ADVICE for the WISE

Newsletter –October’11

1

Economic Update 4

Equity Outlook 8

Debt Outlook 11

Forex 13

Commodities 14

Index Page No.

Real Estate 16

2

Dear Investor,

The month of September saw increased volatility in Global

markets as recession concerns gained ground in the developed

part of the world. The ‘operation twist’ initiated by the Fed lead

to widespread disappointment in the markets as it clearly fell

short of investor expectations. All asset classes came under

pressure with equities and commodities taking a bigger cut. In US,

Banks briefly led the S&P500 into bear-market territory as fears of

contagion from Europe spread. The month end saw partial

recovery as macroeconomic data improved somewhat in United

States.

After a very volatile September, there are signs that European

crisis would be contained as of now. European political leadership

and Central Bank have been taking steps to firewall other euro-

zone members like Italy and Spain from the crisis. Unlike Greece,

these countries face a liquidity crisis and not solvency issues;

Efforts are on to recapitalize the European banking system. It is

also expected that Greece might be allowed to default in an

orderly fashion Greece thereby limiting the contagion.

Indian equity correction was led by banks with Moody’s

cutting the debt rating of State Bank expressing concerns

about capital adequacy and asset quality. The short term

equity view remains cautious although we see value

emerging in selected pockets. As markets drift down,

investors can look at slowly increasing the beta of their

portfolio systematically thus positioning for outperformance

over the recovery as and when it happens. After the last

correction, private sector banking space appears cheap and

should merit selective buying. Other higher beta sectors like

metals and capital goods could also see strong recovery on

hopes of stabilization in European situation .

We continue to advise investors to lock-in the high yields in

the fixed income space. We expect further interest rate hikes

in the next two RBI meets with a total hike of 25-50bps.

“Advisory services are provided through Karvy Stock Broking Ltd. (PMS) having SEBI Registration No: INP000001512. Investments are subject to market risks. Please read the disclaimer on slide no.19”33

4

As on 30th

Sep 2011 Change over last month

Change over last year

Equity markets

BSE Sensex 16454 (1.3%) (18.0%)

S&P Nifty 4943 (1.2%) (18.0%)

S&P 500 1131 (6.7%) (0.9%)

Nikkei 225 8700 (2.8%) (7.1%)

Debt Markets

10-yr G-Sec Yield 8.44% 13 bps 59 bps

Call Markets 8.30% 25 bps 230 bps

Fixed Deposit* 9.25% 0 bps 250 bps

Commodity markets

RICI Index 3463 (13.9%) 3.0%

Gold (`/10gm) 26000 (2.8%) 35.7%

Crude Oil ($/bbl) 105 (8.8%) 31.9%

Forex

markets

Rupee/Dollar 48.9 (5.9%) (8.2%)

Yen/Dollar 76.6 0.2% 9.2%

10 yr Gsec

Gold

* Indicates SBI one-year FD

7580859095

100105110115120125 Sensex Nifty S&P 500 Nikkei 225

6.80

7.30

7.80

8.30

8.80

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4

US

Europe

Japan

Emerging economies

• According to the HSBC Purchasing Managers’ Index (PMI), the services sectorindex fell to 49.8 points in September from 53.8 in the previous month. Fifty isthe point that separates contraction (below 50) from growth (above 50).

• Real GDP is expected to grow by a fairly robust 6.4 percent in emerging anddeveloping economies (IMF Projection)

• The Conference Board Consumer Confidence Index, which had declined sharplyin August after the rating downgrade, remained essentially unchanged inSeptember at 45.4, up slightly from 45.2 in August.

• U.S. jobless claims rose less than expected in the last week keeping theunemployment rate stagnant at 9.1 percent.

• The Eurozone purchasing managers index for the month of September is at 48.8,lower than the previous month’s reading of 51.5. This reading marks the firstdecline to below the 50.0 point level since August 2009.

