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Bulls on the backfoot - Views on News from Equitymaster
 
 
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  • Jan 14, 2006

    Bulls on the backfoot

    Bears remained in total control of the Indian stock market proceedings this week. The holiday-shortened week (on account of Id) saw the benchmark indices lose ground on the back of profit booking across most sectors, triggered by a fall in some key index heavyweights. Thus, at the end of the bear hammering, the Sensex had lost about 3% while the Nifty was lower by a little over 2%. However, similar to last week, the mid-cap and small-cap segments of the markets continued to witness heightened activity, with the BSE Mid Cap (up 0.4%) and the BSE Small Cap (1.5%) ending the week in the positive.

    Riding strong on the back of the gains witnessed last week, the Indian stock markets opened on a firm footing, with the benchmark indices creating new lifetime highs in early trades. However, while it seemed that the bull party would continue unabated, this happiness amongst investors turned out to be only short-lived, as the bears played spoilsport from noon onwards on Monday itself.

    From hereon, it was a different ballgame altogether. The tables turned on the bulls as the bears went into profit booking mode. This saw the Indian benchmark indices nose-dive into the negative territory. This trend persisted in the remaining trading sessions of the week as well, as every rise was met with a fresh bout of selling pressure. However, there was no specific development that could have led to this correction and it seemed largely in the nature of profit booking by institutions, with the Foreign Institutional Investors (FIIs) being net sellers to the tune of Rs 6.3 bn while domestic mutual funds sold equities worth Rs 8.1 bn. It must be noted that apart from the fact that lower-than-expected 3QFY06 results by market leaders Infosys and Reliance played their part in spoiling the mood on the bourses, the fact that the Sensex had gained about 23% in the last 10 weeks and valuations were at a hefty 19 times trailing 12-month earnings also resulted in market participants lightening their portfolios.

    However, one segment of the market remained in the reckoning throughout the week. This was the IPOs segment of the market, with some new listings during the week remaining absolutely unscathed (see table below) by the bearish sentiments that prevailed during the week. However, while the new listings continue to attract high investor interest, we would advise utmost caution to investors before investing in these and thoroughly check the valuations, fundamentals and management quality of these stocks.

    Some new listings during the week
    Company Allotment Price Price on Jan 13 (Rs) % Change
    Educomp Solutions 125 285 128.3%
    Bartronics 75 112 49.9%
    Celebrity Fashions 180 224 24.3%

    Now let us consider some sector/stock specific developments this week:

    • While most of the sectors/stocks witnessed profit booking this week, there were some that managed to stand out, Ranbaxy being amongst them. The stock was the biggest gainer amongst the Nifty stocks, up 4%. While the strength in the stock was more in the nature of bargain-hunting at lower levels, on the news front, it has entered into an in-licensing agreement with Ferring International, a Switzerland-based speciality biopharmaceutical company, for the latter's urology drug, 'Desmopressin'. As per the agreement, Ranbaxy will market the product in the Indian markets under the brand name 'Adiuretin'. This agreement is beneficial to Ranbaxy, as it is in line with its strategy to introduce differentiated products in the domestic markets. Other pharma stocks
      Company Price on
      Jan 6 (Rs)
      Price on
      Jan 13 (Rs)
      %
      Change
      52-Week
      H/L (Rs)
      BSE-SENSEX 9,640 9,374 -2.8% 9,690 / 6,069
      S&P CNX NIFTY 2,914 2,851 -2.2% 2,927 / 1,894
      RANBAXY 370 385 4.2% 568 / 339
      DABUR 214 222 3.5% 226 / 81
      GUJ. AMBUJA 87 89 1.8% 91 / 49
      M&M 512 520 1.5% 529 / 216
      MTNL 147 149 1.4% 157 / 108

    • M&M, the largest tractor and utility vehicle player in the country, is planning to set up a completely knocked down (CKD) assembly unit in Russia and Malaysia. The entry will be through a JV with local partners, wherein M&M will hold a majority stake. Though details are not available, it appears that company will be primarily exporting 'Scorpio' and 'Bolero' to these countries. The move is a positive for M&M, as this will not only help the company diversify its geographical reach but also enable it to improve its average realisations and hence its margins. The stock ended the week with 1.5% gains. Other auto stocks

    • Foreign tourist arrivals in the country for 2005 touched 3.9 m. This is 13.2% higher as compared to last year. The ministry of tourism has targeted a figure of 4.4 m visitors in 2006. With the demand far exceeding the supply of rooms and no additional rooms being planned in the next couple of years, hotel room rates are bound to remain firm with an upward bias, which augurs well for all the players in the sector. On the bourses this week, while Indian Hotels gained 4%, Taj GVK was up 3%.

      Company Price on
      Jan 6 (Rs)
      Price on
      Jan 13 (Rs)
      %
      Change
      52-Week
      H/L (Rs)
      HDFC 1,268 1,181 -6.8% 1,310 / 677
      INFOSYS 3,053 2,845 -6.8% 3,080 / 1,876
      VSNL 396 376 -5.2% 445 / 161
      HDFC BANK 769 730 -5.1% 775 / 448
      PNB 489 466 -4.7% 520 / 338

    • HDFC, the largest housing finance company (HFC) in the country, has decided to review its lending rates due to pressure on the cost of funds. The company is expected to increase its rates on the home loan portfolio in 4QFY06. HDFC has always targeted a fixed spread between its cost of funds and loans. Last year, when banks were flush with liquidity, most were willing to extend bulk loans to HDFC because of its high credit rating. However, this year, given the tightening of the market and the exposure limits reached by other banks, HDFC will have to diversify its borrowing. The move would help the HFC protect its margins. However, the stock topped the losersí list this week, down almost 7%. Other finance stocks

    Going forward, investors would continue to feel the heat, as the markets could become more volatile as more of Corporate India reveals its December quarter performance. While we believe that India Incís financial performance scorecard would decide the market movements in the near-term, we would advise investors to take a long-term approach while investing. While investment in equities was never risk-free, this is compensated for by the higher returns. The risks can surely be mitigated to a large extent by following a disciplined, staggered and fundamental investment approach, which is an optimum strategy, especially for a retail investor, for whom preservation of capital is as important as earning decent returns on the same. Happy and safe investing!

     

     

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