Bulls make it four in a row! - Views on News from Equitymaster

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Bulls make it four in a row!

Jan 20, 2007

Driven by a largely buoyant results season so far, bulls continued to hold sway over the proceedings and for the fourth week in a row, enabled both the benchmark indices to close in the positive with gains of nearly 1% each.Taking cues from an extremely strong ending last Friday, markets started this week's proceedings on an equally buoyant note, but the gains never really built up and although the indices did end in the positive, it was a case of too much promised but little delivered. The next four days however was witness to a strong tussle between bulls and bears and while the latter came out on top on two occasions, strong gains on Monday and Thursday made sure that both the indices end the week comfortably in the positive.

As far as the institutional activity on the bourses was concerned, Foreign Institutional Investors (FIIs) were net buyers this week to the tune of nearly Rs 3.2 bn. Domestic mutual funds also turned out to be net buyers to the tune of Rs 9.6 bn.

(Rs m)MFs FIIs Total
12-Jan6,371 1,592 7,963
15-Jan1,035 2,070 3,105
16-Jan718 (2,389)(1,671)
17-Jan896 1,013 1,909
18-Jan590 912 1,502
Total9,610 3,198 12,808

As far as sectoral indices are concerned, this week it were the 'BSE Small Cap' and 'BSE Mid Cap' indices that hogged the limelight and emerged as the highest gainers with gains of 3% and 2% respectively. It should be worth noting that these indices did not participate in the current rally as strongly as before and now, since most of the large caps are looking adequately valued, investors are turning their intention towards companies in these indices. Among other indices, 'BSE Oil and Gas' index, last week's top performer, continued to find place among the top three and ended third this week with gains of close to 2%. The performance was largely driven by Reliance, the private sector giant that accounts for close to 60% of the index and the one that gained 3% for the week. Among the losers, the metal index continued to languish as it closed the week with near 1% erosion in value.

IndexAs on January 12As on January 19% Change
BSE SMALCAP7,372 7,560 2.6%
BSE MIDCAP5,975 6,076 1.7%
BSE OIL AND GAS6,559 6,658 1.5%
BSE BANKEX7,383 7,485 1.4%
BSE FMCG1,927 1,950 1.2%
BSE HEALTHCARE3,872 3,885 0.3%
BSE PSU6,215 6,220 0.1%
BSE AUTO5,638 5,620 -0.3%
BSE METAL9,030 8,973 -0.6%
BSE IT5,348 5,310 -0.7%

Having looked at the institutional activity and the movement in key indices in the last week, let us consider some sector/stock specific developments:

Reliance, the private sector refining behemoth, was among the top five gainers on the Sensex during the week as it edged higher by 3%. The optimism was a consequence of a strong, way –above- expectations performance put in by the company during 3QFY07. Riding on the back of firm petrochemical prices and record high GRMs, the topline and bottomline grew by 46% and 58% YoY respectively during 3QFY07 and the same stood at 40% and 23% YoY for the nine months ended Dec 2007. GRMs, a barometer of the refining performance, jumped to its highest ever levels of US$ 11.3 per barrel compared to US$ 9.1 per barrel during the same period last year. However, it should also be borne in mind that the numbers for the quarter were not strictly comparable owing to a maintenance shut down of its Jamnagar refinery during 3QFY06. Among its peers, ONGC edged lower by 3% during the week.

Top gainers during the week (BSE A)
CompanyPrice on
Jan 12 (Rs)
Price on
Jan 19 (Rs)
%
Change
52-Week
H/L (Rs)
BSE Sensex14,057 14,183 0.9% 14,326 / 8,799
S&P CNX NIFTY 4,052 4,090 0.9% 4,140 / 2,596
CMC LTD 698 1,097 57.2% 1320 / 335
ISPAT INDS13 15 19.4% 25 / 10
ROLTA INDIA 272 310 13.7% 330 / 124
IDBI86 98 13.5% 101 / 49
ING VYSYA BANK 152 171 12.6% 190 / 82

Ranbaxy, India's largest domestic pharma company was another major company to announce its results during the week. It announced strong results for the fourth quarter and year ended December 2006. Strong performances in the US, backed by the 180-day exclusivity received for 'Simvastatin', and BRICS markets backed by contribution from Terapia have contributed to the topline growth of 16% for the year. That said, the key markets of the UK, France and Germany reported decline in revenues. Operating margins improved sharply due to lower SG&A costs and R&D expenditure (as percentage of sales). All these factors put together have contributed to the superlative bottomline growth of 167% YoY and 97% YoY during 4QFY06 and CY06 respectively. The stock however, ended 2% lower for the week along with its peer Cipla that lost 1%. Dr Reddy's however, ended marginally higher.

Top losers during the week (BSE A)
CompanyPrice on
Jan 12 (Rs)
Price on
Jan 19 (Rs)
%
Change
52-Week
H/L (Rs)
NESTLE 1,245 1,123 -9.8%1,387 / 800
J&K BANK 675 620 -8.1%700 / 306
IGATE SOLUTIONS397368-7.5%432 /145
STERLING BIOTECH 200 188 -6.0%208 / 87
MOSER-BAER INDIA333314-5.7%345 / 162

Among auto stocks, Bajaj Auto, India's second largest two-wheeler manufacturer announced its 3QFY07 results during the week. The company continued to witness pressure at operating level, thus once again nullifying the strong volume growth it had witnessed during the quarter. On a robust topline growth of 28% YoY, the net profit of the company grew by 24% YoY, due largely to a 370 basis points contraction in operating margins. Infact, had it not been for the 51% jump in other income, net profit growth would have been an extremely muted 4%. The performance on a nine month basis was also affected by input cost pressure, with the bottomline growing at a considerably slower pace of 20% YoY on the back of a strong 31% YoY jump in the topline. Quite expectedly, investors were none too pleased with the performance and consequently, the stock ended the week 1% lower. Arch rival Hero Honda also closed the week with a 2% decline.

Results will continue to pour heavily next week as well and barring a few surprises, we don't really expect the companies to post disappointing set of numbers. While we are not experts at gauging how the markets would react to this phenomenon, as this is too short term for us, we would like to reiterate that all the long-term fundamentals seem to be in place for an investor to achieve sizeable returns from equities from a long-term perspective without taking undue risks. The key is to be disciplined and stay invested in fundamentally strong companies with a proven track record.

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