• Unemployment rate in the Euro zone is at 10% while the inflation is estimated at 3%. S&P has lowered the expected GDP growth to 1.1% compared to the previous forecast of 1.5%

• Manufacturing PMI in Japan decreased to 49.3 points in September against 51.9points seen in August.

• Exports rose for the first time after the March 2011 earthquake. The increase was2.8 percent in August from a year earlier, led by shipments of cars, which rose 5.3percent.

5

6

• The GDP growth rate for Q1 FY12 came in at 7.7%, theweakest in last 6 quarters. The growth was seen at 7.8% inthe last quarter. The economic growth for FY11 was 8.5%backed by improved farm output and growth in theservices sector.

• While the manufacturing sector grew 7.2 percent in April-June from a year earlier, construction was a dark spot in the data, rising just 1.2 percent annually, down from 7.7 percent a year earlier, as higher interest rates dampened the housing market and big-ticket projects were plagued by delays in approvals. Mining output grew 1.8 percent, compared with 7.4 percent a year ago while Financing, insurance, real estate and business service grew 9.1 percent versus 9.8 percent a year ago.

• A steady rise in interest rates combined with stubbornlyhigh inflation would impact demand and credit sensitivesectors making a growth target of 8% difficult to achieve.

IIP monthly data

GDP growth

• Industrial output as measured by the Index of IndustrialProduction (IIP) dropped to a low of 3.3% in July waylower from the consensus estimate of 6.2% and theunexpectedly high rate of 8.8% in June. The figure forApril has been revised downwards to 5.3% from an earlier5.8%. This data was according to the new base year(2004/05), new components and weightings.

• During the month, the capital goods sector witnesseddegrowth of 15.2% (YoY) compared to a growth of 37.7%(YoY) in June 2011. Manufacturing also slowed to 2.3%from 10.3% in the previous month while an increase wasseen in consumer goods which increased to 6.3% from anearlier 2.3%.

• The IIP figures have been very volatile in the last year andespecially after the introduction of the new series. Webelieve that monthly indicators and IIP in isolation maynot a very efficient way of indicating long term growth.We expect the growth to eventually moderate out thoughhigh input costs may be a dampener for themanufacturing sector.

4.0

5.0

6.0

7.0

8.0

9.0

10.0

FY10(Q2) FY10(Q3) FY10(Q4) FY11(Q1) FY11(Q2) FY11(Q3) FY11(Q4) FY12(Q1)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

Jul 10 Aug 10 Sep 10 Oct 10 Nov 10 Dec 10 Jan 11 Feb 11Mar 11 Apr 11 May 11

Jun 11 Jul 11

6

• Bank credit growth increased to 20.7 percent inAugust* from 19.3 percent in July* while Depositsgrew by 18.0 percent compared to 18.1 percent inJuly 2011.

• On account of the increasing interest rates, somemoderation has been seen in the credit demand inthe last few months. Persistently high inflation maytrigger a rate hike in the coming months increasingthe borrowing costs further.

• Moderation in the credit offtake is expected tocontinue in the coming months.

• Inflation as measured by WPI increased to a oneyear high of 9.78% in August from 9.22% in July‘11. The number for June was revised upwardsto 9.6% from an earlier estimate of 9.4%. Theincrease was driven by increase in food and fuelinflation. The food inflation grew to 9% from an8.19 last month while the fuel inflationincreased from 12.04% to 12.8%. High fuelprices also drove the manufacturing inflation to7.8% from an earlier 7.5%

• With the monetary tightening stance by RBI, wedo expect WPI inflation numbers to moderateout eventually.

Growth in credit & deposits of SCBs

Wholesale Price Index

* End of period figures

5.0%

10.0%

15.0%

20.0%

25.0%

30.0%

Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11

Bank Credit Aggregate Deposits

7.5%

8.0%

8.5%

9.0%

9.5%

10.0%

7 7

8

The month of September has seen increased volatility in Global markets as the macro economic data indicates that developedcountries- US, Eurozone and Japan are seeing significant slowdown in growth and could be moving towards a recessionaryenvironment. Eurozone continues to grapple with solvency and liquidity issues. There are renewed concerns about default by Greeceand sovereign debt rating of Italy has been downgraded. There has been a sharp counter-trend rally in dollar as the risk aversion tradeplays out coinciding with significant corrections in global equities, commodities and precious metals.

