February 2008


Markets were flat during the month and it is going through a period of consolidation after sharp melt down in the month of January 08. Energy and banking stocks were weak during the month, whereas the defensives like consumers, IT did well during the month. The mid and small cap stocks continued to be weak during the month. With foreigners pull out funds, the Rupee weakened slightly against the USD, leading to some positive outlook for the IT sector. Continued concerns over the US market is expected to weaken sentiment for equity markets.


As the country moves into a potential election year, the budget was expected to have a strong tinge of populism. The Finance Minister had several things in the budget for the common man (Rs 60,000 cr of farm loan waiver, increase in the tax slab would reduce for someone earnings Rs 500,000 annually the tax burden reduced from Rs 99,000 to Rs 55,000, reduction in excise duty, etc), but withheld any major benefits to large corporate and the richer sections (no change in corporate tax rates, increase in Short Term capital gains tax from 10% to 15%). The budget is increasingly having less new impact as much of the liberalization moves have been done with over the past decade. Now, the key issues are from a implementation perspective rather than the policy perspective.


With the correction in the market, we are starting to see sensible prices in companies that are good longer term bets. HDFC Bank has seen some correction and started to give prices points where we could increase the holding. The bank is expected to growth in excess of 30% annually for the next several years and run by a management team that constantly reduces risks to such growth. The bank announced the acquisition of Centurion Bank of Punjab during the month, at prices that seems to be about 30% higher than what would consider a good price on a stand alone basis. On the other hand, with the RBI controlling the branch network roll out, the acquisition allowed HDFC Bank to expand its branch network by 70% for diluting its equity holding by about 20%. The move will pay off well if HDFC Bank manages to improve the productivity standards of Centurion’s branches.