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Clouds of US recession

Feb 23, 2008

Growing global concerns over an imminent US recession cast a shadow over Indian stock market during the week, with the BSE-Sensex ending in the red on 3 out of the 5 sessions. For the week ended February 22, 2008, the Sensex lost 4.2%, while the NSE-Nifty shed 3.6%.The week began on a subdued note although selective buying interest was seen in index heavyweights from the commodity, banking and FMCG sectors. The Sensex lost 67 points, while the Nifty shed 26 points. Tuesday was marked by volatility, with indices starting off well but oscillating on either side of the dotted line by the final trading hour. However, the Sensex managed to post a marginal gain of 28 points while the Nifty trudged upwards by 4 points. The indices began Wednesday's proceedings well below the dotted line and from thereon things went downhill as they declined with each successive trading hour. Even though select stocks in the software and power sectors managed to buck the trend, the Sensex lost as much as 458 points while the Nifty shed 126 points.

Buying activity in stocks from the software sector aided the indices on Thursday, while engineering heavyweights and financial institutions featured among the key losers. The Sensex gained 117 points while the Nifty appreciated by 37 points. On Friday, the indices opened on a melancholic note and remained depressed for the entire day, echoing global concerns over US recession. Thus, the BSE Sensex closed at 17,349 (down 386 points) while the NSE Nifty closed at 5,111 (down 81 points) during the last trading day of the week.

On the institutional activity front, between 15th February and 22nd February, FIIs emerged as net buyers buying equities to the tune of Rs 30 bn, while mutual funds sold equities to the tune of Rs 6 bn.

(Rs m)MFs FIIs Total
15-Feb1,619 11,475 NA
18-Feb(451)(1,159)(1,610)
19-Feb(3,268)15,851 12,583
20-Feb(1,913)567 (1,346)
21-Feb(2,268)2,856 NA
Total(6,281)29,590 9,627

On the sectoral indices front, the BSE Healthcare index (up 1%) led the pack of gainers, while BSE Bankex (down 7%) led the pack of losers.

IndexAs on Feb 15As on Feb 22% Change
BSE HEALTHCARE3,692 3,745 1.4%
BSE METAL16,167 16,369 1.2%
BSE FMCG2,208 2,231 1.0%
BSE IT3,880 3,918 1.0%
BSE MIDCAP7,592 7,594 0.0%
BSE SMLCAP9,621 9,595 -0.3%
BSE AUTO4,769 4,708 -1.3%
BSE PSU8,552 8,209 -4.0%
BSE OIL AND GAS11,269 10,673 -5.3%
BSE BANKEX10,884 10,150 -6.7%

Now let us have a look at some of the key stock/sector specific developments during the week.

As per a leading business daily, Ambuja Cements has outlined Rs 35 bn capacity expansion plans to cater to the growing demand for the commodity. The company plans to expand capacity by about 7 m tonnes to take its total production to 25 m tons in two years. The company currently has five integrated plants, besides six grinding units at different locations across the country. The company would expand its capacity in Rauri (Himachal Pradesh) and Bhatapara (Chhattisgarh) by setting up new lines of 7,000 tons per day clinker production in each and is also setting up a 33 MW captive power generation plant in Bhatapara to ensure smooth functioning of the plant. The entire investments would be supported through internal accruals. Owing to the favourable scenario (demand supply mismatch), the company has been witnessing higher realisations, which has led to huge cash flows for the company. The move will help company to maintain its market share. However, once the announced capacities come on stream starting middle of the current calendar year, the current high realisations will cool off impacting margins. While Ambuja Cements closed higher by 1%, ACC ended higher by 2%.

Reliance Power is planning to issue free bonus shares to all its shareholders to compensate the losses they suffered when the company was listed a week ago. From the time of opening of initial public offer of Reliance Power on January 15, the stock is down 11% from the IPO price for retail investors, and 15% for other categories of investors. The company had issued the shares at Rs 450 while giving a discount Rs 20 a share to retail investors. The promoters will be excluded from the bonus issue. The company may have to use its share premium account to issue the bonus. Of the Rs 116 bn mobilized through the recent IPO, roughly Rs 113 bn is in the share premium account. The bonus share issue, once completed, will reduce the promoters' holding to less than 90%, while the stake holding of retail and financial institutions will go over 10%. While Reliance Power closed higher by 8%, Reliance Energy ended 9% lower.

Top gainers during the week (BSE A)
COMPANY Price on February 15 (Rs)Price on February 22 (Rs)% CHANGE52-WEEK H/L (Rs)
BSE SENSEX 18,115 17,349 -4.2% 21,207 / 12,316
S&P CNX NIFTY 5,303 5,111 -3.6% 6,357 / 3,555
GSFC 233268 15.0% 370 / 152
NALCO362415 14.9% 547 / 204
EIH LTD.167186 11.5% 247 / 88
ENGINEERS INDIA754829 10.0% 1,314 / 430
THOMAS COOK INDIA 7077 9.8% 144 / 46
CIPLA184199 8.0% 260 / 160

ONGC is planning to revamp its ageing infrastructure at oilfields across the country for a cost of Rs 150 bn. The revamping would start with its assets in Assam. The company would soon float tenders worth Rs 2.5 bn. ONGC has three fields in Assam - Rudrasagar, Lakwa and Geleki. The renewal project would be completed in three years and is expected to increase the oil production by 20%. Once the Assam mission is completed, the company will then renew the old equipment in the company's fields in Gujarat and the east coast. The Ankleshwar and Cambay fields in Gujarat started production in the mid-1960s. The company in recent times has been facing leakage problems due to the old assets. The renewal plan will help it reduce leakages and increase production. While ONGC closed lower by 3%, Reliance ended 6% lower.

Top losers during the week (BSE A)
COMPANY Price on February 15 (Rs)Price on February 22 (Rs)% CHANGE52-WEEK H/L (Rs)
HDFC 2,921 2,574 -11.9% 3,257 / 1,397
INDUSIND BANK 105 95-9.8% 136 / 37
CANARA BANK305 276 -9.5% 421 / 174
KOTAK BANK 902 816 -9.5% 1,436 / 402
BPCL 469 425 -9.3% 560 / 287

We are led to believe that India will achieve thousands of every important physical unit in key sectors- megawatts of power, million cubic meters of gas, million tonnes of metals, million square feet of real estate and so on. Huge capex plans are announced and a deluge of IPOs follows. While its fine to be an optimist in general, dear reader, we prefer to be realists when it comes to investing. Buffett mentions in his 2000 letter to shareholders, "We make no attempt to pick the few winners that will emerge from an ocean of unproven enterprises. We're not smart enough to do that, and we know it...we try...to keep our estimates conservative and to focus on industries where business surprises are unlikely to wreak havoc on owners." In an era of grand plans, we urge you to look at track records and avoid ugly surprises.

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