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Another week, another 'fifer'! - Views on News from Equitymaster
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  • Mar 3, 2007

    Another week, another 'fifer'!

    The finance minister and global markets partnered in crime that saw the benchmark indices down by another 'fifer' for the second week in succession. For the week ending March 2, 2007, both the indices lost a little more than 5% each.

    The Union Budget loomed large over the market in the week gone by. With India Inc expecting some benefits to come its way, the weakness in recent times was largely looked over and it was being felt that the upward journey might soon resume. The finance minister however had other ideas. In a bid to focus on rural India and give increased importance to education and health care, he gave the industry the cold shoulder. Infact, quite a few sectors were subjected to even higher levies and duties. Unhappy at this treatment, investors lined up for selling and in the process led the benchmark BSE-Sensex to a heavy fall of more than 500 points in just a single day. The fact that global markets also weakened considerably, added further fuel to the fire. While the markets did attempt to break out of the negative trend on the penultimate day of the week, the current negative sentiment and lack of good buying opportunities never really helped loosen the bear stranglehold any further.

    (Rs m) MFs FIIs Total
    23-Feb 372 42,872 43,244
    26-Feb 2,706 (5,821) (3,115)
    27-Feb 3,486 (4,157) (671)
    28-Feb 2,435 (16,443) (14,008)
    1-Mar (291) (4,387) (4,678)
    Total 8,999 12,064 25,450

    As far as institutional activity is concerned, both Foreign Institutional Investors (FIIs) and mutual funds turned out to be net buyers during the week as they pumped Rs 12 bn and Rs 9 bn respectively into the Indian markets.

    Index As on Feb 23 As on March 2 % Change
    BSE FMCG 1,786 1,756 -1.7%
    BSE PSU 5,876 5,686 -3.2%
    BSE HEALTHCARE 3,611 3,490 -3.3%
    BSE MIDCAP 5,665 5,466 -3.5%
    BSE SMLCAP 6,904 6,646 -3.7%
    BSE METAL 8,799 8,423 -4.3%
    BSE BANKEX 6,760 6,447 -4.6%
    BSE OIL AND GAS 6,536 6,193 -5.3%
    BSE IT 5,262 4,954 -5.8%
    BSE AUTO 5,337 5,016 -6.0%

    As far as the sectoral indices are concerned, for the second week in a row, all of them ended in the red. This week, however, it was the turn of the FMCG sector, among last week's worst performers, to come out with minimum damage. ITC, the behemoth that accounts for 50% of the total sector weightage was the only lone gainer on the BSE (it gained marginally) and hence the sector emerged as the best performer. Tata Motors and Bajaj Auto, the stocks that have the maximum weightage in the auto index fell significantly during the week and as a consequence the index emerged as the worst performer on the BSE during the week.

    Let us now have a look at some key stock/sector specific news during the week:

    Cement majors also lost a lot of ground during the week. Gujarat Ambuja, Grasim and ACC, all ended lower in the region of 7% to 11%. The sell off was a consequence of some punitive measures for the sector companies in order to curb the rising inflation. In order to stabilise retail prices of cement, the finance minister has reduced excise duty to Rs 350 per tonne for producers who sell their cement below Rs 190 per bag of 50 kgs at the retail level. However, if sales are made at above Rs 190 per bag, it will attract an excise duty of Rs 600 per tonne. With the pricing power currently lying with the producers, the move has boomeranged, as it is believed that producers have passed on the price hike to the end consumer.

    Top gainers during the week (BSE A)
    Company Price on Feb 23 (Rs) Price on March 2 (Rs) % Change 52-Week H/L (Rs)
    BSE Sensex 13,633 12,886 -5.5% 14,724 / 8,799
    S&P CNX NIFTY 3,939 3,727 -5.4% 4,245 / 2,596
    NIIT 638 751 17.6% 804 / 247
    THOMAS COOK INDIA 469 532 13.3% 829 / 411
    WOCKHARDT 331 373 12.8% 562 / 318
    CMC LTD 1,104 1,187 7.5% 1,320 / 335
    BRITANNIA 1,202 1,291 7.5% 1,955 / 1,025

    Banking majors closed weak for the week. Major losers being OBC (down 13%), ICICI Bank (down 7%) and SBI (down 5%). However, there was one positive news for the sector. In a welcome relief to the banking sector, the Reserve Bank of India (RBI) has agreed to pay interest on the cash reserve maintained by banks by way of CRR because of a delay in a notification canceling the payments since June 2006. It may be recalled that the RBI had announced that it would stop paying interest on cash reserves maintained by banks, which made the statutory cash reserve (hiked from 5% to 6% of banks' demand and time liabilities) non remunerative for the players in the sector. However, the central bank has now decided to pay differential interest rates - cash reserves maintained from June 24 to December 8, 2006, will draw 3.5% interest, and those maintained from December 9 to February 16, 2007, will get 2%. For reserves maintained from February 17 2007 onwards, it will pay 1%. Also, the minimum CRR level of 3% and the maximum CRR level of 20% have been reinstated.

    Top losers during the week (BSE A)
    Company Price on Feb 23 (Rs) Price on March 2 (Rs) % Change 52-Week H/L (Rs)
    POLARIS SOFTWARE 200 172 -14.1% 237 / 52
    ORIENTAL BANK 200 175 -12.6% 280 / 139
    INDUSIND BANK 49 43 -11.9% 64 / 27
    BOM DYEING 581 515 -11.4% 989 / 382
    GUJARAT AMBUJA 123 110 -10.8% 150 / 77

    Software stocks also traded weak with heavyweights like Satyam and TCS, each losing 5% over the week. This was another sector that faced the wrath of higher tax outgo. The Finance Minister has brought in IT companies within the ambit of Minimum Alternative Tax (MAT). MAT would be applicable at an effective rate of 11.33%. The news came as a shock for IT companies, as they were not expecting this at all. Instead, the IT companies were expecting an extension to the exemption provided to companies in Software Technology Park (STP). Further, with gains on ESOPs also being brought under the ambit of FBT, this is further likely to hurt software companies as they make the maximum use of ESOPs to lure talent.

    Car sales in the month of February 2007 have been on the rise with sales of Maruti outperforming those of its other listed peers. The company saw a growth of 62% YoY in volumes of its cars sold in India. This performance was mainly driven by the growth in sale of its small cars segment (grew by 80% YoY). On the other hand, M&M's domestic sales recorded a growth of 18% YoY with sales of its largest selling SUV (sports utility vehicle) growing by 14% YoY. Tata Motors recorded growth of 19% YoY in its domestic car sales. However, this would have been much better but for the performance of its mid-sized cars that failed to deliver volumes. The trend of increased car sales continued despite the hike in interest rates and prices, showing the strength in demand for private vehicles by the burgeoning Indian middle class. The stock of Maruti closed 4% lower, while its peers M&M (down 10%) and Tata Motors (down 5%) also closed weak.

    With Budget out of the way, the focus would now be on how the fourth quarterly results pan out and how the companies stack up for FY07 as a whole. Barring a few surprises, it is most likely to be another robust quarter and no indications have been found on the contrary. The problem however is, most of it seems already factored into the stock prices. Infact, going by the history, even the medium term earnings seem to be factored in. Hence, any surprises on the negative side are likely to lead to further erosion. However, if one is a long-term investor, such falls can be good opportunities to enter into fundamentally strong companies at reasonable valuations. For in markets like India with a strong growth potential running many years into the future, the price paid could make all the difference. Happy investing!



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