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Life after 10k... - Views on News from Equitymaster
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  • Feb 11, 2006

    Life after 10k...

    While it was merry making time for the bulls on Dalal Street, the bears were left licking their wounds after their big defeat, as the bulls cruised into the 10,000+ territory with surprising ease this week. The Indian stockmarkets created history yet again this week, as the Sensex breached the 10,000 mark with its near-4% gains. The Nifty too gained 3% and is now comfortably perched in the 3,000+ zone. With the largely decent 3QFY06 results out of the way, a scenario wherein global markets are flush with liquidity and the Indian Budget is round the corner, which has resulted in some expectations build-up amongst market participants, has led to the optimistic behaviour on the bourses.

    Despite last week's correction that saw the Sensex lose almost 180 points in the second half of the trading week, markets opened on Monday on an optimistic note. They traded rock solid for the entire trading session on Monday and by close, logged in one of the steepest single-day rises in recent history of the Indian stockmarkets (Sensex up 238 points). Thus, they not only covered the losses of the previous few trading sessions, but also managed to contribute further gains. However, more than this, Monday's trading session (February 6, 2006) will be remembered for the historic event of the Sensex breaching the much-awaited 10,000-mark!

    Going into Tuesday's trade, while apprehensions abounded about the sustainability of these gains and levels, the Sensex rallied a further 100 points, leaving the bear camp struck in awe of the ferocious moves made by the bulls. However, Wednesday's trading session saw some profit booking at higher levels, leading to a marginal correction, before buying resumed on Friday (Thursday being a holiday) and the BSE-Sensex continued its record run, registering new lifetime highs. Further, the buying action was not restricted to large caps alone. The mid-cap and small-cap stocks also witnessed investor interest, albeit at a relatively cautious pace. This was evident from the fact that while the Sensex closed higher by about 4%, the BSE Mid-cap Index and BSE Small-cap Index logged in gains of about 2.2% and 2.6% respectively.

    As far as the institutional action this week was concerned, while Foreign Institutional Investors (FIIs), flushed with liquidity, continued to pump in huge amounts of money into Indian equities (see chart above), domestic mutual funds (MFs) preferred to remain net sellers. For the first 4 trading sessions of the week for which data is available, while FIIs bought over Rs 16 bn, MFs sold equities worth almost Rs 2 bn. Thus, with this, while FIIs have already invested around Rs 63 bn (almost US$ 1.5 bn) in 2006 to date, MFs have been net sellers of equities to the tune of Rs 20 bn (approx. US$ 450 m).

    Top gainers over the week (NSE-50)
    Company Price on
    Feb 3 (Rs)
    Price on
    Feb 10 (Rs)
    H/L (Rs)
    BSE-SENSEX 9,743 10,111 3.8% 10,122 / 6,118
    S&P CNX NIFTY 2,941 3,028 3.0% 3,032 / 1,896
    CIPLA 484 561 16.1% 581 / 212
    RANBAXY 392 433 10.6% 568 / 339
    HLL 190 208 9.3% 209 / 126
    HERO HONDA 849 923 8.6% 927 / 471
    ZEE TELE 152 163 7.2% 206 / 128

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

    • Cipla once again made it to the top gainers' list this week (up 16%), making it 25% gains in a mere 2 weeks! What continued to keep the stock in the limelight, as mentioned last week also, was the announcement made by the company regarding its plans for a bonus issue. The company's board of directors is scheduled to meet on February 11, 2006 to discuss this issue. It is also planning to consider the issue of raising funds and increasing the investment limit of foreign institutional investors (FIIs) in the company. Other pharma stocks

    • Domestic pharma major, Ranbaxy, was in the top gainers' list amongst the Nifty stocks this week. There were a couple of news items that could have helped work sentiments towards the stock. One, Ranbaxy has entered into a 70:30 JV with South-African based Community Investment Holdings (CIH), which will sell the former's range of anti-retroviral (ARV) products in South Africa and other African markets. The value of the African market is estimated to be between US$ 5 bn and US$ 8 bn and the market for ARVs is pegged at US$ 70 m to US$ 100 m. While realisations are likely to be lower, higher volumes are expected to drive growth. In another news, the company has reportedly bid 500 m euros (around Rs 28 bn) for Betapharm, which is Germany's fourth-largest generic company. Both these moves are part of Ranbaxy's strategy to expand its geographical reach. Other pharma stocks

    • Two-wheeler auto stocks found favour amongst participants this week. This was seemingly the fallout of a good set of volume numbers reported by leading two-wheeler companies for the month of January 2006. For January 2006, while Bajaj Auto (up 3%) continued to outperform the industry growth with a 28% YoY growth in its volumes, TVS Motor (down marginally) reported a strong 20% YoY growth led by its motorcycle sales, which grew by 25% YoY. However, Hero Honda (up 9%) registered a single digit growth. It should be noted that the strong growth numbers in January 2006 should be viewed in the backdrop of the subdued performance in the months of November and December 2005. Other auto stocks

      Top losers over the week (NSE-50)
      Company Price on
      Feb 3 (Rs)
      Price on
      Feb 10 (Rs)
      H/L (Rs)
      GAIL 292 283 -3.2% 297 / 199
      TATA STEEL 401 389 -2.9% 456 / 329
      HPCL 314 310 -1.4% 380 / 282
      BHARTI TELE 367 364 -0.9% 395 / 193
      WIPRO 516 512 -0.7% 548 / 272

    • Following the footsteps of the largest housing finance company in the country, HDFC (up 4%), the other two market leaders in this segment of financing, ICICI Bank (up 6%) and SBI (up 3%), have also indicated a 50 basis points rise in interest rates. Hardening of interest costs have now started pressurising the net interest margins of banks to unsustainable levels, which is necessitating this move. The bankers are of the view that while the current round of interest rate hikes will not affect the incremental demand for credit, the continuation of the current trend of hardening rates over a longer period of time would act as a dampener. Also, the rate hike is expected to reflect in auto loans in the medium term, while the high-yielding personal loans and credit cards are likely to remain shielded. Other banking stocks

    So, what's in store for an investor beyond 10,000? While this continues to remain the billion-dollar question, with only 'guesstimates' (guessed estimates) as the probable answers, there are a few points that investors must bear in mind. While there is no denying the fact that India Inc.'s performance has been nothing less than splendid, there have been noticeable signs of a slowdown in corporate profit growth in 3QFY06. Further, with the capex cycle on the upturn, corporates would have to bear additional costs on their debt with interest rates on the rise, which would suppress profitability growth.

    Moreover, the Indian stockmarkets now are not only more expensive (Sensex P/E of 18.6 times trailing 12-months earnings) than what they were a year ago (15.6x), they are also relatively expensive compared to other Asian markets (Hong Kong 14x, Korea - 11x, Thailand 10x), despite considering India's growth potential. This warrants caution as, in the event of FII money flowing back with US interest rates now well above 4% compared to 1% in June 2004, there is the possibility of a larger share being pulled out from India.

    While we should not be construed as belonging to the bear camp, we continue to believe that at the current juncture, it would be wise to look at the downside first rather than the upside. Further, we continue to advocate investing in fundamentally sound companies with a 3 to 5 year view, as we remain positive on India as a growth story and equities as an asset class in the long-term. Happy and safe investing!



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