In this months FOMC meeting, Fed decided to replace 400bl$ worth of short term maturity bonds with long duration one which couldhelp flatten the yield curve. This could put downward pressure on longer-term interest rates which lower cost of mortgage and autoloans and help spur some demand. However, the markets were disappointed as there was no indication of further quantitative easingalthough Fed Chairman continues to mention that Fed has several tools available at their disposal to spur growth and they will use it asand when required. With a sharp slowing down in growth and political bickering in Washington, Monetary stimulus is expected to playa bigger role in reviving US growth than what has been done so far by Fed.

IMF has aggressively cut growth forecasts for the Eurozone countries and the fiscal austerity measures being undertaken might hurtgrowth further. The Markit flash Eurozone composite output PMI fell to 49.2 in September from 50.7 in August which would imply aneconomic contraction; the first in more than two years. The liquidity crisis continues to play out with rising risk of Spain and Italy losingmarket access. European Financial stability fund (EFSF) continues to buy government debt in the meantime. It is our view that sooneror later, European governments might agree to some kind of fiscal consolidation and Eurobonds may be allowed. That remains the oneof the most probable long term solution to prevent a full-blown crisis and a renewed round of panic might force the governmentsarrive at that earlier than expected.

In India, we have continued to see equity market correction on the back of renewed FII selling. We have seen rupee depreciating closeto 12% from its levels of 44 n August, further compounding the downside for foreign investors. The sudden weakness of the INR hasbeen led by the recent risk aversion globally. The worst case scenario for Indian markets would be a Sensex level of 13,500 with themarkets discounting the FY13 earnings by 10 times( PE multiple at the low of 8000 in march 2009 was 10). We don’t expect this level,even if it comes, to sustain. The recent correction has brought the equity valuation down to very attractive levels. There is no reason topanic and move out of equity at this point of time. With inflation and interest rates close to peaking out in the next three months, thesecond half of this fiscal should be better for Indian equity. Although short term volatility may continue due to adverse global factors,we believe that markets are very close to the bottom and it is a great time to go out and start building a long term equity portfolio.

8

9

Sector Stance Remarks

Healthcare Overweight

We believe in the large sized opportunity presented by Pharma sector in India. India’s strength in

generics is difficult to replicate due to quality and quantity of available skilled manpower. With the

developed world keen to cut healthcare costs, and a vast pipeline of drugs going off-patent, Indian

pharma players are at the cusp of rapid growth. We would bet on the opportunity in Generics and

CRAMS space

FMCG OverweightWe prefer “discretionary consumption” beneficiaries such as Cigarettes and branded garments, as the

growth in this segment will be disproportionately higher vis-à-vis the increase in disposable incomes.

E&C Neutral

The USD 1 trillion Infra opportunity is hard to ignore. We believe Power sector to be a better play over

oEther sub sectors such as ports, roads and telecom infrastructure, because of favorable economics

under PPP model. Within power, we like the engineering companies and utilities over T&D and other

infrastructure owners because of their superior profitability and better competitive dynamics.

BFSI Neutral

Financial sector is undeniably the lubricant for economic growth. Whether the growth comes from

consumption or investments, credit growth is inevitable. Being a well regulated sector, BFSI in India has

good asset quality and capital adequacy ratios. Despite the increasing in interest rates, we believe banks

will be able to pass on higher cost of funds to clients as demand remains strong

Telecom Neutral

The regulatory hurdles, competitive pressures and leverage prevent any return to high profitability levels

in the short to medium term. However, incumbents have started to increase tariffs slowly and we

believe that consolidation will happen sooner than expected.

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Sector Stance Remarks

Automobiles Neutral

Demand outlook remains robust with strong earnings growth. Raw material prices have started

coming down which would boost margins. We are more bullish on two-wheeler and agricultural

vehicles segment due to lesser competition and higher pricing power.

