Rising market boosts returns

The markets were quite weak and lacklustre in the first half of the one year period in Smart Portfolios. However, we had an eventful second half, as the markets soared backed by renewed optimism of global economic recovery, better-than-expected corporate earnings and a thumping win by the UPA government in the general elections.

The market upswing saw a huge change in fortunes for investors with fund managers cashing in on the up move. Today, at the end of Smart Portfolios Season I, the benchmark (BSE 200) has given a return of 9.37 per cent.

In sharp contrast to the benchmark’s net returns, our four fund managers have out-performed by a wide margin. Amar Ambani’s networth has zoomed 161 per cent to Rs 26.12 lakh, Anand Agarwal’s portfolio value has soared over 120 per cent to Rs 22.02 lakh, Kashyap Pujara’s networth has appreciated by over 34 per cent to Rs 13.42 lakh and Sadanand Shetty’s portfolio value is up nearly 64 per cent at Rs 16.37 lakh.

In the week under review, the Smart Portfolios networth rose by 4.5 per cent.

QUIET WEEK
KASHYAP PUJARA
Fund Manager, ENAM Direct

Kashyap Pujara remained on the sidelines for the second straight week, while his portfolio value appreciated by 2.8 per cent. His top performing stocks were Century Textiles (up 74 per cent), Sterlite (up 70 per cent) and EID Parry (up 59 per cent).

Top Holdings	% of assets	Cost Price (Rs)	Current price (Rs)	Value (Rs lakh)
Balrampur Chini	25.34	96.27	113.35	3.40
Aditya Birla Nuvo	15.05	695.00	1009.70	2.02
Century Textiles	13.54	273.00	454.25	1.82
ONGC	13.18	1028.00	1179.20	1.77
EID Parry	9.67	313.99	324.25	1.30
Total investments	94.08	-	-	12.62
Cash	5.92	-	-	0.79
Net worth	-	-	-	13.42
Returns (%)	34.17	-	-	-

The laggards were Reliance Communications (down 53 per cent) and Madras Aluminum (down 30.3 per cent).

MARGINAL GAINS
ANAND AGARWAL
Head – Products & Investments, Reliance Money

Anand Agarwal was a net seller of stocks worth Rs 5.66 lakh, and his portfolio value moved up by 0.8 per cent (Rs 18,000) last week. His networth scaled over 120 per cent, thanks to Axis Bank (up 187 per cent) and TRF (up 61 per cent).

Top Holdings	% of assets	Cost Price (Rs)	Current price (Rs)	Value (Rs lakh)
Numeric Power	22.71	372.00	490.35	5.00
Rasoi	20.44	301.00	375.05	4.50
Sakthi Sugar	15.41	79.68	84.85	3.39
Prime Focus	4.49	171.25	197.65	0.99
Total investments	63.06	-	-	13.88
Cash	36.94	-	-	8.13
Net worth	-	-	-	22.02
Returns (%)	120.19	-	-	-

Jet Airways (down 56 per cent), Deccan Aviation (down 60 per cent) and Reliance Communications (down 37 per cent) were the major drags.

HEALTHY PROFITS
AMAR AMBANI
Vice President (Research), India Infoline

Amar Ambani’s networth rose by 5.3 per cent (Rs 1.32 lakh) in the week under review. He was a net seller of stocks worth Rs 15.85 lakh. His best pick was Hindustan Oil Exploration with a net gain of over 92 per cent followed by Elantas (up 79 per cent), and Falcon Tyres (up 65.4 per cent).

Top Holdings	% of assets	Cost Price (Rs)	Current price (Rs)	Value (Rs lakh)
Aban Offshore	12.03	1350.00	1571.30	3.14
Allied Digital	9.59	452.80	500.75	2.50
NIIT Tech	2.44	114.95	127.50	0.64
Jindal Drilling	2.39	517.00	624.25	0.62
Suven Life	1.86	22.75	32.40	0.49
Total investments	31.51	-	-	8.23
Cash	68.49	-	-	17.89
Net worth	-	-	-	26.12
Returns (%)	161.20	-	-	-

On the other hand, Jindal Saw Pipes, Axis Bank and Jaiprakash Associates were the top three laggards.

IN BUY MODE
SADANAND SHETTY
Vice President, Kotak Securities

Sadanand Shetty was a net buyer of stocks worth Rs 3.23 lakh, and his networth rose by 4 per cent last week. Orbit Corporation with an average gain of 100 per cent was the top performing stock in his portfolio. It was followed by Godrej Consumer (up 84 per cent) and Balrampur Chini (up 71 per cent).

