Archive for March, 2010

HOW IMPORTANT IS INTEREST RATE?

Essentially, interest is nothing more than the cost someone pays for the use of someone else’s money. In India, an individual willing to purchase a home uses bank’s money (through a mortgage) and in return pays interest to the bank for the privilege or the credit card user borrows money for the short term in order to buy something right away. But the very question that comes to everyone’s mind is how to determine where the rates are heading & what impact will it have?

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So in order to find where the interest rates are heading all one needs to do is to look at the deposits & loans advances of the banks. If banks credit growth is more than its deposits then banks may raise the deposit rates or may increase the lending rates in order to match the asset & liability mismatch. When the Central Bank (RBI) feels that the credit growth has started picking up & is higher than its target levels, RBI tinkers with its policy rates gives signals to the commercial banks to review the interest rates be it on the deposit front or on the lending front.

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Effects of the rising interest rates On individuals

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The first indirect effect of an increased rate is that banks increase the rates that they charge their customers to borrow money. Individuals are affected through increases to credit card and mortgage interest rates, especially if they carry a floating interest rate. This has the effect of decreasing the amount of money consumers can spend. After all, people still have to pay their EMI’s, and when these installments become more expensive, households are left with less disposable income.

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On the Corporates financials

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Corporates too borrow money from banks to run and expand their operations. When the banks make borrowing more expensive, corporates may  not borrow at all or may not borrow at the same pace that they were doing when the rates were lower. Less business spending can slow down the growth of a company, resulting in decreases in profit.

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Even businesses are also indirectly affected as a result of the actions of the individual consumers as individuals are left with less disposable income which affects the company’s top & bottom lines (that is, revenue and profits). Apart from having an indirect affect businesses are affected in a more direct way as well.

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On GDP Growth

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The government essentially has two weapons in its arsenal to help guide the economy towards a path of stable growth without excessive inflation; monetary policy and fiscal policy. Fiscal policy comes from the government in the form of taxation and federal budgeting policies. While fiscal policy can be very effective in specific cases to spur growth in the economy, most market watchers look to monetary policy to do most of the heavy lifting in keeping the economy in a stable growth pattern. Monetary policy is defined as any action to limit or increase the amount of money that is circulating in the economy. That means the central bank (RBI) can make money easier or harder to come by, thereby encouraging spending to spur the economy and constricting access to capital when growth rates seem to be approaching unsustainable levels.

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Stock Price Effects

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Clearly, changes in the rates affect the behavior of consumers and business; hence the stock market is also affected. Remember that one method of valuing a company is to take the sum of all the expected future cash flows from that company discounted back to the present. To arrive at a stock’s price, take the sum of the future discounted cash flow and divide it by the number of shares available. This price fluctuates as a result of the different expectations that people have about the company at different times and are willing to buy or sell shares at different prices. If the company is seen as cutting back on its growth spending or is making less profit – either through higher debt expenses or less revenue from consumers then, the estimated amount of future cash flows will drop. All else being equal, this will lower the price of the company’s stock.

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Investment Effects

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With a lowered expectation in the growth and future cash flows of the company, investors will not get as much growth from stock price appreciation, making stock ownership less desirable. Furthermore, investing in stocks can be viewed as too risky as compared to other investments. When the central bank raises its rate, newly offered government securities, such T- bills and bonds, are often viewed as the safest investments and will usually experience a corresponding increase in interest rates. In other words, the “risk-free” rate of return goes up, making these investments more desirable.

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Conclusion

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We should keep in mind, however, that these factors and results are all interrelated. What we described above are very broad interactions, which can play out in innumerable ways. Interest rates are not the only determinant of stock prices and there are many considerations that go into stock prices and the general trend of the market – an increased interest rate is only one of them. Therefore, one can never say with confidence that an interest rate hike will have an overall negative effect on stock prices.

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Stay Tuned for More Updates :)

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GUAR…… “U” TURN AHEAD

Guar gum enjoys prominent position in the exports of minor forest products. India exports guar gum in various forms to all parts of the globe. More than 80 per cent of exports of minor forest products are accounted for by guar gum.

