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No bad news is good news!

Mar 4, 2006

This seemed to be the basic premise for investors to have encouraged them to go on a buying spree on the Indian bourses this week. Thus, the Indian stockmarket rally gathered momentum this week, with the Union Budget having seemingly gone down well amongst most market participants. They expressed their acceptance of the budget by giving a thumbs-up to the stockmarket indices, which scaled new peaks this week. The BSE-Sensex and the NSE-Nifty gained a good 4% and 3% respectively, backed by strong retail and institutional participation. As far as the mid-cap (index up 3.5%) and small-cap (index up 2.3%) segments of

The markets began the week on a robust note, seemingly in anticipation of positive announcements from the Union Budget, which was to be presented the following day. The Economic Survey released on Monday also helped sustain the momentum, which projected an 8.1% growth for the Indian economy in FY06 and a reduced (7.7%) consolidated fiscal deficit situation. This was followed by the Budget on Tuesday. Though the markets remained significantly volatile during the course of the Finance Minister’s speech and for a brief period, post its conclusion, wherein the Sensex lost almost 150 points from its early intra-day highs to come near the 10,200-mark during noon, post that, it was a different scenario altogether, as the tables turned on the bears.

The bulls took over the market proceedings from hereon, as they made an exceptionally strong comeback on Tuesday and also in the following two trading sessions. In all these three trading sessions (latter half of Tuesday to Thursday), the bulls were in total control of the Indian stockmarkets. The Sensex scaled new lifetime highs on the back of strong support from all the factions of the investor community, as it breached the 10,700-mark on Thursday, which implies a near 500-points gain in a mere three trading sessions! However, the bulls seemingly took a breather on Friday, which led to marginal losses for the indices.

As far as the institutional activity on the bourses this week was concerned, while the Foreign Institutional Investors (FIIs) continued to lap up stocks worth Rs 18 bn (data available for the first four trading sessions of the week as yet), taking their total to Rs 120 bn (US$ 2.7 bn) in 2006 to date, MFs were net buyers to the tune of Rs 6 bn. However, it must be noted that while mutual funds (MFs) have raised significant money from investors in the last couple of months through new fund offers, they have been net sellers of Indian equities so far in 2006 to the tune of Rs 17 bn (US$ 390 m).

New listings during the week
Price on
Mar 3 (Rs)
% ChangeHigh/Low
GVK Power 310 302 -2.6% 400 / 295
Sadbhav Engineering185 329 78.1% 380 / 200
Reliance Natural Resources5 17 243.0% 26 / 17

We belong to that faction of the market which believes that there was nothing extraordinary about the budget this year and in our view, it was largely a non-event, the fact that there was nothing (bad/negative) in the budget seemingly helped market sentiments. While certain sectors like engineering, power, food processing and auto emerged clear winners, for the media and energy sectors there was some bad news. However, most of the sectors remained largely unaffected.

Top gainers over the week (NSE-50)
CompanyPrice on
Feb 24 (Rs)
Price on
Mar 3 (Rs)
H/L (Rs)
BSE-SENSEX 10,201 10,595 3.9% 10,706 / 6,118
S&P CNX NIFTY 3,050 3,147 3.2% 3,170 / 1,896
MARUTI778 931 19.6% 940 / 393
TATA MOTORS784 905 15.4% 910 / 400
ACC593 683 15.2% 722 / 351
BHARTI TELE364 408 12.1% 412 / 193
BHEL1,908 2,123 11.3% 2,180 / 740

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

  • Maruti (up 19%) and Tata Motors (15%) were the key gainers amongst index stocks this week. This could be attributed to the announcement of the 8% excise duty reduction from 24% to 16% for compact cars, i.e. passenger cars having an engine capacity upto 1,200 cc in the case of petrol-based engines or 1,500 cc in the case of diesel-based engines, and cars measuring upto 4,000 mm in length. The move is a positive, as most of Maruti's offerings and Tata Motors' Indica are likely to be the key beneficiaries. M&M (up 4%) also found favour this week, seemingly on account of the budget announcement of the increase in agriculture lending upto Rs 1,750 bn and the availability of credit at a concessional rate of 7% for loan amounts upto Rs 0.3 m. This, in turn, is expected to aid demand for tractors, as it will facilitate availability of funds for farm mechanization. Other auto stocks

  • Cement stocks, which have been finding favour on the bourses since the last couple of weeks, witnessed some selling pressure in the latter half of the trading week. The positive sentiments towards cement stocks had stemmed on account of reports of price hikes in some parts of the country upto Rs 15 per bag, which was being attributed to strong demand in those regions. However, the management of a leading cement company denied any such price hike in recent times at the manufacturer level. Moreover, it indicated that price hikes, if any, were largely to neutralize the effect of the rise in freight costs post the recent Supreme Court judgment banning overloading of trucks and would not have any major positive impact on the profitability of companies. Nonetheless, cement stocks managed to end the week with significant gains.

  • Steel stocks were in the reckoning this week, as integrated steel producers have increased basic prices of steel by Rs 1,500 to Rs 2,000 per tonne on the back of rising international steel prices. Also, the basic import duty on major steel products, which is 5%, was not changed in the budget. Only duties on alloy steel and stainless steel were cut to 7.5% from 10%. Hence, integrated steel manufacturers like SAIL, Tata Steel, JSW Steel, Ispat and Essar Steel have all raised prices of their products. Hot rolled coil (HRC) prices have also been increased, which led to a rise in prices of downstream flat steel products like cold rolled coils and galvanised steel, with Tata Steel raising the prices of HRCs by Rs 500 to Rs 2,000 a tonne and galvanised steel products by Rs 750 to Rs 1,000 a tonne.

    Top losers over the week (NSE-50)
    CompanyPrice on
    Feb 24 (Rs)
    Price on
    Mar 3 (Rs)
    H/L (Rs)
    BPCL449 425 -5.4% 471 / 339
    HDFC1,365 1,317 -3.5% 1,420 / 677
    ONGC1,180 1,145 -2.9% 1,298 / 806
    NALCO286 279 -2.5% 310 / 139
    IPCL238 233 -2.2% 272 / 156

  • Energy was one of the sectors that was at the receiving end in the budget on the back of the announcements that the cess on petroleum crude oil stands increased from Rs 1,800 per tonne to Rs 2,500 per tonne and a reduction of 5% from 10% on the customs duty of naphtha. Also, the FM stated that the increase of levy on crude oil would be absorbed by oil-producing companies and will not be passed on to the consumers. As far as the reduction in peak customs duty is concerned, lower import duty on petroleum products (including naphtha) is likely to lower the gross refining margins of refining companies, as the protection from import duty stands reduced. Therefore, overall, the budget measures this year were negative for the energy sector as a whole.

To conclude, the meteoric rise of the Indian stock markets and the valuations of most sectors/stocks continue to baffle us as a research house. At the risk of sounding repetitive, while we do remain optimistic about the growth prospects of the Indian economy over the next 3 to 5 years, the Sensex valuations of 17x and 16.3x FY07 expected earnings assuming a growth rate of 15% and 20% respectively indicates that there is not much upside left on the table for investors. This also implies that there is not much margin of error available for India Inc. and any negative surprise on the earnings front could take a severe toll on stock prices.

Investors must realise that it is the sheer gush of global (FIIs) and domestic liquidity (MFs) that is helping the Indian stockmarkets sustain the momentum. Thus, we continue to advocate utmost caution at the current levels and advise investors not to get swayed by market movements and rather follow a disciplined and long-term approach to investing. Happy and safe investing!

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