Top Holdings	% of assets	Cost Price (Rs)	Current price (Rs)	Value (Rs lakh)
United Phos	7.88	166.21	166.45	1.29
GVK Power	6.27	43.15	47.45	1.03
NDTV	5.86	157.00	159.95	0.96
United Spirits	5.84	888.68	955.05	0.96
JSWSL	5.41	687.25	708.85	0.89
Total investments	83.63	-	-	13.69
Cash	16.37	-	-	2.68
Net worth	-	-	-	16.37
Returns (%)	63.66	-	-	-

On the other hand, Glenmark Pharma with an average loss of around 50 per cent was the biggest underperformer in his portfolio. Everest Kanto (down 50 per cent) and MIC Electronics (down 49 per cent) were the other big losers.

Smart Portfolios Season II

Over a year ago, we had taken the initiative to start a unique educational game – Smart Portfolios – for a one-year period. This initiative was started with four money managers who were given a virtual corpus of Rs 10 lakh to be used for creating a portfolio which could beat the benchmark, the BSE 200. The year-long exercise helped investors understand the investing philosophy of the fund managers as well as their picks. Your enthusiastic response has led to the launch of “Season II” of Smart Portfolios from September 1, 2009.

There are changes in the rules, the people playing the game and the benchmark. Two new fund managers – Ajay Parmar, head, Research-Institutional Equities, Emkay Global and Peeyoosh Chadda EVP & co-head Asset Management, Edelweiss will join Amar Ambani and Sadanand Shetty for the second season. The benchmark will also change to the S&P CNX 500.

Globus Spirits - Rich spirits

Increased capacities and foray into under-penetrated markets could sustain growth for Globus Spirits, but valuations aren’t cheap.

Globus Spirits, which manufactures and sells industrial alcohol (rectified spirit and extra-neutral alcohol), country liquor and Indian-made foreign liquor (IMFL), was less impacted than its peers during the downturn. A diversified revenue portfolio (35-40 per cent revenues from country liquor) and its flexibility to shift between raw materials (molasses and grain) in the production process helped. The company has been operating at higher capacities, and thus the need for an IPO, amongst other things. It plans to expand its capacities by 73 per cent to 500 lakh bulk litres. While the project cost of Rs 89.3 crore also includes setting up power generation capacity and modernisation of IMFL bottling plants, all these are likely to go on stream by March 2010.

Expansion plans
The company plans to expand its alcohol manufacturing capacities at its two distilleries at Samalkha (Haryana) and Behror (Rajasthan). IMFL sales, though constitute around 6-7 per cent of overall production volumes, are considered more profitable. From the expanded capacities, Globus plans to increase IMFL’s share to around 20 per cent over three years.

The company’s brand portfolio in the country-liquor segment includes Rana and Rajasthan No.1. In the IMFL segments, it has 20-20 Premium Whisky and Hannibal Legendry Rum. The company has allocated a third of the IPO proceeds towards brand and distribution development for its own IMFL brands, which indicates its intention to improve visibility and reach. Globus also does job work for IMFL brands such as Officer’s Choice Whisky (Prestige, Classic) and Officer’s Choice XXX Rum.

Margin cushion
The company’s production facilities can utilise either molasses or grain or both, thus mitigating the dependence on any specific raw material. This would enable it to manage margins in a scenario of rising input prices, given that raw materials account for over 60 per cent of costs. Better sourcing has also helped maintain EBITDA margins at around 13 per cent, on average of the last three years, however it is lower than some peers. Going ahead, Globus’ increasing focus towards IMFL would also provide cushion to margins.

ON A HIGH
in Rs crore	FY09	FY10E	FY11E
Net sales	197.1	252.4	347.8
EBITDA	26.0	36.6	50.4
Net profit	12.9	22.4	33.2
EPS (Rs)	10.6	11.2	16.6
PE (x) @ Rs 90	8.5	8.0	5.4
PE (x) @ Rs 100	9.4	8.9	6.0
E: Estimates

Conclusion
The negatives for the sector are the excessive regulation by the different state governments. Among positives, increasing disposable incomes, favourable demographics and lower penetration of alcohol in the country offers opportunities for players in the sector. Globus clocked about 35 per cent growth both in the bottom line and top line on an average in the last five years, albeit on a smaller base. This robust performance is expected to continue in the next two years also, though the near-term concerns include the uptick in raw material prices. Also, how successfully the company is able to break into new markets and establish presence of its own brands will reflect on the numbers.