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The government has appointed Shellac and Forest Products Export Promotion Council (SHEFEXIL) as the canalising agency for export of guar gum to Europe. “Guar gum exports to European Union, originating in or consigned from India and intended for animal or human consumption have been allowed subject to endorsement by SHEFEXIL.

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Around 90% of the total Guar Gum production is exported to countries like China,US, Germany and France.

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Sowing and Harvesting Season….

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The crop is sown from June and extends up to July. It is harvested from October and the peak arrival time continues till the end of December.

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Guar complex mostly follows the seasonal pattern in its movement, but quite volatile during March- September. As given in the above chart, guar seed prices tend to remain low during January, June and September months. The price movement starts its bull run from February, the time of lean arrivals & reaches its peak in the month of July. Later on, during August the reports of sowing come into scenario which affects the prices. The arrival pattern during October & December further brings the prices down.

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The early south- west monsoon forecasts and progress of monsoon from June to September influence the price movement. Later on, arrival pattern and demand from stockiest affect the prices.

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The Road Ahead: Considering the supply side in the current crop season i.e. October 2009-September 2010, production is estimated to be lower at around 3-3.5 million bags compared with 8.5-9 million bags in 2008-09. Carryover stocks of last year for Guar seed stands at around 3-3.5 million bags. Thus, total supplies for 2009-10 stands at around 6 million bags, which is far below the total consumption of 7-7.5 million bags. Guar gum stock with the stockiest currently stands at around 150,000 tonnes. Guar futures have already discounted by almost 15-18% since the beginning of the year due to slowed down off-takes by millers. They were not buying Guar seed at high prices as they have huge stocks of Gum & also due to huge disparity in the price of seed and gum.

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However, after the futures finishing their correction phase, the current scenario signifies that the stockiest have started stocking Guar seed at the current low prices on expectations that the prices would rise further due to a drop in output. However, further price rally would depend on the overseas demand for Guar gum which is expected to pick up which may lead prices to breach the level of 5100 in medium term.

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Stay Tuned for More Updates :)

Weekly Update 29th March – 02nd April

The domestic markets had a mixed week; it started weak following RBI hiking the repo and reverse repo by 25 basis points each and growing concerns from the 16-nation Euro zone—first over conflicting signals from the currency bloc on resolving Greece’s debt problems and second over Fitch Ratings lowering Portugal’s sovereign credit outlook.

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But, concluded the week on green zone buoyed by continued liquidity inflow and earnings optimism; both the indices Sensex & Nifty, saw the highest closing levels in more than two years. FIIs bought stocks worth Rs 12125.81 crore this month till 25 March 2010.

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On the whole, over the last few months the confidence of global & domestic investors has resulted in an excellent run up in the domestic markets. Closer home, further rate hike together with hike in CRR is expected in order to anchor inflationary expectation in the next RBI meet which is scheduled on 20th April.

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Increasing capacity utilisation and rising commodity and energy prices are exerting pressure on overall inflation. Taken together, these factors heighten the risks of supply-side pressures translating into a generalised inflationary process. Food inflation in India dipped marginally falling to a five-month low.

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Inflation for the Food Articles group dropped to 16.22% in the week ended March 16, as compared to 16.3% in the previous week. While it is largely anticipated that this time around the increase in interest rates would not be a spoil sport for the markets as the signs of recovery in the growth are promising. Data on Industrial production & more specifically the acceleration in the growth of the capital goods sector points to the revival of investment activity.

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Expectations of the good corporate results as indicated by buoyant advance tax figures & the forecast for the southwest monsoon for 2010 is likely to play a catalyst role for the next direction of the market. On the global economic front; in a bid to restore confidence in their common currency, all 16 euro zone leaders have reportedly agreed to provide joint financial assistance to the debt-laden Greece in tandem with the IMF.

In the US front, Unemployment increased in 27 states in February and dropped in seven, a sign the labor market needs to pick up across more regions to spur consumer spending and sustain the economic recovery.

