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Scaling new peaks... - Views on News from Equitymaster
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  • Feb 25, 2006

    Scaling new peaks...

    It was largely a joy-filled week for investors amidst the extreme bouts of volatility that were witnessed on the bourses this week. The Indian stock markets, after last week's subdued performance, resumed their northward journey, as the bulls came back from their brief relaxation period. The benchmark indices made new lifetime highs, finally settling with about 2% gains during the week. However, the action this week in the mid-cap and small-cap segments of the market was rather tepid.

    Considering the cautious behaviour witnessed on the Indian stock markets last week, investors seemed apprehensive in the early hours of Monday. The BSE-Sensex continued its downward journey, which had begun a couple of trading sessions back from about the 10,200 levels. However, another 100-points fall in early hours of Monday (down 3% from its lifetime highs) seemed enough reason for the bulls to get back into the ring and start bottom fishing. Post this, there was no looking back for the Indian stockmarkets, as the tables turned on the bears who were forced to run for cover and the markets sky-rocketed to higher levels, with the Sensex staging a near-200 points recovery from the lows of the day.

    This trend continued well into the following three trading sessions, with the Sensex making new lifetime highs every day. On Thursday, it breached the 10,300-mark on a couple of occasions, but failed to sustain at these levels owing to profit booking. In fact, the final hour of Thursday's trade witnessed a strong bout of profit booking, which continued into Friday's trade as well. Nonetheless, despite the correction on the final trading day of the week, the Sensex managed to end the week in the positive. As far as the institutional activity was concerned this week, while the Foreign Institutional Investors (FIIs) were net buyers to the tune of Rs 19 bn this week, domestic mutual funds (MFs) continued to remain in the sell mode with net sales of Rs 2 bn.

    New listings over the week
    COMPANY Allotment price Price on Feb 24 (Rs) % CHANGE
    Jagran Prakashan 320 270 -15.6%
    INOX 120 187 55.7%
    Click on the link above to read our view on the IPO

    Apart from the two news listings this week, as can be seen in the table above, 2 of the 4 companies belonging to the Anil Ambani Group listed this week. These were Reliance Capital Ventures and Reliance Energy Ventures. While the former company is the holding company of the group's telecom businesses, the latter owns 45% of Reliance Energy.

    Top gainers over the week (NSE-50)
    COMPANY Price on Feb 17 (Rs) Price on Feb 24 (Rs) % CHANGE 52-WEEK H/L (Rs)
    BSE-SENSEX 9,981 10,201 2.2% 10,305 / 6,118
    S&P CNX NIFTY 2,982 3,050 2.3% 3,078 / 1,896
    TATA STEEL 387 423 9.4% 456 / 329
    NALCO 263 286 8.9% 310 / 139
    BAJAJ AUTO 2,401 2,584 7.6% 2,688 / 1,002
    TATA POWER 487 518 6.4% 521 / 326
    SAIL 59 63 5.8% 70 / 47

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

    • Domestic pharma major, Ranbaxy, has been prohibited by a court in Finland from manufacturing the generic version of Pfizer's blockbuster drug, 'Lipitor'. The ruling involves Pfizer's patent (FI94958) that covers processes and intermediate compounds used to make Atorvastatin, the active ingredient in Lipitor. It must be noted that 'Lipitor' generates around US$ 12 bn annually in global sales, with US$ 30 m to US$ 35 m generated from Finland. The patent in Finland is scheduled to expire in February 2009. This decision follows the adverse rulings received by Ranbaxy in the key markets of US and Europe. The stock was, however, up 1% this week, despite the correction post the ruling, as it had run up prior to the adverse ruling. Other pharma stocks

    • As per reports this week, the government is planning to exempt the power sector from duties to increase the spread of power in the rural hinterland. The benefit is likely to accrue to players in all three segments - generation, transmission and distribution. Similarly, the power equipment players will also benefit to the extent their equipments will be used in the rural India. Apart from this, the government aims to have a larger role for the private players through the franchisee system. This move is beneficial for the industry as a whole as this will reduce the cost of power and thereby increase the consumption of the same. Some of the key gainers this week included Tata Power (up 6%), NTPC (9%) and some engineering stocks like BHEL, L&T and ABB, which were up by 2% to 3%.

      Top losers over the week (NSE-50)
      COMPANY Price on Feb 17 (Rs) Price on Feb 24 (Rs) % CHANGE 52-WEEK H/L (Rs)
      HDFC BANK 742 711 -4.2% 775 / 448
      M&M 599 579 -3.4% 627 / 216
      ZEE TELE 175 170 -3.3% 206 / 128
      JET AIRWAYS 989 967 -2.2% 1,379 / 891
      GAIL 278 274 -1.5% 299 / 199

    • HCL Infosystems, the largest distributor of Nokia GSM cell phones in the country, came under the bear hammer this week post its revised agreement with Nokia to split the distribution business. As per the new agreement, which will run for 5 years, both the companies will jointly distribute mobile handsets in the country. It must be noted that over the next 18 months, volumes from the sale of handsets will be split equally between the two partners, which is likely to hamper HCL Infosystems' revenues. However, the existence of two competing distributors would have led to price-cutting and a squeeze on margins. Therefore, the partnership is expected to keep HCL Infosystems' margins more or less intact. Nonetheless, given the fact that this business contributes to as much as 80% of HCL Infosystems' revenues (2QFY06), revenue growth will more likely than not witness a slowdown. The stock was down 33% this week. Other software stocks

    Going forward, while the markets have continued to defy gravity as yet, with the Sensex gaining almost 1,000 points in under 2 months, the risks associated with investing at current levels have also increased. With the index valuations already at about 16 times FY07 expected earnings, there is not much left on the table for an investor in the near-term, as much of the growth of the next year has already been factored into the current valuations. Further, investors must understand that though the Sensex does not appear to be extremely out of sync with its historic valuations (15x to 17x), many of the stocks, which form a part of the index, could be (or rather are) extremely overvalued. It wouldn't be incorrect to assume here that many of these stocks are rising largely owing to their presence in the benchmark indices. This is because most of the FIIs, which invest in large caps, invest in index stocks.

    Further, a close watch is warranted on the global liquidity factor, which is amongst the biggest reasons for the meteoric rise of the Indian stock markets. While we would not advise investors to sit on total cash, we would certainly caution them and advise them to follow a staggered long-term investment approach to create wealth. Happy investing!



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