Regarding valuations, Globus’ PE works out to 8.9 times its estimated 2009-10 earnings at the upper band, which is expensive as compared to its peers like Tilaknagar (PE of around six times trailing 12 months EPS). While the growth story of Globus looks good, immediate gains are ruled out as the IPO pricing is high.

Tata Steel - Regaining strength?

Early signs of a recovery in demand along with measures to improve profitability at Corus indicate that Tata Steel may bounce back into the black.

Tata Steel reported its second consecutive consolidated quarterly loss last week. The poor operating performance of its European business, lower metal prices and slow pick up in demand were among prime reasons for the losses and remain key concerns going ahead. Not surprisingly, the company expects the next few quarters to be challenging.

On the positive side, to deal with these challenges, the company has already taken several initiatives, which are aimed at bringing its operations, particularly European, on track. The company’s recent $500 million GDR offer should also ease some funding concerns and provide fuel for the company’s expansion plans, mainly the highly profitable domestic facilities. While the stock has been in the limelight for the wrong reasons, there are early signs of recovery which indicate that it the going ahead could be better. Here is an analysis of the recent events and the future outlook for the company.

Corus dents profit, once again
Tata Steel’s global operations weigh heavily on its overall performance as almost 80 per cent of its total capacities are based in the overseas markets. Its European operation alone, which comes under Corus, accounts for 75 per cent of the total capacity. The impact was clearly seen in June 2009 quarter. While Tata Steel’s standalone EBIDTA was Rs 1,789 crore, on a consolidated basis it reported an operating loss of Rs 29.9 crore; consolidated net loss stood at Rs 2,240 crore. The performance was weak on account of lower volumes and realisations at its European operation as the global economic slump shrunk demand. This in turn meant that Corus was able to utilise only 53 per cent of its capacity; its volumes dropped to 3.3 million tonnes in June 2009 quarter as compared to 6.2 million tonnes in June 2008. This along with high cost of opening inventory of raw material (iron ore and coal) impacted its operating performance.

The company, thus, reported a loss of $117 per tonne at the operating level as against a profit of $123 per tonne in June 2008 quarter.

Ready to bounce back?
In the current environment, to achieve a breakeven level at its European operations, analysts estimate that the capacity utilisations is required to move beyond 75 per cent levels, which is likely to happen in the second half of 2009-10 on the back of a pickup in demand. The company has already reached a 70 per cent capacity utilisation during the month of July 2009. They estimate that steel demand in Europe is stabilising and steel output is increasing along with de-stocking of inventory. According to the data provided by the World Steel Organisation, sequentially the demand in the European regions has increased from 9.42 million tonne in the month of April 2009 to 11.24 million tonne in July.

“As far as Corus is concerned, by December 2009 we could move to a breakeven level or a positive side, mainly helped by the combination of three components viz., lower raw material cost, additional cost savings and higher volumes,” says Koushik Chatterjee, Group CFO, Tata Steel.

Analysts also reckon this. “While 2009-10 will be challenging for Corus, we expect sequential improvement in prices and volumes as well as cost savings of $1.2 billion to lead to improved profitability,” says Edelweiss Securities’ analyst in a recent note. “We expect Corus to return to profitability, as steel prices in Europe are already $100 per tonne higher than the average price of $460 per tonne seen in quarter ending June 2009,” says Rakesh Arora, who tracks the metals sector at Macquarie Securities.

Trimming costs
Higher utilisation, better steel prices and improving volumes would be the key triggers, but only in the second half of 2009-10. On its part, the company has envisaged a cost saving of about Rs 6,200 crore for 2009-10 on the back of initiatives like ‘Weathering the Storm’ and ‘Fit for Future’. Under these initiatives, Corus has already achieved savings of Rs 2,200 crore during the June 2009 quarter. These initiatives include securing long-term captive supplies of raw materials like iron ore and coal.

In the near-term, expect inventory costs to also come down. Till June 2009 quarter, the company had high-cost inventory of raw materials. It now hopes to sign new contracts at the lower rates thus, leading to substantial savings in the coming quarters. Like in the case of coal, the average cost for Corus was about $300 per tonne as against the current prices of about $170 per tonne. The company is now negotiating new contracts at lower prices, which if signed would lead to substantial cost savings.

For the long-term, the company is looking at overseas mines. For instance, during 2009-10, Corus had captive sources of raw material to the extent of about 25 per cent of its requirements, but now it is eyeing new mines (acquisitions, equity stake) to take this figure to 50 per cent by 2015. Besides raw materials, Corus is also planning to reduce its staff cost by lowering its employee count from 40,000 to 35,000 in 2009-10. Thanks to these initiatives, analysts expect Corus’ EBIDTA to improve to $480-490 million in 2009-10 itself.

