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How far is too far?

Jan 3, 2004

The mood was that of utmost euphoria and optimism on the bourses this week, as history was created on the Indian stock markets. While the BSE-Sensex gained 5.7%, the NSE-Nifty closed with gains of 5.9%. Buying was witnessed across sectors with index heavyweights providing ample support, which helped the indices to scale newer highs. The gains this week were the biggest witnessed since the rally began in April 2003.

History was created on the bourses this week, as the Sensex closed for the first time over the 6,000 levels. It must be noted that in the year 2000, during the tech boom, the Sensex had only managed an intra-day high of 6,150, but had closed well below the 6,000 mark. But it was a different story this week. Good second quarter GDP growth numbers of 8.4% and expectations of good December quarter results augured well for the markets. If we look at the weeks trading, barring a small blip on Tuesday due to profit booking, markets closed in the positive.

Top 5 gainers over the week
COMPANY Price on
December 26 (Rs)
Price on
January 2 (Rs)
BSE-SENSEX 5,699 6,027 5.7% 6,034/2,904
S&P CNX NIFTY 1,837 1,946 5.9% 1,952/920
GAIL 226 285 26.1% 290/69
INDRAPRASTHA GAS 119 148 24.4% 0/0
DSQ SOFTWARE 17 21 22.8% 25/5
JINDAL STEEL 550 671 22.1% 1,102/302

Increased Foreign Institutional Investors (FIIs) inflows added to this euphoria as a net amount of around Rs 11 bn flowed into the Indian equity markets during the week. One major gainer during the week was Indraprastha Gas. Fundamentally speaking, the company could be a part of the imminent consolidation in the long term. However, it has to be ascertained as to how of expectations is already reflected in the stock price. With the markets moving up, as usual, momentum stocks like DSQ Software are in the thick of the action. We would advice retail investors to stay away from such volatile stocks.

Top 5 losers over the week
COMPANY Price on
December 26 (Rs)
Price on
January 2 (Rs)
NIRMA LTD. 500 464 -7.2% 520/220
LML LTD. 67 63 -7.0% 70/26
EIH ASSO. HOT. 29 27 -5.6% 32/7
HINDUJA TMT 377 358 -5.2% 403/145
APOLLO HOSPITALS 195 185 -5.1% 198/91

As the Indian markets are moving towards their new highs, the risks of investing in them at current levels are increasing as well. A broader view on a sectoral basis reveals that earnings expectations of FY05 are already reflected in current valuation levels (engineering, power, software and banking to name a few). Since expectations (both return on equities as well as earnings of corporate India) are rising each day, on the eventuality of earnings growth not meeting this expectations in the future, there could be a sharp correction in valuations. Investors, in this context, should take the risk-return perspective into consideration before investing in equities at the current levels.

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