2, 3, 5, 8, 13, 21, 34, 55, and 89 on to infinity. The sequence has a series of interesting properties. The sum of any two consecutive numbers equals the next higher number.

After the first four numbers, the ratio of any number to its next highest number approaches 0.618. The ratio of alternate numbers approach .382. These ratios are often simplified to the key Fibonacci levels—38%, 50%, and 62%.

While many of the features of Fibonacci sequences appear throughout nature, traders have harnessed their power to predict stock prices. Below are three simple applications of Fibonacci retracement levels.

1. Provide levels of support and resistance Fibonacci retracements use horizontal lines to indicate areas of support or resistance. They are calculated by first locating the

high and low of a price move on the chart. Then five lines are drawn: the first at 100% (the high on the chart), the second at 61.8%, the third at 50%, the fourth at 38.2% and the last one at 0% (the low on the chart).

It has been observed in the past that the new support and resistance levels are often at or near these lines. 2. Alerts to trend changes Prices often consolidate near retracement levels. Regardless of a trend’s potential, approaching retracements will slow down

the pace, before the stock once again resumes or reverses its existing trend.

3. Price targets The most popular use of Fibonacci retracement levels are setting of price targets. When a stock bottoms out at say Rs.20 and

begins rallying, the 38% retracement level of the previous down move from say Rs.100 to Rs.20 is an obvious price target that can be set by traders.

Fibonacci levels are thus both mystic and useful. It can be helpful to learn and use them.

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Derivatives Commentary:

The May series started on a negative note as the Nifty continued to trend lower before bouncing from a low of 7997. The index then trended higher and made higher bottoms in the process, thereby recovering the losses made in the early part of the series. The Nifty lost a marginal 0.16% during the May series.

FIIs sold Rs 12,07,533 crore worth of shares in F&O segment in the entire series with lot of fluctuation in their investment pattern which also contributed in the volatile move of the broader market.

The June 2015 series has started on a lighter note compared to the previous series. In terms of value, the June 2015 series has

begun with market wide Fut OI at Rs.79,370crs. Vs. Rs.82,049crs. at the beginning of the May 2015 series. It was Rs.84, 100crs. at the beginning of the April 2015 series.

This decrease in OI suggests long unwinding ahead of the expiry and indicates that traders had turned cautious due to disappointing corporate earnings and fear of a below normal monsoon.

Traders have also become reluctant to build long positions in the F&O segment due to FIIs turning less positive about India. However fresh long positions have been built in Auto and Private Banking stocks ahead of the RBI rate setting meet early in June.

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Looking at the rollover data, we observe that Nifty rollover figures were lower at 68% Vs. the three month average of 75.0%. Market wide rollover too was lower at 78% Vs. the three month average of 81%.

Reflecting the decreasing volatility expectations and the trending nature of the market, the Nifty IV dipped to 16.45% at the start of the June series from 17.3% at the beginning of the May series. The Nifty OI PCR declined to 0.95 at the start of the June series from 0.99 at the start of the May series. The fall in the OI PCR indicates a greater buildup of calls in the market and can be considered a bullish signal.

Technically, with the Nifty recently breaking out of the 8364 resistances and making higher bottoms and higher tops in the last few weeks, the underlying trend remains up. A continuation of the uptrend will be confirmed when the Nifty crosses above the immediate swing highs of 8490. The Nifty could head towards the 8550-8635 levels once it crosses and holds above 8,490 levels.

Index option activity is suggesting a trading range of 8200-8800 in the near term. This is because the maximum Call OI is currently being seen in the 8800-9000 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 8300-8200 puts, suggesting this is the maximum risk on the downside for the near term.

Learning Derivatives Analysis Cash Secured Put The cash-secured put involves writing an at-the-money or out-of-the-money put option and simultaneously setting aside enough

cash to buy the stock. The goal is to be assigned and acquire the stock below today's market price. Whether or not the put is assigned, all outcomes are presumably acceptable. The premium income will help the net results in any event.

The investor is bullish on the underlying stock and hopes for a temporary downturn in its price. If the stock drops below the strike, the put may be assigned. That would allow the put writer to buy the stock at the strike price. The effective purchase would be even lower: strike price less the premium received.

There are two principal risks. First, the stock might not only dip but plummet well below the strike price. The investor must be comfortable with the strike price as an acceptable long-term acquisition price, no matter how low the market goes.

