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Almost there! - Views on News from Equitymaster
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  • Feb 5, 2005

    Almost there!

    The strong bull run continued on the bourses with the indices ending the week with over 3% gains and no prizes for guessing what or who was the primary factor in the drivers' seat. It were the Foreign Institutional Investors (FIIs) who continued to pour money aggressively into Indian equities helping the indices scale nearer to the previous all-time highs witnessed in early 2005.

    The indices opened on a strong footing and proceeded to move higher throughout the week with minor hiccups. However, while the indices are now much closer to all-time highs, investors who were expecting the indices to breach their previous all-time highs (6,696 on Sensex) this week will have to wait for some more time. It must be noted that before changing gears on Friday, the BSE-Sensex almost nudged (6,684) its previous all-time highs. However, soon profit booking emerged at these higher levels pushing the indices into the red. Nonetheless, the week-on-week performance of the indices remained impressive.

    As can be seen in the chart above, akin to the previous week, a meteoric rise in FII inflows helped the markets continue its northward journey. Just to put things in perspective, the FIIs have pumped in over US$ 1 bn (!) in the last 6 trading sessions helping the indices notch near 9% gains during the period. Investors must realise that this quantum of FII inflows in such a short period of time is by no means a small feat. However, it must be mentioned here that these inflows include the US$ 300 m (approx) of the Bharti deal between Warburg Pincus and some FIIs.

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

    • Cement stocks have been in the limelight in recent times on the back of strong demand leading to favourable industry scenario for cement players. This has led to improving realisations for cement companies. The optimism towards the sector continued this week also on the back of a further hike in cement prices across regions by about Rs 5-10 per 50 kgs. This, thus, improves the bottomline prospects for cement companies going forward. Cement stocks over the week and over the month

      Some key gainers over the week (NSE-50)
      Company Price on
      Jan 28 (Rs)
      Price on
      Feb 4 (Rs)
      H/L (Rs)
      BSE-SENSEX 6,419 6,618 3.1% 6,696 / 4,228
      S&P CNX NIFTY 2,008 2,078 3.5% 2,120 / 1,292
      ABB 953 1,079 13.2% 1,147 / 491
      COLGATE 182 206 13.0% 208 / 102
      REL. ENERGY 520 580 11.6% 818 / 426
      BPCL 414 456 10.1% 519 / 230
      BHEL 722 791 9.6% 807 / 375

    • The clearance of the national electricity policy by the government kept power and engineering stocks in the limelight during the week. The policy is aimed at an accelerated and efficient development of the sector and meeting the country's power demand by 2012. Further, with higher investments envisaged for the sector over the next few years in light of expanding rural electricity networks, engineering companies are likely to benefit in terms of larger orders to set up power plants. The positive impact of the policy was clearly visible among power (Reliance Energy up 12% and Tata Power up 5%) and engineering stocks during the week.

      Some key losers over the week (NSE-50
      Company Price on
      Jan 28 (Rs)
      Price on
      Feb 4 (Rs)
      H/L (Rs)
      MTNL 149 139 -6.5% 170 / 92
      ITC 1,399 1,342 -4.1% 1,417 / 812
      OBC 323 310 -3.9% 367 / 149
      DR. REDDY 743 732 -1.4% 1,349 / 650
      GLAXO 692 687 -0.7% 799 / 520

    • Another big mover this week was the FMCG behemoth, HLL, which gained over 8%. This was on the back of the company announcing a revision in its detergent prices amounting to an increase of around 5%. The company has hiked prices of its key brands first time post the price war with P&G had forced it to nearly halve prices in early part of 2004. The revision in our view is totally based on the fact that input costs have risen and one should not expect the company to declare very high profitability over the next two quarters. Other FMCG stocks

    Going forward, with the Indian indices now trading in the region of about 14x-15x their trailing 12-month earnings, they are no longer amongst the most attractive of destinations in terms of valuations. While the valuations going forward (with a 2-3 years perspective) remain attractive, at the current juncture the indices have started to look somewhat expensive. While we are not trying to take the role of a 'doomsayer', what we are concerned about is the fact that markets are seemingly not taking into consideration the various risks that cloud the horizon. Thus, at this moment, it is pertinent to look at both the upside and the downside with a fundamental view i.e. earnings growth and relative valuations. In the same breath, we would like to state that we remain positive on India Inc.'s long-term prospects and believe that a selective and staggered investment approach is apt for investing into equities at the current juncture. Happy investing!



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