IT/ITES Underweight

IT space might come under pressure due to continued concerns about growth in developed parts

of the world. While US and European customers of Indian IT companies are in good health, Order

inflows might slow down in near term

Energy UnderweightWe would stay away from oil PSUs, due to issues of cross subsidization distorting the underlying

economics of oil exploration and refinery businesses.

Metals Under weightCommodity prices are coming under pressure due to concerns about growth in developed parts

of the world. Hence a cautious stance is recommended

Cement UnderweightCement demand will certainly grow over the next three years. But the issue is on the supply side.

We do see an oversupply situation for the next 3-4 quarters.

Power Utilities Underweight

We like the growth prospects of power sector but believe that value will be created by

engineering services providers. Merchant power rates have been sliding downwards and coal

prices have been on the way up putting pressure on return ratios.

10

• After a decrease in the yields last month, the 10 year benchmark G–Sec yield increased by 13 bps inSeptember to close at 8.44%. This was after an increase of 25 bps in the interest rates by RBI. Thoughthis increase had been factored in, the unexpectedly high borrowing schedule for Q2 made the yieldsspike considerably towards the end of the month.

• After trading at 8.30 levels, moderation was seen in the yields of the 1 year papers post theannouncement of the borrowing plan by the Govt. The 1 year paper was trading at 8.10 levels at theend of the month.

• With no respite from the high inflation in spite of monetary tightening, we expect another 25 - 50bps hike in the year.

10-yr G-sec yieldYield curve

(%)

6.80

7.00

7.20

7.40

7.60

7.80

8.00

8.20

8.40

8.60

8.0

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3.9

4.8

5.8

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9.6

10

.6

11

.5

12

.51

3.4

14

.4

15

.4

16

.3

17

.3

18

.2

19

.2

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OutlookCategory Details

Long Tenure Debt

With inflationary pressure not easing, we expect more rate hikesin the year though these may not be implemented immediatelyand could be limited to a couple of hikes. Moreover, these hikesare already expected and may get factored in. Hence, we havechanged our stance from negative to neutral and believe that itmay be a good time to start looking for interesting investmentopportunities in the medium term.

Some AA and select A rated securities are very attractive atthe current yields. A similar trend can be seen in the FixedDeposits also. Tight liquidity in the system has alsocontributed to widening of the spreads making entry atcurrent levels attractive.

We recommend investment into short term bond funds witha 6-12 month investment horizon as we expect them todeliver superior returns due to high YTM. We have seen theshort term yields harden due to reduced liquidity andconsecutive rate hikes prompted by inflationary pressures. Tillthese factors do not stabilize, we see Short term bond fundsand FMPs as an interesting investment option.

Short Tenure Debt

Credit

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• In the last month, the Rupee has depreciated nearly 6percent against the USD. The Rupee nosedived to a two yearlow of Rs 49.82 level in the interim before closing at Rs. 48.9per Dollar.

• The reasons for this decrease are increased demand of USDby the Indian companies and weak FII inflows. The decreasedIndian Corporates currently have high level of foreign debtwhich is due for repayment in 2011-13 and are hence facingrepayment pressures. Increasing risk aversion and the globaluncertainty may also make refinancing of this debt difficult.

• We expect the rupee to continue to weaken in the short termgiven the continuous demand for dollars by oil importers andother corporates.

Rupee movement vis-à-vis other currencies (M-o-M) Trade balance and export-import data

• Exports for the month of Aug increased by 44.2% (y-o-y)while imports increased by 41.8% over last year. The tradedeficit increased to USD 14 bn.

• Capital account balance was positive throughout FY11 andstood at `273133 Cr. at the end of the year. For FY 12, thecapital account is at `93,621Cr. for Q1.

• We expect factors as higher interest rates to attract moreinvestments to India. Increased limits for investment byFIIs would also help in bringing in more funds thoughuncertainty in the global markets could prove to be adampener.

