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Down...but not out! - Views on News from Equitymaster
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  • Jan 31, 2004

    Down...but not out!

    It was yet another week of profit booking on the bourses, as both the indices continued to move into reverse gear and lost about 2% each. With corporate India having continued to deliver good December quarter results, the losses this week on the bourses was primarily a factor of profit booking, which has been prevailing in the markets for some time now. With losses in the current week, this is the first time in this rally (which began in late April 2003) that the indices have lost for 3 consecutive weeks. Over the last 3 weeks, while the BSE-Sensex has lost 7.1%, the NSE-Nifty has corrected downward by 8.5%.

    It was a shortened trading week on account of the holiday on Monday (Republic Day). However, Tuesday saw the continuance of buying euphoria that was witnessed last Friday when the indices had gained by about 4% each in a single day. Tuesday saw the Sensex once again cross the 6,000 mark in the closing hours of trade, albeit closing marginally below the coveted level. Early buying on Wednesday gave investors the feeling that the indices were back on track after two weeks of losses only to prove them wrong once again. From thereon till close on Friday, amidst significant volatility, the indices headed only in one direction – that was down!

    With India Inc. having continued to deliver splendid results and Foreign Institutional Investors (FIIs) continuing to pump in money into Indian equities, the correction witnessed was largely owing to profit booking, as retail investors abstained from buying and rather preferred to stay on the sidelines and play the wait-and-watch game. This was also evident from the trend in the futures & options (F&O) segment, which had its settlement on Thursday this week, wherein investors chose not to roll over their positions. The reason for this apprehension amongst investors could be due to factors like increased volatility being witnessed on the bourses, increase in margins imposed by the regulator last week and the general elections, which are round the corner.

    Top 5 gainers over the week
    COMPANY Price on
    January 23 (Rs)
    Price on
    January 30 (Rs)
    H/L (Rs)
    BSE-SENSEX 5,817 5,696 -2.1% 6,250 / 2,904
    S&P CNX NIFTY 1,848 1,810 -2.0% 2,015 / 920
    HEXAWARE TECH 345 391 13.4% 433 / 90
    HUGHES SOFTWARE 512 578 12.8% 628 / 136
    TATA MOTORS 467 520 11.2% 540 / 148
    EIH ASSO. HOT. 23 25 8.8% 32 / 9
    E.MERCK 369 401 8.6% 460 / 217

    However, amidst the all round weakness witnessed on the bourses, there were some stocks that managed to buck the general market trend and close the week with substantial gains (see table above). Amongst the key gainers this week was Tata Motors, which appreciated by 11% over the week. The reason for the gains can be attributed to the spectacular December quarter results declared by the company wherein it posted a 179% jump in bottomline on the back of a 55% growth in topline. The operating margins during the quarter also improved by 130 basis points over the corresponding quarter last year. The topline spurt was a factor of a 47% rise in commercial vehicle (CV) sales and a 60% rise in car unit sales during 3QFY04. Read full analysis

    Top 5 losers over the week
    COMPANY Price on
    January 23 (Rs)
    Price on
    January 30 (Rs)
    H/L (Rs)
    UNITED PHOS. 34 17 -49.9% 42 / 9
    ARVIND MILLS 60 51 -15.0% 71 / 19
    TRIGYN TECH. 17 15 -13.2% 26 / 10
    HINDUJA TMT 327 287 -12.4% 403 / 145
    JINDAL STEEL 585 515 -12.1% 680 / 151

    On the other hand, amongst the key losers this week was the textiles major, Arvind Mills, which lost 15% during the week. The stock lost ground post the announcement of its 3QFY04 results, which were quite disappointing. The company's bottomline slumped 48% on the back of a 7% fall in topline. The primary reason for the fall in profits was the higher input costs, especially that of cotton, which, according to the company, is likely to continue affecting its margins for the next few quarters.

    One sector, which was particularly out of favour this week, was the software sector. It must be noted that despite the good set of December quarter numbers declared by software companies and promising outlook, the sector witnessed a bout of selling. While stocks seemed to re-align closer to valuations they deserve, another important cause, which seemed to have turned the sector out of favour, was the news of increasing protectionism against the Indian IT sector from developed economies like the US and the UK.

    The US senate recently introduced a bill (not yet a law) that bans outsourcing of US government contracts. Further, the backlash against outsourcing continued with two Colorado lawmakers introducing bills that will deny state contracts to companies that move out jobs to India and other countries. While the former step in itself is not a big setback to the outsourcing story for India as, according to estimates, US government contracts form a mere 2% of India's total software and BPO exports, this development could further fuel the rising wave of protectionism. Some key losers.

    With the results season coming to an end this week, investors, analysts and research houses would now start to concentrate on the future growth prospects of the economy at large and India Inc. in particular. With the current ruling government’s vote-on-account for the interim general budget next week and elections not far away, the mood on the bourses could be of cautious optimism, albeit not without its share of volatility, till a clear picture emerges post the general elections. However, it must be noted that such corrections in the market are only short-term phenomena and the longer-term growth story of India Inc. continues to remain promising on the back of reasons discussed time-and-again like outsourcing, manufacturing competitiveness and the current reforms underway in the country.



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