The lesser impacted
Tata Steel’s Indian operations have provided great support. Although here too, realisations have fallen, volumes have been growing on the back of steel demand in the country, particularly for long products from the infrastructure sector. Domestic sales volume grew by 22.4 per cent to 1.42 million tonne in June 2009 quarter. Even on the margins front, despite lower realisations, the company reported strong operating profit margins of 32 per cent due to its lower cost of production.

While domestic steel prices have recovered by about 10-12 per cent from their lows in April 2009, steel production has grown at 4.25 per cent in July 2009 on a year-on-year basis. Since Tata Steel’s domestic business figures among the top three cost-efficient steel operations globally, expect its performance to improve further on the back of higher sales volumes and better realisations in the coming quarters.

IMPROVING NUMBERS
	FY 09	FY 10E	FY 11E
Capacities (in million tonne)
Tata steel	5.23	6.7	7.22
Corus	19.7	17	18.9
Others	3.5	3	3.1
Total	28.43	26.7	29.22
in Rs crore
Avg. realisation (Rs/Tonne)	51,811	37,343	38,420
Consolidated sales	147,300	99,707	112,263
EBIDTA	18,130	11,624	15,795
Consolidated net profit	4,950	2,963	5,921
Consolidated EPS (Rs)	61.9	35	68
PE (x)	7.1	12.5	6.4
Source: Analyst estimates and Bloomberg

Easing liquidity
Tata Steel increased its domestic steel capacity to 6.8 million tonne last year. It intends to take this further to 10 million tonne by mid-2011. However, analysts were worried about the funding and consequent increase in debt levels. But, with the completion of its recent $500 million GDR issue, which the company will utilise for capital expenditure in India, acquisition of new mines in overseas markets and prepayment of debt at Corus, these concerns are easing out. Last week, it equipped itself with shareholder approval to raise additional funds worth Rs 5,000 crore, though the route has not been spelt out. Meanwhile, as at the end of June 2009 quarter, the company’s consolidated net debt stands reduced by Rs 3,891 crore to Rs 49,170 crore.

Outlook
Tata Steel’s major concern remains to be its international business where the improvement is only expected after September 2009 quarter. Meanwhile, as it is taking steps to bring down cost, there are early signs of demand picking up in the European region, which should help improve Corus’ utilisation levels. This along with the benefits of higher international steel prices should mean better profitability in the coming quarters. However, the full benefits of the initiatives and recent developments should only be seen from 2010-11, through a strong recovery in earnings believe analysts. “We think Tata Steel has reached the bottom of its earnings cycle, and we expect a sharp recovery from the December 2009 quarter,” says Arora. The stock, which is trading at 6.5 times estimated 2010-11 earnings, is partly factoring in a recovery, the sustainability of which will only get confirmed over the coming months. In this light, experts believe that investors can consider the stock on dips but with a 2-3 year perspective

Can the Brics bounce back?

If you're not invested in Brics, you could be forgiven for wondering what you're missing out on. But it's simply an acronym for the countries Brazil, Russia, India and China which were identified in 2001 as being the leading nations among a group of emerging economies.

The term BRIC was coined by Goldman Sachs's head of global economic research, Jim O'Neill. He forecast that the countries' GDP growth could outpace the rest of the world, with the GDPs of China and India in particular set to surpass those of the major Western economic powers and dominate the global economy within 50 years.

The theme was taken up by others, leading to a wave of Bric funds being launched. The countries themselves joined the bandwagon, holding the first Bric economic summit this summer in Yekaterinburg, Russia. But the countries have fairly little in common, beyond their size.

Brazil's economy, for instance, is based on agriculture as well as oil, while Russia likewise is an oil- and gas-rich nation. India's economic growth is based on IT and services – think of call centres – while China's manufacturing industry make it the world's biggest exporter. Investing in a Bric-based fund, then, means buying into the argument that these four emerging countries offer the best opportunities for growth despite their differences.

That's not a view that Threadneedle's head of global emerging market equities, Julian Thompson, subscribes to. "It's true that the rise of emerging markets will be extremely important, but we don't think it's a good idea for investors to be limited to the Bric countries. There are lots of countries with good prospects, such as Indonesia, so we think it's better to offer a general emerging markets fund."

