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Markets stabilise - Views on News from Equitymaster
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  • Feb 7, 2004

    Markets stabilise

    The current week saw the markets break off from the three-week losing streak and close in the positive. While the Sensex gained 1.6%, the Nifty managed was up by 1.3%. Despite the continuation of bad news on the software outsourcing front and a largely uneventful interim budget (vote-on-account), the markets stabilised, as investors decided to bargain hunt at lower levels post the 7%-8% fall in the indices during the last three weeks.

    The intra-day volatility of 125-150 points continued into the current week also. After the prolonged break (Monday being a holiday on account of Eid), markets began on Tuesday on a marginally positive note only to slide back immediately into the negative territory. The vote-on-account by the Finance Minister failed to lift market spirits. Every attempt by the bulls to bring the markets out of the trough was met by stiff resistance from the bears who sold at every rise. While this was largely the case throughout the week, Wednesday and Friday saw the indices close in the positive.

    Top 5 gainers over the week
    COMPANY Price on
    January 30 (Rs)
    Price on
    February 6 (Rs)
    H/L (Rs)
    BSE-SENSEX 5,696 5,786 1.6% 6,250 / 2,904
    S&P CNX NIFTY 1,810 1,834 1.3% 2,015 / 920
    BOMBAY DYEING 130 166 27.5% 172 / 43
    BATA INDIA 52 60 16.2% 73 / 26
    NALCO 149 166 11.5% 205 / 70
    JINDAL STEEL 515 568 10.5% 680 / 151
    BHEL 513 563 9.9% 605 / 195

    Contrary to beliefs that 2004 would continue to see strong inflow of FII money into Indian equities, which was also vindicated by the huge FII inflow in the month of December last year, the same has failed to happen. Just to put things in perspective, while in the month of December 2003, FIIs brought in almost Rs 65 bn into Indian equities, this figure stood at a mere Rs 24 bn in the month of January 2004. Though the temporary effect of the uncertainties with respect to Participatory Notes last month could have had kept a check on FII inflows, the same failed to pick up substantially (as expected) even after the clarification by the market regulator.

    Top 5 losers over the week
    COMPANY Price on
    January 30 (Rs)
    Price on
    February 6 (Rs)
    H/L (Rs)
    STERLITE IND 1,312 636 -51.5% 1,630 / 143
    ESCORTS 75 61 -18.1% 113 / 35
    DSQ SOFTWARE 11 10 -14.5% 25 / 5
    TITAN LTD. 113 97 -14.0% 144 / 50
    LML LTD. 44 38 -13.9% 70 / 26
    Note: Sterlite Industries stock has gone ex-bonus

    The Finance Minister presented the interim budget on Tuesday. While he did not have much scope for changing tax structures (as expected) or other policy measures radically, considering that this budget was more or less a 'vote-on-account', still the following are some key announcements that need to be highlighted.

    • BPO earnings of foreign companies, if the services are ancillary in nature, have been exempted. However, in case of outsourcing core activities, the MNCs would have to pay taxes. While there is a general opinion that this taxation regime would hurt the prospects of the Indian BPO industry (still in the nascent stages of its growth), we believe that, in the long-term, the prospects would be more defined by factors other than mere taxation of earnings.

    • Sops to the power sector have been extended till 2012. This announcement comes in the wake of the Government's bid to improve infrastructure facilities across the country so as to facilitate sustainable growth.

    • The interim budget also announced sops for the rural and small industries sectors. Credit to these segments may be given at lower rates than what is currently prevailing in the markets. This could put pressure on the credit delivery mechanism of banks, as they would now be arm-twisted to lend to the agri and small industries sectors, which have historically been unproductive and unprofitable. Also, if these loans are not assessed properly, there may be a danger of higher NPAs over the long-term.

    • The interim budget finally gave the approval to the tonnage tax regime for the shipping sector. This would lead to considerable savings for shipping companies on their tax outgo front, as under the new regime, the impact of tax would reduce to about 2%-3% compared to over 30% up till now. These savings could then be ploughed back into expansion of fleet and other plans of the companies.

    Among other news of the week:

    Bharti Tele gained (4%) during the week on the back of the news of strong subscriber additions during the month of January, wherein the company has managed to sign in around 360,000 new customers.

    Steel prices have once again been raised, though not formally, by about 10%, which is in the form of withdrawal of rebates. However, not much should be read into the recent price hikes, as much of it is owing to the fact that the prices of raw materials, required in the manufacturing of steel, have strengthened considerably and as such, the effect of the steel price hikes is unlikely to have a significant impact on the bottomline of steel companies.

    Finally, the much-awaited divestment of governments' residual stake in companies like IPCL, CMC, IBP, Dredging Corporation (DCI), ONGC and GAIL has got the go-ahead. With Securities and Exchange Board of India (SEBI) likely to issue a guidance letter soon to the government to go-ahead with the divestment of the above, the latter has issued a time schedule of the process. Energy stocks seemed to have been propped up on Friday largely owing to this divestment news.

    We would like to re-iterate that going forward, the gains will be much more stock/sector specific and at a relatively relaxed pace. The market movement will be based more on the earnings delivered by India Inc. So, keep an eye on the developments taking place across sectors and companies, especially in wake of the sops announced by the Finance Minister to bolster the growth of the economy. However, a word of caution here would be that since expectations (both return on equities as well as earnings of corporate India) are on a high, on the eventuality of earnings growth not meeting the expectations in the future, there could be a sharp correction in valuations. Investors, in this context, should take the risk-return perspective into consideration before investing in equities at the current levels. Happy Investing!



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