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Stock markets: What next?

Mar 5, 2004

The month of February was a rather eventful month. While there was a lot of action on the political front, the stock markets were also abuzz with activity, mainly on the IPO front. Against this backdrop, while the markets remained largely range bound and finally managed a gain of nearly 4% over the last 30 odd days, there were still certain stocks that outperformed by a good margin. Let us review the month gone by and see which stocks emerged as top gainers and try to analyse the reason behind the same.

February 2004 - In short…
BSE-SENSEX5,621 5,866 4.4%
Reliance Energy547 797 45.7%
Hero Honda434 531 22.4%
Bharti Tele128 156 21.9%
L&T503 595 18.3%
ITC1,021 1,156 13.2%

Reliance Energy: With close to Rs 6,000 bn of investment expected in expansion of power capacity over the next decade, it was widely expected that Reliance Energy, one of the leading players in the power sector, was not expected to be left behind. Thus, it was anticipated that the company, courtesy the huge gas find of the parent in the KG basin, had something big up its sleeves and was on the look out for a good site in order to execute its plan. Last month, however, it put to rest all the speculations and announced that it will set up a huge 3,500 MW gas based power plant in the state of UP, entailing a total investment of Rs 100 bn.

As a result, the stock of the company experienced a strong bout of buying and gained close to 46% in a short span of 30 days. Also, the successful raising of funds to the tune of Rs 8.1 bn and aggressive bidding for power circles in the state of Gujarat were some of the other news that helped the stock register robust price appreciation. However, it should be noted that power generation projects typically have a long gestation periods and therefore it will take sometime before this expansion starts filtering into higher profitability.

Hero Honda: Just when industry watchers were about to write off Hero Honda, the largest two- wheeler manufacturer in the country, bounced back right into contention, mainly on the back of its robust 3QFY04 results and a significant 35% YoY jump in volume sales for the month of January. Meanwhile, the company's offering in the entry level, 'CD Dawn', received a favorable response from the public and at one stage even surpassed the leader and archrival 'Boxer' in terms of volume sales. On account of these favorable trends, the company emerged as the second highest gainer over the last month on the bourses (up 22%).

Going forward, we believe the market share of the company is going to come under pressure as its competitors, mainly TVS Motor and Bajaj Auto, who were a little late to come to terms with structural shift from scooters and mopeds to motorcycles, have started offering contemporary products at competitive rates. Moreover, while competition from its rivals would put pressure on realisations, higher input costs would have an adverse impact on margins. Therefore, while from a short-term perspective the valuations appear to be stretched, the company's fortunes in the longer term would depend on its ability to come out with new models and sustain its market share.

Bharti Tele: The largest GSM player in the country saw its stock appreciate by almost 22% and as a result, emerged as the third highest gainer. Despite stiff competition from both cellular and limited mobility players, the company continues to expand its subscriber base, albeit at a slower rate. However, considering the intensity of competition and large-scale capital expenditure plans, it is wise to exercise caution. It remains to be seen how much of future growth is already reflected in the stock price.

L&T: Riding on the back of robust order booking and increasing anticipation of a possible demerger of its cement division, L&T, the engineering major, emerged as the fourth largest gainer (up 18% last month). Increased activity in the oil and gas sector has had a rub off effect on L&T (the company won a Rs 10.1 bn order from ONGC). Just to put things in perspective, the contract forms around 10% of the company's FY03 revenues. The total order book of the company, which stood at around Rs 173 bn at the end of 3QFY04, will receive a further boost. Moreover, the demerger of the cement division will make the company cash rich and will help it in bidding for higher projects on account of its stronger balance sheet. While from a short-term perspective, most of the growth in the order booking of the company seems to have been factored in, long-term prospects of the company look promising.

ITC:The FMCG major took up the last slot in the hallowed list and registered gains of 13% over the last month. After a lacklustre performance by HLL during the fiscal and continued pressure on margins, investors seem to be turning towards ITC. During 3QFY04 while the company's hotel business grew 31% YoY, the company' s paper board business showed a YoY growth of 9% in revenues. Moreover, the company's e-choupal initiative (IT backed rural distribution and sourcing infrastructure) is also expected to touch 4,100 installations by March this year. These initiatives will help the company to significantly build non-tobacco strengths and reduce its dependence on the tobacco business.

Having looked at the performance of key stocks in February 2004, it is time to look ahead. From our perspective, there are few concerns that could have a negative impact on the stock market.

  1. Elections are round the corner and as a result, new policy initiatives will take a backseat. A stable government is extremely critical to sustain growth of the economy.

  2. Global economic performance and its consequent impact on money flow into India.

  3. Given the country's dependence on monsoon, any disappointment on this front could slowdown growth in corporate profitability.

  4. Valuations of companies are already reflecting the near term growth in profitability. Performance of companies may fail to meet investor expectations and consequently, there could be a selling pressure.

We suggest investors to consider these four factor and weigh their investment decisions accordingly. We would also like to re-iterate the fact that all that shines is not gold.

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