Ben Yearsley of independent financial advisers Hargreaves Lansdown adopts a different approach. "While I think investors should have exposure to the Bric economies, I prefer buying funds invested in individual countries, rather than a broad-base emerging markets fund." Mr Yearsley invests in a Russia fund, a Latin America fund, several Chinese funds and an Indian one.

"Some of these economies offer the best growth potential for the coming decade," says Mr Yearsley. "They are generally not saddled with the problems associated with many of the more developed countries. For example, they don't have pensions problems because they don't have massively ageing populations. They don't have the banking problems of the West either."

Brics and emerging market funds could form up to 25 per cent of an investor's portfolio for the foreseeable future. His recommendations? "If you want a Bric fund, use Allianz Bric Stars. If you want an emerging markets fund, use First State Global Emerging Markets Leaders. If you want individual funds, I'd go for Jupiter China, First State Latin America, First State Indian Subcontinent and Neptune Russia and Greater Russia."

Of the four Bric countries, Brazil is favoured by Adrian Lowcock of advisers Bestinvest. "The Brazilian economy is defined by the commodities industry and in particularly oil. The stock market is dominated by two companies which operate in the oil sector. Therefore, to some extent, investment into a Bric fund will be influenced by the performance of that sector; with Russia and Brazil on the supply side with China and to a lesser extent India providing the demand." He also highlights the First State Latin America as a way to profit from the potential growth. "It's a new launch so there is not much to report in terms of performance figures; however, it has returned 17 per cent in three months," he points out.

But investing in emerging markets is not for the faint hearted. "You can make a lot of money in emerging markets but you can also lose it in double quick time," Darius McDermott, managing director of Chelsea Financial Services, said. "Last year, for example, the stock markets in the developed nations fell 30 per cent but emerging markets more than 50 per cent. We give investments a risk rating between one and 10: one is the least risky and 10 the most. Emerging markets are definitely a 10. You have the potential for sharp currency moves eroding returns, geopolitical risks and, to be frank, fraud in these economies," Mr McDermott said. Only those investors with money already in savings accounts and in UK stock market funds or corporate bond funds should consider taking the emerging markets plunge.

"You have to build your way up from cash through UK funds, and only when you have substantial holdings should you consider emerging markets," Mr McDermott said. What's more, for those nearing retirement who cannot afford to remain invested for the long term, it may be best steering clear of emerging markets. In fact, many independent financial advisers reckon that investors should have a maximum of between 5 and 10 per cent of their portfolios in these high-risk funds. However, a smaller band of IFAs think investors would be wise to invest more as the long-term economic story of countries such as Brazil, India, China and Russia is a good one. "It's all about your attitude to risk, but I know some clients who really believe in these countries and are heavily invested," Mr McDermott said.

Brazil

Economic growth in Brazil is not as impressive as that recorded by China. However, the South American giant has fared better than expected in the face of the recession gripping Europe and America. “This year we expect growth in Brazil to be flat, but that is no bad thing. Crucially, commodity prices, on which the economy relies heavily, have bounced back and the consumer sector looks robust without high levels of personal debt or inflation,” said Bryan Collings, the manager of Hexam Capital’s Emerging Markets Fund.

Investors should have a “healthy dose of Brazil” in their portfolios, added Mr Collings, as share prices could be inflated by an influx of US-based investors. “More US cash is now going to Brazil than India and this is helping transform the stock market and boost the domestic investment culture.” However, this is not to say that there aren’t dangers inherent to investing in Brazil. “Commodity prices are key to the prospects of the economy, which makes it a little vulnerable, but with China still going ahead, there is a floor under those commodity prices,” Mr Collings said.

Russia

At the start of the year, with the Russian stock market nose-diving, there were those who thought Russia should be removed from the exclusive Bric club. Jim O’Neil from Goldman Sachs, who coined the term Bric, was one who questioned Russia’s right to be considered an emerging economic powerhouse rather than a perennial basket case. Bryan Collings of Hexam Capital said: “The main problem with Russia is the volatility. There can be dramatic rises and falls and that frightens some investors. The economy is dependent on commodity prices and often, when these fall, you see selling of the stock market. Unlike in the West, where you have big pension and investment funds that buy when share prices fall, in Russia there is no natural brake. As a result, when prices fall, it can be substantial and fast.” But if the world economy does pick up speed next year, Russia could be in a strong position. “

With its excellent natural resources and large population, Russia is well placed for outperformance as the world economy recovers,” Mr Collings said. “It may be riskier than the other Bric countries, but that can be a good thing if it’s within the confines of a larger emerging-markets or Bric fund.”