Second, by waiting for a price dip, the investor risks missing out on a stock that keeps climbing upward. The choices then include repeating the short put strategy (possibly at a higher strike price), or closing out and buying the stock outright, or simply accepting that this winner 'got away.'

According to the terms of a put contract (prevalent not in India but in the west), a put writer is obligated to purchase an equivalent number of underlying shares at the put's strike price if assigned an exercise notice on the written contract. Many investors write puts because they are willing to be assigned and acquire shares of the underlying stock in exchange for the

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premium received from the put's sale. For this discussion, a put writer's position will be considered as "cash-secured" if he has on deposit with his brokerage firm a cash amount (or equivalent) sufficient to cover such a purchase.

When to Use? There are two key motivations for employing this strategy: either as an attempt to purchase underlying shares below current

market price, or to collect and keep premium from the sale of puts which expire out-of-the-money and with no value. An investor should write cash secured put only when he would be comfortable owning underlying shares, because assignment is always possible at any time before the put expires. In addition, he should be satisfied that the net cost for the shares will be at a satisfactory entry point if he is assigned an exercise. This strategy can become speculative when more puts are written than the equivalent number of shares desired to own.

Benefit The put writer collects and keeps the premium from the put's sale; no matter how much the stock increases or decreases in

price. If the writer is assigned, he is then obligated to purchase an equivalent amount of underlying shares at the put's strike price. The premium received from the put's sale will partially offset the purchase price for the stock, and can result in a purchase of shares below the current market price. If the underlying stock price declines significantly and the put writer is assigned, the purchase price for the shares can be above current market price. In this case, the put writer will have an unrealized loss due to the high stock purchase price, but will have upside profit potential if retaining the purchased shares.

Risk vs. Reward Maximum Profit: Limited i.e. Premium Received Maximum Loss: Substantial i.e. Strike Amount - Premium Received Upside Profit at Expiration: Premium Received from Put Sale Net Stock Purchase Price if Assigned: Strike Price - Premium Received from Put Sale

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Gainers & Losers – May 2015

Price Price % chg 30-Apr-15 29-May-15

DISHTV 75.3 101.3 34.6

AJANTPHARM 1263.0 1579.7 25.1

EICHERMOT 15191.6 18896.5 24.4

STAR 1029.1 1264.4 22.9

UNIONBANK 143.8 173.4 20.6

JUBLFOOD 1491.2 1790.6 20.1

BAJAJ-AUTO 1948.7 2316.1 18.9

MINDTREE 1219.3 1448.7 18.8

PAGEIND 13654.1 16204.8 18.7

VOLTAS 281.1 333.0 18.4

Price Price % chg 30-Apr-15 29-May-15

SRTRANSFIN 969.9 823.6 -15.1

JPPOWER 8.6 7.4 -14.5

JINDALSTEL 139.6 119.7 -14.3

DLF 136.5 117.8 -13.7

JPASSOCIAT 20.6 18.0 -12.6

TECHM 621.4 554.4 -10.8

EXIDEIND 171.6 153.7 -10.4

CAIRN 213.5 192.6 -9.8

ADANIPOWER 43.0 39.0 -9.3

CANBK 378.4 343.4 -9.3

Price Price % chg 30-Apr-15 29-May-15

AMTEKINDIA 105.5 181.1 71.6

BBTC 419.1 547.3 30.6

CHENNPETRO 91.3 117.4 28.5

ASAHIINDIA 131.9 168.0 27.3

AJANTPHARM 1263.0 1579.7 25.1

EICHERMOT 15191.6 18896.5 24.4

SHASUNPHAR 313.4 387.3 23.6

KEC 98.3 121.3 23.5

STAR 1029.1 1264.4 22.9

STRTECH 60.0 73.4 22.3

Price Price % chg 30-Apr-15 29-May-15

RASOYPR 0.5 0.3 -33.3

MANGCHEFER 86.1 57.7 -33.0

ABGSHIP 204.4 143.0 -30.0

KESORAMIND 124.5 92.5 -25.7

VAIBHAVGBL 799.8 597.8 -25.3

SUPREMEINF 216.1 162.4 -24.9

TVTODAY 234.6 187.4 -20.1

CENTENKA 190.0 157.4 -17.1

KSK 57.7 48.0 -16.8

SRTRANSFIN 969.9 823.6 -15.1

Top Gainers From F&O Top Losers From F&O Top Gainers From CNX 500

Top Losers From CNX 500

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: [email protected]

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.