Operators rule… - Views on News from Equitymaster

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Operators rule…

Feb 22, 2003

With Mr. Hans Blix, the UN chief weapons inspector, giving almost a clean chit to Iraq and therefore, delaying a possible conflict in the Gulf, the Sensex (up 2.6% for the week) and the Nifty (2.9%) bounced back. However, the list of top gainers that includes stocks like Pentamedia, Silverline and DSQ Software indicates that it was the week of speculators. With fears of a war lingering in the background, investor community is likely to have adopted a wait and watch policy.

Top five gainers BSE 'A' Group
COMPANY Price on
Feb 14, 2003 (Rs)
Price on
Feb 21, 2003 (Rs)
% Change52-Week H/L (Rs)
BSE Sensex3,2233,3072.6%3,314 / 2,828
S&P CNX Nifty1,0361,0662.9%1,069 / 920
Pentamedia 111428.5%14 / 11
EIH91227.0%12 / 7
Bank Of Baroda688321.3%85 / 44
DSQ Software111317.0%13 / 10
Silverline Technologies111316.2%13 / 11

The market opened significantly higher on Monday. This was on the back of buying in technology stocks, a knee jerk reaction to the positive events during the weekend that delayed the impending US-Iraq war. The technology stocks, which witnessed selling pressure in the previous week on fears of the conflict hurting business, were back in favour. However, it was the momentum stocks that were in the limelight. DSQ Software, GTL, Sonata, Trigyn, Pentasoft, Silverline and HFCL gained significantly. Silverline and Pentasoft crossed the 20% mark. Since fundamentals, per se, have not changed significantly for these companies in the recent past, the sharp spurt could be short-term in nature. It is wise to exercise caution given the past track record of the aforesaid companies.

Top five losers BSE 'A' Group
COMPANY Price on
Feb 14, 2003 (Rs)
Price on
Feb 21, 2003 (Rs)
% CHANGE52-Week H/L (Rs)
IND.Resort4643-6.5%43 / 35
HINDALCO 596573-4.0%579 / 469
Essel Propack Ltd. 145140-3.7%142 / 139
DR.Reddy's902873-3.3%883 / 675
Chennai Petro2928-3.3%29 / 22
Philips9996-3.0%96 / 83

The prospects for technology majors like Infosys continue to be extremely strong barring short-term concerns. Investors could consider investing in the company from a three to five year perspective. However, in case of a possible conflict, the stock is likely to witness selling pressure. Another stock that jumped on Monday was ACC. The stock moved up swiftly (up 7% for the day). The rise was due to expectations of an open offer from Gujarat Ambuja, which holds 14.4% stake in the company. Gujarat Ambuja bought this stake from the Tata's for Rs 370 per share.

On Tuesday, Hero Honda, the second highest gainer over the week amongst the BSE-30 stocks, continued to rise north after plummeting to Rs 205 levels in the previous week. This nervousness was on the back of a concerns regarding sales slowing down and rising inventory levels. However, the company posted a sharp 22% rise in motorcycle sales for January 2003 and some of the fears were allayed. Hero Honda is expected to launch a 100cc entry-level bike and a 200 cc motorcycle during the course of this calendar year to keep volume growth ticking. Though we are positive on the volumes front, price realisation would continue to remain under pressure.

Wednesday too was a good day for the bourses. While stocks like Hero Honda and HLL continued to gain, the banking stocks were back in favour. This time the buying interest was on the back of the news that Government is considering raising the FII limit (foreign institutional investor) limit in public sector banks to 49%. Consequently, PSU banks gained significantly. SBI closed the week with gains of 4%. However, star performers were Bank of Baroda (21%), Andhra Bank (19%), Union Bank (16%), Punjab National Bank (15%), Canara Bank (14%) and Oriental Bank (14%).

We would urge retail investors not to get carried away by the news flow and properly research before making an investment into these stocks. Many of these banks recently debuted on the bourses, which is too short a time to establish management credibility. For retail investors it would be safer to run with stocks that have a proven track record when it comes to management credibility. Also, investors should keep an eye for asset quality of the banks (how much of the loans given out have gone bad and have been provided for). Another important number to check before making your investment decision is the valuation at which the bank is trading. For example, Oriental Bank at Rs 60 is trading at a Price to Adjusted Book Value (P/ABV) of 0.7x. Generally, a valuation of P/ABV of more than 1x is considered fair. Also, most of the PSU banks are in a restructuring mode, implementing technology and re-aligning work force for greater productivity. How has the stock you are considering performed on this front?

On Thursday and Friday, the bourses took a breather and profit taking set in. The losers list included stocks that had run up in the previous trading sessions. On Thursday there was another piece of good news for the banking sector. The RBI was considering further concessions to banks, which may now allow them to transfer sticky assets to an asset reconstruction company on better terms. Earlier the central bank had stipulated that the sticky assets transferable should not exceed 40% of the quantum net worth of the bank. The RBI has however, now stated that this allowance may be on a case-by-case basis.

Another stock that steadily moved up during the week was HLL, our recommendation for the week (Quantum View). The stock gained 5% during the week’s trading. While topline growth continues to be a concern with the stock, we believe that the company’s restructuring exercise and new initiatives should result in strong performance in the long term. However, please keep in mind that our recommendations are from a long to medium term perspective. Other key gainers for the week were engineering stocks that gained on expectations of the electricity bill being introduced in the parliament and thus, accelerating power sector reforms.

As the budget draws closer, the trading on the bourses will increasingly become news based. During the week, the employee of a leading business daily was arrested for allegedly trying to extort money from a broker. This shows how dangerous news based trading can be. Apparently, the person arrested had asked the broker to pay up for not printing a story of the broker's wrong doings. It is not very difficult to imagine that when news comes out, there is a good possibility that it can be the other way around i.e. some news is purposely printed for some favours granted. Therefore, we would urge retail investors to make their investments based on fundamentals and not on 'hot' news. Understand the management, the company's business, its financials, future prospects and valuations. Only then make your investment decision.

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