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Trend of world stock markets is up though China is showing some weakness along with some weakness in commodities. US dollar index rise above 81 has brought uncertainty in world markets and the Euro zone problem in Greece is giving uncertainty to Euro. One should trade carefully in such markets. Nifty has support between 5150-5050 and Sensex between 17200-16800 levels..

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Commodities are moving on their own fundamentals. Recent blow up in dollar index could not give much impact on the commodity prices as it was expected earlier in market. However, with the recent rise in dollar index, upside in commodities seems to be limited. Commodities are now expected to trade in a range after a volatile week. Expected improvement in employment data from US is likely to cap the downside. Agro commodities can perform mix. Spices, especially turmeric and pepper may trade in a range after an upside rally. Same trend may go with chana futures as well whereas guar may firm further.

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Stay Tuned for More Updates :)

Union Cabinet Approved the Implementation of Guidelines on Corporate Governance

The Union Cabinet approved the implementation of guidelines on corporate governance for Central Public Sector Enterprises (CPSEs) from voluntary to mandatory basis.

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The official statement said, “The guidelines have now been made mandatory and are applicable to all CPSEs. They cover issues like composition of Board of CPSEs, audit committee, subsidiary companies, disclosures, Code of conduct and ethics, risk management and reporting,”

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PSUs will now have to compulsorily follow corporate governance norms as per a cabinet decision.

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An official close to the matter said, “The guidelines have now been made mandatory and are applicable to all central public sector enterprises (CPSEs). The guidelines cover issues like composition of board of CPSEs, audit committee, subsidiary companies, disclosures, code of conduct and ethics,”.

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These guidelines follow from the first draft of June 2007 which were modified as per the feedback received during the experimental phase.

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It includes additional provisions relating to monitoring the compliance of guidelines by the CPSEs and formation of remuneration committee, reports IANS.

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The statement says, “There was a continued need to adopt and apply the good corporate governance practices in respect of CPSEs where huge public funds are invested in the light of recent events in the corporate world,”

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According to statements issued, “NKN is expected to encourage a larger section of research and educational institutions to create intellectual property. Health, education, grid computing, agriculture and e-Governance are the main applications identified for implementation and delivery on NKN,”

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In the initial phase, a core backbone consisting of 15 PoPs have been established with 2.5 Gbps capacity. Around 40 institutions of higher learning and advanced research have been connected to the network and six virtual classrooms set up.

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The statement added that the guidelines have been modified and improved with the experience gained during the experimental phase and includes additional provisions relating to monitoring the compliance of guidelines by the CPSEs and formation of a Remuneration Committee.

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Further, it said that suitable modifications in the guidelines would be carried out to bring them in line with prevailing laws, regulations and acts, adding that it will facilitate protection of interest of shareholders and other stakeholders, and also ensure transparency in the operations of CPSEs.

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Other details:

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” The number of functional directors should not exceed half of the board”s strength and at least a third should be independent directors.

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” The audit committee of these companies should have a minimum of three directors as members and an independent director should head the committee.

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Additional provisions relating to the compliance of guidelines by government-run firms and the formation of a remuneration committee.

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” Remuneration of directors should be disclosed in the company”s annual report.

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Stay Tuned for More Updates :)

LEAD “The Element of Earth’s crust”

Lead is a heavy, malleable, bluish grey metal. It is one of the metals most resistant to common corrosion problems. Lead has some important properties, in particular malleability (i.e. it can be hammered into shape), ease of production, ease of melting and joining, and good corrosion resistance.

Applications


There are many different uses of Lead. It may be used as a pure metal, alloyed with other metals, or as chemical compounds. The main end-uses for lead are as Batteries (80%) mainly cars, also industrial uses, Sheet (6%)- roofing, Lead compounds – stabilisers for plastics, Pigments – manufacturing of paints, Lead alloys – specialist alloys, Cable sheathing – power cables, Miscellaneous – includes radiation shielding, balancing weights.