-20000

-15000

-10000

-5000

0

-200

20406080

100Export Import Trade Balance (mn $)

-10000

40000

90000

140000

FY 10 (Q2) FY 10 (Q3) FY 10 (Q4) FY 11 (Q1) FY 11 (Q2) FY 11 (Q3) FY 11 (Q4) FY 12 (Q1)

Capital Account Balance

-7.0%

-6.0%

-5.0%

-4.0%

-3.0%

-2.0%

-1.0%

0.0%

USD GBP EURO YEN

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Precious

Metals

Oil & Gas

The recent downgrade by US credit rating to AA+ by S&P hastriggered a bout of selling across all major asset classesbarring precious metals. Gold Futures in the COMEX hasclimbed to a record $1700 an ounce following investors rushto the safer haven. As commodities are likely to correctfollowing global fund liquidation, any dips in gold pricesshould be bought. Coupled with the domino effect on globalstock markets mayhem, gold is entering into a seasonallystrong fourth quarter and gold can only go up. We continueto maintain our year-end target of $1780 an ounce.

The recent bout of global uncertainty have pressurized crudeoil amid concern of double dip recession in the US and globaleconomy slipping into red. We expect crude oil prices havetopped out in the interim and can only move down from hereon. Although, the middle east will be hit by the falling dollarincome and might try to limit their production in order tosupport prices, we believe any such temporary uptick shall notbe sustained. This is obviously a positive news for theemerging markets. Expect crude oil to remain under pressure.

Crude

Gold

15000

17000

19000

21000

23000

25000

27000

29000

60.0

70.0

80.0

90.0

100.0

110.0

120.0

130.0

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Product Specifications

Nature of Debenture Secured, Redeemable, Non-Convertible Debentures

Opening Date 05-Oct-11

Closing Date 25-Oct-11

Deemed Date of Allotment(DDA) 07-Nov-11

Principal Protection 100%

Participation Rate 120%

Tenor 40 months

Reference Index/Asset MCX Front Month Gold Futures Price

Initial Fixing Level Official Closing level of reference index/asset on DDA

Final Fixing Level (1/36)*Σ Reference Index (i); where i=1to36M

Coupon Max{0%,PR*(Final Level/InitialLevel-1)}

Minimum Investment Rs.10,00,000 and in multiples of Rs.100,000

Placement Charges 3%+10.30%S.T on placement charges collected upfront

Objective:

To generate provide enhanced upside participation in gold while mitigating any downside risk and providing capital protection to the investor

15

Asset Classes Tier-1* Tier-II**

Residential

Strong pre-launch sales still keeps the developers far

from any correction, though sales are down to alsmost

35% since last quarter, there is no correction visible. The

over-supplied locations are stagnant and would be

similar for the coming 2 quaters. Entry points anywhere

from Rs. 3000 - Rs. 6000 per sqft in cities like Pune, NCR,

Hyderabad, Chennai and Bangalore are still considred

lucarative by first time home -buyers depending on their

usage. The retail investors (2nd home buyers) and HNI

investors vary or delaying their decision with expectation

of correction. Mumbai stands still tall with prices on their

peak in over-supplied market also. Correction again are

reported only on media and not on ground level.

The demand is keeping the Tier II cities afloat, the

infrastructure development in these cities have made

the residential development spread across the city

limits. On an average price is still affordable. Key

development developer are seeing demand of 3BHK

and luxury development but are only doing well if the

project size is limited to 100-150 units. The trend seems

to be favorable since there is lot of Investor demand

comes from smaller cities closer to these Tier-II & III

cities. Excellent time to buy anything between Rs. 3000-

3500 sqft with known developers.

Advice Price point entry is the key. Good time to sell. Time right to buy, look at 3-8 acre developments only

Commercial/IT

Still in the shadows of over-supply and cautious

expansion approach by corporate, this segment has gone

through correction. Rates per sqft have seen almost 30%

down-trend and will be stagnant for the coming 2-3

quarters. Surely, the segment is at the down-tip of the

cycle, and is the best opportunity for companies looking

for long term holding of real estate office space.