India

Like China, India seems to be successfully riding out the world economic storm. The key is that India has a balanced economy with companies able to appeal to a strong domestic market when its exports start to dip. “A lot has to do with the growth of the middle-class, educated workforce and infrastructure investment,” said Charlie Awdry from the Gartmore emerging markets team. And the latest signs are that the country’s consumers have continued to spend. “After a brief blip, car and motorcycle sales are on the up again, interest rates are low and business can find the credit it needs to invest,” said Teera Chanpongsang, the manager of Fidelity’s India Focus fund. In addition, the Indian government is moving to liberalise the economy further and reduce the budget deficit. But India’s stock market relative to the other Bric countries is quite expensive, with share prices trading around 15 times company earnings. “The Indian stock market is at a premium but I expect a lot of companies to upgrade their earnings expectations which should balance this out. Overall, India has been one of the best performing emerging markets over the past 10 years, but a long-term approach has to be taken,” Mr Chanpongsang added.

China

China has a massive population and has toppled the US as the world’s largest exporter. Recent figures suggest that the Chinese economy has weathered the worst of the world downturn and is returning to its near double-digit growth. “The long-term economic drivers, such as demographics and infrastructure, are all in place and they’ve been supplemented by the fiscal stimulus package the Chinese government put together last November,” said Pinakin Patel, a client portfolio manager at JP Morgan.

But there remain worries that the country is too in thrall to state interference. “There is no doubt the state is highly involved in the day-to-day running of people’s lives, but having the government at the helm of economic growth has been positive. It has been able to push through progress reasonably quickly,” Mr Patel said. Martha Wang, a portfolio manager at Fidelity’s China Focus fund, said there should be further positive effects from the stimulus measures. “But stock markets in China are likely to stay volatile in the near term as the global economic and investment outlook is still uncertain,” she warned. “Chinese companies could outperform world equities over the longer term, given China’s structural growth potential.”

GDP - India is at the 24th spot in the list of the fast growing economies of the world!

September sonnet for stocks: A sliding Sensex?

Going by history, the stock market could be in for some troubles as September has been the worst month historically for the bourses, but the analysts are still hopeful that the trend may be reversed this time around.

Moreover, the analysts here believe that September being the worst month of the year in terms of the benchmark index performance is more of a US phenomenon and the Indian market, being structurally different, might not follow the same trend.

According to an analysis of the the average monthly performance over the last 100 years of the Dow Jones Industrial Average, the benchmark index of the US market, the month of September has given the worst return with an average decline of 0.96 per cent.

The analysis shows that over the last 100 years, the month of September has recorded decline a majority of 58 times.

In September 2008, the Indian stock market benchmark Sensex fell by 1,704 points or 12 per cent, while DJIA declined by 666 points or six per cent.

Last September also recorded a complete collapse in the investor confidence levels worldwide, as the American banking giant Lehman Brothers went bankrupt and was followed by a series of high profile failures and heightened financial crisis.

Besides, the volatility tends to be the maximum during this month and it has been historically about 10 per cent higher than the previous month in the US stock market, as turbulence and fear grips the market with a bearish phase.

"One should execise caution as September tends to be a weaker month for stock market as history shows that the volatility in the US markets reaches its highest," SMC Global Vice President Rajesh Jain said.

However, others believe that the signs of improving economic growth rate scenario and the build-up in the investors' confidence should ward off the concerns in India.

"Volatility is already there in the market in the past few trading sessions. However, the scenario now is positive as the signs of faster economic growth is fuelling the market forward," Unicon Financial Chief Executive G Nagpal said.

Ashika Stock Brokers Research Head Paras Bothra also noted that at the current levels, instead of going down, there was more probability that the stocks would move up.

"Market has a habit of greeting investors with a surprise. But, there could be huge movement on the indices and volatility would be heightened," he added.

India’s Growth Accelerates for First Time Since 2007

India’s economic growth accelerated for the first time since 2007, indicating the global recession’s impact on Asia’s third-largest economy is waning.

Gross domestic product expanded 6.1 percent last quarter from a year earlier after a 5.8 percent rise in the previous quarter, the Central Statistical Organisation said in New Delhi today. Economists forecast a 6.2 percent gain.

India joins China, Japan and Indonesia in rebounding as Asian economies benefits from more than $950 billion of stimulus spending and lower borrowing costs. India’s recovery may stall as drought threatens to reduce harvests and spur food inflation, making it harder for the central bank to judge when to raise interest rates.

“The weak monsoon has complicated the situation for the central bank,” said Saugata Bhattacharya, an economist at Axis Bank Ltd. in Mumbai. “Poor rains will hurt growth and stoke inflationary pressures as well.”