Supply

The world’s top refined lead producing countries in 2009 were as follows:

1. China – 3.708 million tonnes

2. United States – 1.240 million tonnes

3. Germany – 388,000 tonnes

4. United Kingdom – 312,000 tonnes

5. South Korea – 290,000 tonnes

World production of refined lead totalled 8.815 million tonnes in 2009.

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Capacity Production Figures in tonnes (1000s)

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Demand Global lead demand this year is estimated at about 8.7 million tonnes, compared with 8.2 million tonnes in 2009. About 80 percent is used by battery producers. Demand for lead is less cyclical than that for most other base metals as about 40 to 50 percent is for replacement batteries, which makes it very resilient.

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The top five lead consuming nations in 2009 were as follows:

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China – 3.860 million tonnes, United States – 1.426 million tonnes, South Korea – 320,000 tonnes, Germany – 314,000 tonnes, Spain – 233,000 tonnes. In India about 75 per cent of total demand is from the domestic battery industries.

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Tug Of War………..stocks V/s Price

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Benchmark lead on the London Metal Exchange at around $2,221 a tonne is up more than 160 percent since hitting $850 a tonne in December 2008 when markets started to fear economic recession could turn into a 1930s style depression.

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Since the beginning of the year 2009, lead prices as well as lead stocks are both increasing. The reason could be anything from large banks which are manipulating the market to gain profit on a short term to a big country which want to lower their USD currency reserves by stepping into metals.

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In the year 2010, the graph of the lead price compared with the world stock of lead seems to look quite healthy. Lead stocks are getting up and as a reaction the lead price is going down. The basics of supply and demand seem to work.

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News from Industry

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·Xstrata’s sizeable Brunswick mine in eastern Canada is due to become depleted in 2011. It produced around 66,500 tonnes of lead in concentrate last year.

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·Ivernia expects to produce about 60,000 tonnes of contained lead in concentrates in 2010 and expects that to ramp up to 85,000 tonnes a year from 2011 onwards.

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DID YOU KNOW….???

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Lead makes up only about 0.0013% of the earth’s crust.

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COMMODITY WEEKLY COMMENTARY

Most of the commodities closed in positive territory when Federal Reserve repeated its pledge to keep monetary conditions loose for the longer term. Impact was seen on all metals and energy; despite the rise in dollar index. Base metals complex was no exception, copper traded in upside territory.

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Power distribution problems after a devastating earthquake in Chile also supported the price. Terrific short covering witnessed in nickel on the news that BHP Billiton would take up to two weeks to restart nickel production at its Kwinana refinery in Australia apart from other factors. Both, lead and zinc closed down.

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Event risk made energy complex volatile. OPEC for the fifth time since 2008 decided to maintain its production limits unchanged. Furthermore, crude stocks rose 1 million barrels last week, while distillate inventories fell 1.5 million barrels and gasoline stocks dropped 1.7 million barrels, according to EIA.

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Crude traded in upside territory but could not breach $83 per barrel. Worries about Greece’s debt problems capped the upside. Surplus in inventory gave a jolt to natural gas prices and its futures dropped to the lowest price in more than five months. Vague movements in dollar index and euro resulted in see saw movements in bullions. However, on Friday many commodities including base metals and energy complex erased their previous gains on rise in dollar index.

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Agri commodities on domestic front traded with sideways to bullish bias in the week gone by. Guar pack remained in range due to subdued trading activity in spot as well as future market. In oil seed section; soya bean prices traded in range while mustard seed futures gained smartly on NCDEX.

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Weak trend in overseas market and bearish domestic fundamental factors such as weak export demand for soya meal and ample inventories of edible oils capped the upside in soya bean prices. The sharp decline in Malaysian palm oil futures had also pressurized the prices. However, mustard futures gained on the back of strong fundamentals. Lower production projection for the current year had a positive impact on the market.

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In spices pack; turmeric and pepper shot up like a bullet last week while chilli and jeera futures remained range bound. Pepper futures traded on a positive note due to continued fresh buying on the exchange supported by the factor of tight supply situation amid gaining demand. Despite the expectations of increase in production, arrivals are on the lower side. This is leading to tight supply in the physical markets. Turmeric futures gained consecutively for the sixth week and hit contract highs in the week gone by on firm spot cues and low stocks, but conceded the gains by the end of the week on profitbooking.

