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When liquidity strikes! - Views on News from Equitymaster
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  • Jan 28, 2006

    When liquidity strikes!

    The Indian stock markets continued their breath-taking and gravity-defying run in this holiday-shortened week also, with the BSE-Sensex and the NSE-Nifty gaining 4% and 3% respectively. The action, however, was largely restricted to large-caps, as was evident from the relatively tepid gains in the mid-cap (up 1.5%) and small-cap (up 1.1%) indices. Continuation of good numbers from India Inc., the Reserve Bank of India (RBI) raising its GDP growth estimates for the country from 7.5% to 8%, positive indications by the government in terms of FDI, recovery in global markets and smooth rollover of January derivatives series all collectively aided sentiments on the bourses.

    Despite the firm end to last week's trading, the Indian stock markets began the week on a rather subdued note. This followed weak global cues, as stockmarkets across the globe were subdued on the back of concerns pertaining to rising crude oil prices. The indices remained largely rangebound throughout Monday's trading session, however, performing relatively much better than their Asian peers. Tuesday and Wednesday, on the other hand, were different ballgames altogether. With oil prices showing signs of cooling off and Asian markets having bounced back smartly, the Indian bulls too went on a buying spree, in the process, pushing the markets higher and into a new orbit. Wednesday saw the indices register new lifetime highs as the Sensex cruised past the 9,700-mark with much ease. This was followed by intensified lapping up of stocks on Thursday, as the indices clocked new lifetime highs once again, with the Sensex nudging the 9,900-mark.

    However, amidst all this euphoria and action on the bourses, domestic mutual funds (MFs) preferred to remain spectators and watched from the sidelines. As per the data available for three trading sessions (Friday's data will be available only on Monday), domestic MFs were net sellers to the tune of Rs 3.4 bn, thus, taking their total net sales tally to over Rs 34 bn. It must be noted that while MFs have been net sellers in 8 of the last 9 weeks, Foreign Institutional Investors (FIIs) have bought equities worth Rs 129 bn, with the Sensex having gained almost 1,000 points in this period. FII inflows have remained positive in all but 1 of the previous 9 trading sessions. This week also, FIIs bought equities worth Rs 5.4 bn.

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

    • The quarterly review of the monetary policy was announced during the week. While on the one hand, the RBI retained the outlook on inflation and credit growth, on the other hand, it also highlighted the risks that had emerged - credit quality concerns, rising asset prices (especially housing), high and volatile international crude prices, the widening trade deficit and the upturn in the international interest rate cycle. Consistent with this stance, the RBI once again raised the reverse repo and repo rates by a quarter percentage point each. While banks have already taken the hit of the higher cost of funds on their margins, the tightening of liquidity will necessitate passing on the rate hike to consumers. While this will on one hand, ease pressures on the sector's margins, on the other, it will also dissuade 'generous' disbursement of credit. Banking stocks this week

      Top gainers over the week (NSE-50)
      Company Price on
      Jan 20 (Rs)
      Price on
      Jan 27 (Rs)
      H/L (Rs)
      BSE-SENSEX 9,521 9,871 3.7% 9,884 / 6,118
      S&P CNX NIFTY 2,901 2,983 2.8% 2,990 / 1,896
      L&T 1,869 2,136 14.3% 2,156 / 890
      ABB 2,252 2,544 13.0% 2,672 / 925
      SAIL 53 58 9.3% 70 / 47
      TATA STEEL 362 395 9.2% 456 / 329
      BHEL 1,581 1,716 8.5% 1,726 / 630

    • Engineering stocks shot onto the investors' radar this week, with hectic buying witnessed in the sector. ABB was the biggest gainer amongst the Nifty stocks. The strength in ABB was seemingly on the back of the good set of numbers for 4QCY05 and CY05 announced by the company. Continuation of strong growth in the company's power technologies and automation technologies divisions aided the topline performance, which grew by more than 30% YoY during the period under consideration. Also, cost savings resulted in an expansion in operating margins, as is evident by the 50% YoY growth in operating profits for CY05. Other engineering stocks

    • Barings Private Equity Partners, which holds around 35% stake in MphasiS BFL, is reportedly in negations with EDS, a US-based company, to sell its stake. The move will be beneficial for MphasiS (up 4%), as this could result in higher order flows from the US multinational. However, there is no clarification from the management of MphasiS. It should also be noted that earlier, Barings had tried to divest its stake in MphasiS, but was not successful in getting through the deal. Hence, investors should tread with caution. Other software stocks

      Top losers over the week (NSE-50)
      Company Price on
      Jan 20 (Rs)
      Price on
      Jan 27 (Rs)
      H/L (Rs)
      JET AIRWAYS 1,126 1,009 -10.4% 1,379 / 973
      ORIENTAL BANK 259 250 -3.5% 382 / 230
      HPCL 317 309 -2.5% 380 / 282
      VSNL 382 373 -2.4% 445 / 161
      BPCL 439 431 -2.0% 471 / 339

    • Oil retailing stocks were out of favour this week on the back of rising crude oil prices. International crude oil prices had recently nudged the US$ 70 per barrel mark, thus, making investors apprehensive about the impact of this on domestic oil retailing companies like HPCL and BPCL. It must be noted that rising crude oil prices leads to contraction in margins of oil retailing companies, as they cannot pass on the increased costs to consumers owing to political compulsions, which consequently affects their profitability. Both the above stocks lost ground this week. Other energy stocks

    • Reliance Industries (RIL) announced its plans to raise Rs 60 bn for its refinery project through an IPO. A new subsidiary, Reliance Petroleum Ltd. (RPL), will implement the new refinery and petrochemical projects at Jamnagar at an estimated cost of Rs 270 bn. It will be a 27 MT export-oriented refinery and 1 MT pa polypropylene plant. The project would be funded by a debt of Rs 160 bn and equity of Rs 110 bn. The commercial production would start by the second half of FY09. RIL has also announced an investment of Rs 33 bn in retail business. The stock, however, did not participate in the rally this week and was down 1%. As far as the other Ambani group stocks were concerned, while Reliance Capital ended the week almost flat, Reliance Energy gained about 2% and Reliance Infrastructure was up 27%.

    With the Sensex trading at 18.7 times its trailing 12-month earnings and over 16 times one-year forward earnings, valuations continue to remain stretched. Going forward, we believe, with little value left on the table for investors across sectors/stocks, it is advisable to just sit back and introspect about the sustainability of this liquidity-driven euphoria. It would be a wise move now to think about what could go wrong that could lead to investors, especially FIIs, pulling out their investments from Indian equities. Our concern should not be construed as if we are bearish on the markets, since we continue to believe that Indian equities is one place to remain invested in for the next 3 to 5 years. However, we do believe that investors must not falter from their investing principles just because stocks around them are flying.

    In fact, at this point of time, investors must remember the famous quote by the legendary billionaire investor, Warren Buffett, "only buy something that you'd be perfectly happy to hold if the market shut down for 10 years". Happy and safe investing!



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