India’s benchmark Sensitive stock index maintained its declines today, dropping 1 percent to 15755.33 in Mumbai at 11:12 a.m. local time. The yield on the key 7-year government bond held at a nine-month high of 7.43 percent, while the rupee was little changed at 48.86 per dollar.

Before the rains turned scanty, the Reserve Bank of India on July 28 forecast the economy would grow 6 percent “with an upward bias” in the year to March 31, the weakest pace since 2003. It also raised its inflation forecast to 5 percent from 4 percent by the end of the financial year. The key wholesale price inflation index fell 0.95 percent in the week to Aug. 15.

‘Recovery Impulses’

The central bank’s Aug. 27 annual report said withdrawing the cheap money available in the economy would heighten the risk of weakening “recovery impulses,” while sustaining inexpensive credit for too long “can only increase inflation in the future.”

As the global recession hit India, the central bank injected about 5.6 trillion rupees ($115 billion) into the economy, which together with government fiscal stimulus amounts to more than 12 percent of GDP.

China’s economic growth accelerated to 7.9 percent last quarter from 6.1 percent in the previous three months, aided by a 4 trillion yuan ($585 billion) stimulus package and lower borrowing costs. China and India are the world’s two fastest growing major economies.

Interest Rates

The Reserve Bank of India kept its benchmark reverse repurchase rate unchanged at 3.25 percent in its last monetary policy statement on July 28 and signaled an end to its deepest round of interest-rate cuts on concern that inflation will “creep up” from October. The next policy meeting is scheduled for Oct. 27.

Manufacturing in India rebounded to 3.4 percent growth in the quarter ended June 30 after shrinking 1.4 percent in the previous three months. Mining rose 7.9 percent compared with 1.6 percent while electricity growth almost doubled to 6.2 percent during the period, today’s statement said.

India’s move to a higher growth trajectory is on course, Ashok Chawla, the top bureaucrat in the finance ministry, told reporters in Mumbai.

Drought or drought-like conditions has been declared in 278 districts in India, or 44 percent of the nation’s total, as rainfall has been 25 percent below average so far in the four- month monsoon season that started June 1, the farm ministry said Aug. 27.

Harvests Hit

Morgan Stanley economist Chetan Ahya and Nomura Securities Co. economist Sonal Varma said the drought will trim farm production though its impact on industry and services will be limited. Services including banking and software make up 55 percent of India’s $1.2 trillion economy, while industry accounts for a quarter.

“The lagged impact of monetary and fiscal policy action, improved business confidence in view of increased political stability, and recovery in external demand should ensure that the growth acceleration is sustained,” Ahya said.

India’s industrial production in June gained 7.8 percent from a year earlier, the fastest pace in 16 months, the government said Aug. 12.

Ahya expects the economy to grow between 5.2 percent and 5.8 percent in the year to March 31. That pace of expansion is attracting overseas companies including Harley-Davidson Inc., the biggest U.S. motorcycle maker. The U.S. economy shrank at a 1 percent annual rate last quarter.

New Factories

Harley-Davidson said last week it plans to start sales in India from next year.

Steel Authority of India Ltd., the nation’s second-largest steelmaker, said this month that demand for so-called flat products, mainly used to make automobiles, is rising and increased their prices by 900 rupees, or 3.4 percent, a ton.

Volkswagen AG, Toyota Motor Corp. and other car manufacturers have announced plans to spend more than $6 billion through 2012 to build factories in India to offset slumping demand in their home markets.

“Economic growth in India is still very good,” said Jnaneswar Sen, vice president in the Indian unit of Honda Motor Co., Japan’s second-largest carmaker. Honda plans to increase production in India by 50 percent from next month in response to rising demand.

Indian Premier’s 100-Day Stock Rally Best Since 1991

Indian stocks rose more in the first 100 days of Prime Minister Manmohan Singh’s leadership than under any new government since 1991. Investors predict more gains as he opens up the world’s second-fastest growing economy.

The Bombay Stock Exchange’s Sensitive Index climbed 16 percent since Singh started a second term on May 22 as international investors bought $4.9 billion more shares than they sold, data compiled by the bourse show. The advance is the biggest since the 40 percent rally after Prime Minister P.V. Narasimha Rao came to power, and compares with the 8.4 percent increase for the Standard & Poor’s 500 in the first 100 days of U.S. President Barack Obama’s administration.

