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Pausing for breath? - Views on News from Equitymaster
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  • Feb 18, 2006

    Pausing for breath?

    Extreme volatility characterised the trading sessions this week, as the bulls and the bears played tug-of-war. While the bears seemed adamant to prevent any further rise in the markets (rather pull it down if possible), the bulls stayed put every time the bears pressed the 'sell' button. At the end of all this, however, the bears managed to score over their opponents. For the week, both the BSE-Sensex and the NSE-Nifty lost over 1% each. The scenario was, however, relatively better for the mid-cap and small-cap indices, which ended the week down 0.8% and 0.4% respectively.

    After the strong gains witnessed last week, the Indian stock markets opened on a subdued note on Monday morning. Till noon, the major indices traded in relatively narrow range, but then the bulls finally managed to break the stranglehold and from thereon, the move was only up. Once again, as has been the case so regularly over the past few trading sessions, the BSE Sensex hit a new lifetime high. However, little did the investors know that they were in for a roller coaster ride from thereon.

    Alternate bouts of buying and selling were witnessed on the bourses in the following trading sessions of the week, without much headway in terms of a clear direction. Nonetheless, the Sensex continued to make new highs in opening trades on every single trading day (barring Friday). But profit booking at higher levels made sure that the indices did not stay long at higher levels. In fact, a strong bout of profit booking in the second-half of the trading session forced the bulls run for cover. As far as the Foreign Institutional Investors (FIIs) and mutual funds (MFs) were concerned, in the first 3 trading sessions of the week, while the former were net sellers to the tune of Rs 2.2 bn, MFs bought equities worth Rs 1.4 bn.

    Some key gainers over the week (BSE-30)
    Company Price on
    Feb 10 (Rs)
    Price on
    Feb 17 (Rs)
    BSE-SENSEX 10,111 9,981 -1.3%
    S&P CNX NIFTY 3,028 2,982 -1.5%
    HLL 208 232 11.3%
    BAJAJ AUTO 2,213 2,401 8.5%
    ZEE TELE 163 175 7.6%
    DR. REDDY 1,205 1,287 6.8%
    SAIL 57 59 3.7%

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

    • FMCG behemoth, Hindustan Lever (HLL), announced a good set of numbers for the fourth quarter ended December 2005 this week. While the topline grew by over 14% YoY during the quarter, lower interest costs (in light of the conversion of debentures) and an extraordinary income to the tune of Rs 892 m resulted in bottomline outpacing topline by a wide margin. However, despite all these anomalies, bottomline grew by a commendable 27% YoY during the quarter. The company closed its books for the year with a decent 11% YoY topline and a 15% bottomline growth. The results led to the stock gaining significant ground this week, up 11%. Other FMCG stocks

    • Domestic pharma major, Dr. Reddy's, was another big gainer (up 7%) amongst index stocks this week on the back of the news that it has acquired Germany's fourth-largest generic company, Betapharm, which markets high-quality generic drugs with a focus on long-term therapy products with high prescription rates. Betapharm's current portfolio comprises about 145 marketed products and the company reported a gross turnover of 164 m euros in 2005. It must be noted that the generics market is getting fiercely competitive and global generic players are looking to consolidate in a bid to acquire scale. This acquisition is expected to strengthen Dr. Reddy's presence in the European region, which is the second-largest market after the US. Other pharma stocks

    • Hindalco raised its aluminium product prices by Rs 2,500 per tonne this week. This is the second price revision by the company this month after undertaking a Rs 3,500 per tonne hike on February 1. This current price rise can be attributed to rising domestic demand, since imports have slowed down. The sectors that are driving demand are power and construction, which is expected to bode well for the company. Heightened construction activities in the country as well as the Gulf, Europe and Japan, would aid the demand from the construction sector. However, the stock witnessed some profit booking this week and was down 6%. Nalco too lost 12%.

      Some key losers over the week (BSE-30)
      Company Price on
      Feb 10 (Rs)
      Price on
      Feb 17 (Rs)
      % Change
      NALCO 299 263 -12.0%
      SHIP. CORP. 165 152 -7.7%
      HINDALCO 164 154 -6.2%
      DABUR 116 109 -5.3%
      ONGC 1,176 1,120 -4.8%

    • The Indian Iron & Steel Co (IISCO), a 100% subsidiary of Steel Authority of India (SAIL), has been amalgamated with SAIL (4%). IISCO's merger with SAIL will help the company build better synergies. The merger would help SAIL grow in size with five integrated steel plants under its fold. An expansion and modernisation plan has already been finalised envisaging an investment of Rs 80 bn for technological upgradation of IISCO. IISCO's iron ore mines at Chiria (Jharkhand), which are rich in quality and quantity would be an advantage for SAIL. Also the experienced manpower of IISCO and SAIL's financial and managerial capabilities would be pooled for faster growth of SAIL. This will thus lead to creation of greater value for stakeholders. Other steel stocks

    Going forward, we anticipate tougher times for investors to identify stocks where significant value/growth remains, as most of them have run up quite substantially. At the risk of sounding repetitive, we would continue to advise investors to take a long-term approach while investing. While investment in equities was never risk-free, this is compensated for by the higher returns. The risks can surely be mitigated to a large extent by following a disciplined, staggered and fundamental investment approach, which is an optimum strategy, especially for a retail investor, for whom, preservation of capital is as much important as earning decent returns on the same. Happy and safe investing!



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