Commercial segment not that significant, but unlike

Tier-I the price differentiation is double favoring

commercial since most of them are in CBD areas.

Advice Excellent time to buy smaller office spaces at CBD areas Space not defined well, depends on independent needs.

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Asset Classes Tier-1* Tier-II**

Retail

The FDI allowance is given lot of impetus to this

sector, its been now almost 3 years since retail has

seen a major transformation on all its business

aspects and have been built to suit Indian way for

consumerism. Low cost, high reach, heavy variety,

less innovation, existence with competition,

maximizing bottom line than top-line approach have

been making the retailers smarter. Revenue share

model with a built in MG is how the deals are done

Retail is slow in these markets; unorganized markets

are still a hot choice. Most high-street locations are

expensive to own thus have a high lease rental and

have witnesses heavy churn. Investment would

always have capital protected due to dearth of

available space..

Land

Most interesting times, traded now more as

commodity, very fastly getting absorbed, locked.

Non-real estate sector see immense opportunity

since it can be used as tangible and most credible

pledge against business

Still available cheaper, plotted development is a hit

since the trend of standalone homes are prevalent.

Advice Hold Land, if Owned Hold Land, if Owned

1. Tier I* markets include Mumbai, Delhi & NCR, Bangalore, Pune, Chennai, Hyderabad and Kolkatta2. Tier II* markets includes all state capitals other than the Tier I markets 3. The IC note is proposed to be presented every quarter

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• Offering COMPREHENSIVE choice of investing across all asset classes• Offering EXTENSIVE choice of multiple products from different product providers under each asset class

Open Architecture – Widest array of products

Intensive Research

We closely track the historical performance across asset classes, sub-asset classes and product providers to identify, evaluate andrecommend investment products (KPW’s or third-party). We have our own proprietary methodology for evaluating products; forproduct providers, we also note the investment style and risk management philosophy. Our comprehensive analysis determinestruly exceptional performers to be added to your portfolio

When you become a Client of KPW, besides getting intelligent & practicable Investment Advice, you get the benefit of “The KPW 3-S Service Promise” :

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Group-wide, we have no Mutual Fund or Insurance products of our own unlike most of the financial services groups (banks orbroking houses), who are doing wealth management. Neither do we have exclusive tie-up with any single insurance company likeall banks do.

Honest, unbiased advise

A talented team of leaders with global and Indian experience, having a unique blend of backgrounds of wealth management,private equity, strategy consulting and building businesses powers Karvy Private Wealth and its operations.

Pedigreed Senior Management Team

18

The information and views presented here are prepared by Karvy Private Wealth or other Karvy Group companies. The information containedherein is based on our analysis and upon sources that we consider reliable. We, however, do not vouch for the accuracy or the completenessthereof. This material is for personal information and we are not responsible for any loss incurred based upon it.

The investments discussed or recommended here may not be suitable for all investors. Investors must make their own investment decisionsbased on their specific investment objectives and financial position and using such independent advice, as they believe necessary. While actingupon any information or analysis mentioned here, investors may please note that neither Karvy nor any person connected with any associatedcompanies of Karvy accepts any liability arising from the use of this information and views mentioned here.

The author, directors and other employees of Karvy and its affiliates may hold long or short positions in the above-mentioned companies fromtime to time. Every employee of Karvy and its associated companies are required to disclose their individual stock holdings and details of trades,if any, that they undertake. The team rendering corporate analysis and investment recommendations are restricted in purchasing/selling ofshares or other securities till such a time this recommendation has either been displayed or has been forwarded to clients of Karvy. Allemployees are further restricted to place orders only through Karvy Stock Broking Ltd.

The information given in this document on tax are for guidance only, and should not be construed as tax advice. Investors are advised to consulttheir respective tax advisers to understand the specific tax incidence applicable to them. We also expect significant changes in the tax laws oncethe new Direct Tax Code is in force – this could change the applicability and incidence of tax on investments

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19

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