Investors are optimistic Singh will accelerate road construction, ease limits on foreign ownership of banks and sell stakes in state companies. The economy may grow 9 percent annually in the coming three years, pushing the benchmark index beyond the record high of 21,206.77 reached in January 2008, according to Mirae Asset Financial Group, South Korea’s biggest money manager. The Sensex is 25 percent below that level.

“India is well-positioned to play the global recovery story,” said Gopal Agrawal, head of equities in Mumbai for Mirae, which has $2.5 billion invested in India and favors automobile, metal and oil stocks. “The policy framework is in place and we have to see how it’s executed and how the people will benefit.”

Sensex’s Rally

The Sensex has risen 65 percent this year to close at 15,922.34 on Aug. 28, and fell 0.7 percent to 15,813.10 as of 11:50 a.m. in Mumbai. It may reach 20,000 by March 2011, UBS AG analyst Suresh Mahadevan wrote in an Aug. 26 report. He advises buying Mumbai-based Tata Steel Ltd., the nation’s largest producer, and Mumbai-based JSW Steel Ltd., the third-biggest.

India’s economic growth accelerated for the first time since 2007, indicating the global recession’s impact on Asia’s third-largest economy is waning. Gross domestic product expanded 6.1 percent in the three months to June 30 from a year earlier after a 5.8 percent rise in the previous quarter, the Central Statistical Organisation said today. Economists expected a 6.2 percent gain.

Singh, 76, was educated at Oxford University and was governor of the central bank from 1982 and 1985. He was Rao’s finance minister and championed free-market policies such as cutting import tariffs and opening the stock market to foreign investors. In 2004, he became the fourth prime minister to run India since Rao.

Asset Sales

His coalition was reelected in May with a majority large enough to separate from communist allies, who had blocked plans for asset sales and the scrapping of a 10 percent cap on the voting rights of foreign investors in non-state banks.

Selling shares in state-owned companies is vital to fund the budget deficit forecast by the government to swell to 6.8 percent of gross domestic product in the year ending March 31, from 6.2 percent last fiscal year.

Oil India Ltd., the nation’s second-biggest oil explorer, plans to raise as much as 27 billion rupees ($552 million) by selling a 10 percent stake to the public starting Sept. 7, according to finance director T.K. Ananthkumar. NHPC Ltd., the leading hydroelectric power generator, is seeking 40 billion rupees in an initial public offering that started this month, Chairman S.K. Garg said.

Aggressive Reforms

“The government is going ahead aggressively with reforms,” said Pauli Laursen, a fund manager who oversees $150 million of Indian equities at SydInvest Asset Management in Copenhagen. “The IPO of a company like Oil India is a positive.”

Lower monsoon rainfall may undermine the rally by reducing farm output, according to Bank of America-Merrill Lynch, which predicted in an Aug. 17 report the Sensex could slide as much as 15 percent in coming months. India’s goods exports, which account for 15 percent of GDP, fell for a ninth month in June.

“We don’t see the level of confidence in emerging markets that we have been used to and India is no exception,” said Gavin Redknap, a strategist in London for Tokyo-based Nikko Asset Management Co., which oversees $6 billion in developing nations. “We aren’t seeing Indian equities at a level where we can call them attractive.”

The economy may expand faster than China’s next year because investors underestimate manufacturing and service industry growth, Puneet Nanda, an executive vice president at ICICI Prudential Life Insurance Co., with $6 billion in equities, said in an interview.

Faster Growth

Economic growth may exceed 7 percent in the fiscal year to March 31, and as much as 10 percent in the following year, Nanda said. China may expand 7.2 percent this year and 7.7 percent in 2010, the World Bank forecast on June 22.

The rupee, which dropped 3 percent in the past three months, may strengthen more than 5 percent to 46.22 per dollar by March 31, from 48.67 on Aug. 28, according to the median forecast in a survey of 20 analysts by Bloomberg News.

The rupee was set for its biggest monthly drop since February while the country’s seven-year bonds headed for their worst month since January, data compiled by Bloomberg showed.

Funds set up to target Indian stocks have attracted $1.2 billion more cash than was withdrawn since June 1, with nine consecutive weeks of inflows, according to Cambridge, Massachusetts-based research firm EPFR Global. Stocks in the Sensex trade for 18.7 times estimated earnings compared with the 21.4 times for China’s Shanghai Composite Index.

“India is under-priced compared to China,” said Venkatraman Anantha-Nageswaran, the global chief investment officer in Singapore at Bank Julius Baer & Co., which oversees the equivalent of $281 billion worldwide. “The relative performance gap in economies and assets markets between India and China will not only narrow considerably, but also move in favor of India.”