1st September, 2004

PAGE 2

1st September, 2004.

Stock Market ReviewThe stockmarket is currently making a strong consolidation at the Sensex 5000 level, and it seems that a gradual rise to about 5500 could well happen. The uncertainties which overhung the markets a month ago have (by and large) been dissipated. The monsoon net result is positive, oil prices (though high) have retracted from dizzy levels, and even with our fractious and noisy national politics, Manmohan Singh seems set to continue at least for the medium term. This means that P. Chidambaram shall present the budget next February, and a build-up for that shall start within the next two months. Corporate results for the second quarter 2004-05 are likely to reinforce a positive sentiment. The success of the TCS public offer has helped to broaden as well deepen the market. Foreign investors continue benign towards India, and barring some terrible disaster (terrorism? communal riots?), there could be a build up to a broad-based secular rally.Set against this background, we are making some comments on specific scrip:

Defensive, index-related funds or scrip: Morgan Stanley, still at a 25-30% discount to NAV, is one such; and Tata Investment Corporation with its price at a much higher discount of at least 50%, and with an expected 4%-plus yield on future dividend payout, is another possibility.Banks and Housing Finance: Banks, especially the nationalized ones (the innumerable ugly sisters) are unlikely to participate in the celebrations. Exceptions could be HDFC Bank and State Bank --- especially if the latter consolidates through merger with its subsidiaries, or other such exogenous factors. In housing finance, HDFC may still defy gravity. It has a small subsidiary company, Gruh Finance, priced at Rs. 28-30 (face value Rs. 10), which may be all right. IDBI slated to merge with IDBI Bank may soon see more and more of its non-performing assets start performing, and hatchet-man Damodaran of UTI may notch up a decisive double success. IDBI should cross Rs. 90.

Metals: Tisco, Hindalco and Nalco should do well. Steel Authority is (of course) the ugly sister.

Auto and auto ancillary sector has had a dream run early this year, but after completing the process of correction the last few months from peak prices, companies like Telco, Mico, Hero Honda, MRF, Apollo Tyres (now with an equity holding by Michelin), Exide, Bharat Forge and Sundaram Fasteners still have potential upside. Automotive Stampings (ASAL), in which Tata holding is 80%, should move up from the current levels of Rs. 62.Cement: The shakeout through mergers and acquisitions has gone quite a bit of way, and with prices firming up, Ultratech Cemco, Grasim, Gujarat Ambuja, ACC and Madras Cements should do quite well.Fast moving consumer goods (FMCG), neglected for a long while, is now seeing some activity after the good monsoon. Hindustan Lever, after its spectacular fall, is one of the best long-term buys --- all it requires is patience, holding power, and ability by the investor to average downwards in the event of further significant fall. Nestle, Marico, Dabur and Colgate should slowly move up. Dependant companies should also do well, and Paper Products (a subsidiary of Van Leer) can be recommended..Petrochemicals, Refineries: With the contrarians logic, this attention should certainly be focused on this sector with cautious buying across the board of ONGC, Reliance, MRPL, and the refinery biggies at every fall.Software: TCS, TCS, and more TCS and perhaps some Wipro and Infosys it is unlikely anyone will go much wrong with this strategy.Hotels: Using the assets criterion, EIH is greatly undervalued. Indian Hotels may be bought at every reaction.Tea Plantations sector is an unlikely entrant to the list, but the industry (with pipeline stocks having dried up, and significant improvement of auction prices) should do very well in 2004-05. Obvious choices: Tata Tea, George Williamson, and Goodricke.Power and Power Equipment, i.e., Tata Power, Reliance Energy, BHEL, ABB and Siemens --- all it requires is holding capability and patience.Miscellaneous: Apollo Hospitals looks a promising runner in the healthcare sector; Asian Paints or ICI (i.e., paints) can be bought after the good monsoon. In the paper sector, BILT still has some promise. ITC with its combination of FMCG, paper, and hotels, should do significantly well; and the target should be Rs. 1350-plus. Welspun Gujarat, which makes high-tech oil and gas pipelines with German technical collaboration, also has an impressive export order book, and current operations are extremely profitable.

Pharmaceuticals, especially the Indian pharma sector, could be good defensive investments. Prices have fallen significantly from the peaks, and contrarian logic indicates that Ranbaxy, Dr. Reddys, Cipla, and Wockhardt should all be good buys.