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Rising arrivals and ample carry forward stocks were seen weighing on chana futures as prices settled in red zone.

NEWS ROUND UP 22nd – 26th March

Hello Friends here we come up with the News Round Up from various categories.

Economy

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·The Reserve Bank of India (RBI) unexpectedly raised interest rates from record-low levels for the first time since it began cutting in 2008, citing intensifying inflationary pressures and a steady economic recovery. The central bank raised the repo rate, the rate at which it lends to banks to 5.00 percent from 4.75 percent and reverse repo rate, the rate which it absorbs funds from the system to 3.50 percent from 3.25 percent with immediate effect.

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·India’s Wholesale price inflation accelerated to 9.89 percent in February from a year ago, above the Reserve Bank of India’s end March projection of 8.5 percent and higher than the 8.56 percent level recorded in January this year.

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·India’s food price index rose 16.30 percent in the 12 months to March 6, while the fuel index was up 12.68 percent. The rise in the food price index was lower than an annual rise of 17.81 percent in the previous week.

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Pharmaceutical

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·Elder Pharmaceuticals had increased its stake in Bulgarian subsidiary Elder Biomeda AD to 61 per cent from the present 51 per cent, as part of its strategy to strengthen its presence in the European market. The Rs 600- crore turnover Elder Pharma did not disclose the deal size. In April 2008, Elder had formed Biomeda AD in Bulgaria, to acquire three Bulgarian healthcare companies belonging to the local Biomeda group.

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Metal

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·Welspun Gujarat Stahl Rohren unit will acquire a 75 per cent stake in MSK Projects, marking its foray into infrastructure. Welspun will invest a total of Rs 400 crore, of which Rs 200 crore will be infused directly into MSK.

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Realty/ Construction.

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·Punj Lloyd has bagged a project worth $40 million (nearly Rs 181 crore) from Abu Dhabi Gas Industries (GASCO) for infrastructure related works.

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The company has secured a letter of award for engineering, procurement and construction works in UAE from GASCO.

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·Subhash Projects & Marketing has bagged two orders worth Rs 475.34 crore for infrastructure related works. The company, along with Kirloskar Brothers Ltd, has bagged a contract worth Rs 439.35 crore from Bangalore Water supply Sewerage Board for civil and electromechanical works.

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·· Hindustan Construction Company (HCC) acquired a controlling stake in Swiss real estate firm Karl Steiner AG in an all-cash deal for around Rs 150 crore (Swiss Francs 35 million), a move that will pave way for the company to enter the European and Gulf markets.

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·PT Madhucon Indonesia, a subsidiary of the Hyderabad-based infrastructure company Madhucon Projects Ltd, has been granted a new coal mining business permit for exploration of 30,970 hectares at Mauraduwa in south Sumatra, Indonesia.

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Oil & Gas

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·GAIL India plans to transit 21 per cent more natural gas through its pipelines at 114.8 million cubic meters per day in 2010-11 fiscal. The company in a press statement that it has set a target of transmitting 114.8 mmscmd of natural gas from domestic fields and imported LNG in 2010-11 fiscal as opposed to moving 94.8 mmscmd during current fiscal.

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Capital Goods

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·McNally Bharat Engineering Company has bagged an order worth Rs 173.2 crore for works at Mahanadi Coalfields in Sambalpur, Orissa. This is the third order that the company has bagged within a week, the first two being from NPCC and SAIL.

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·Larsen & Toubro (L&T) has bagged a project worth Rs 2,035 crore from ONGC Mangalore Petrochemicals Ltd to set up an aromatics complex at Mangalore special economic zone.

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Automobile.

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·Mahindra & Mahindra has joined the long list of corporate houses looking to obtain a banking licence after the finance minister’s budget speech revealed that banking regulator RBI was planning to allow more players in the sector. A top executive of the $6.3-billion group that it was planning to seek a banking licence for its non-banking finance company Mahindra & Mahindra Financial Services (MMFSL).