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How the mighty have fallen...

Mar 8, 2008

Global concerns over a US economic recession, and spiraling commodity prices led to a meltdown on the Indian bourses during the week, with the Sensex ending in the red on 3 out of the 4 sessions. For the week ended March 7, 2008, the Sensex lost 9.1%, while the Nifty shed 8.7%.The week began on a dismal note, as the broader markets could not recover from the opening blues triggered by the fall in US markets the previous week. Banking stocks ended up among the key losers as the BSE Sensex recorded its second highest absolute fall of 901 points. The NSE Nifty shed 271 points. The negative sentiments did not subside on Tuesday even though there was buying interest in heavyweights from the auto, power and cement space. The Sensex lost 319 points, while the Nifty ended lower by 82 points.

However, Wednesday witnessed a change from the downward spiral as IT and FMCG stocks came to the rescue of the indices. The Sensex gained 204 points, while the Nifty added 70 points. After the holiday on Thursday, the markets had yet another dismal day with the Sensex closing below 16,000 for the first time since it began its surge in September 2007. Thus, the BSE Sensex closed at 15,976 (down 567 points) while the NSE-Nifty closed at 4,772 (down 150 points) during the last trading day of the week.

On the institutional activity front, between 29th February and 6th March, FIIs emerged as net sellers of equities to the tune of Rs 15 bn (according to figures available), while mutual funds sold equities to the tune of Rs 4 bn (according to figures available).

(Rs m)MFs FIIsTotal
29-Feb 4,564 (2,441)2,123
3-Mar(4,529)(6,835)(11,364)
4-Mar(1,514)(4,728)(6,242)
5-Mar(2,801) NA NA
6-Mar NA (1,297) NA
Total(4,280)(15,301)(15,483)

On the sectoral indices front, the BSE Bankex index (down 16%) led the pack of losers.

IndexAs on Feb 29As on Mar 07% Change
BSE BANKEX10,113 8,477 -16.2%
BSE SMLCAP 9,628 8,409 -12.7%
BSE MIDCAP 7,680 6,804 -11.4%
BSE PSU 8,484 7,579 -10.7%
BSE OIL AND GAS11,032 10,023 -9.1%
BSE METAL16,739 15,454 -7.7%
BSE IT 3,862 3,638 -5.8%
BSE AUTO 4,887 4,635 -5.2%
BSE FMCG 2,274 2,208 -2.9%
BSE HEALTHCARE 3,929 3,826 -2.6%

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

Foods major Nestle announced its full year results. The company has reported a 24% YoY growth in topline during the fiscal, led by strong double-digit growth in both domestic and export sales. The operating margins have improved by 0.7% YoY on account of lower expenses (as percentage of sales). Excluding the extraordinary and miscellaneous items, net profits have registered a 32% YoY growth during the year. The company has declared an aggregate dividend of Rs 33 for the year 2007 (dividend yield of 2.3%). While Nestle closed higher by 9%, HUL ended marginally lower.

Suzlon Energy has announced a retrofit program to resolve blade-cracking issues discovered during the operations of some of its turbines in the US. The retrofit program involves the structural strengthening of 1,251 (417 sets) blades on S-88 (2.1 MW) turbines, of which 930 blades are already installed while the remaining blades are in transit or inventory. The retrofit program will be carried out by maintaining a rolling stock of temporary replacement blades, to minimize the downtime for operational turbines, and will be completed over a period of six months. The program will utilize its blade manufacturing and service facility for US blades in Pipestone, Minnesota. The total estimated cost of the retrofit program is estimated at Rs 1 bn for which a provision will be made in 4QFY08. While Suzlon Energy closed lower by 12%, BHEL ended 11% lower.

Top gainers during the week (BSE A)
CompanyPrice on
February 29 (Rs)
Price on
March 7 (Rs)
%
Change
52-Week
H/L (Rs)
BSE SENSEX17,579 15,976 -9.1% 21,207 / 12,316
S&P CNX NIFTY5,224 4,772 -8.7% 6,357 / 3,569
THOMAS COOK INDIA 80 89 10.4% 144 / 49
NESTLE 1,372 1,499 9.2% 1,663 / 876
MARUTI SUZUKI 867 933 7.6% 1,252 / 700
SUN PHARMA 1,226 1,308 6.7% 1,352 / 821
NICHOLAS PIRAMAL 274 279 1.9% 383 / 195
NALCO 463 470 1.3% 547 / 217

ICICI Bank has reported investment losses of US$ 264.3 m due to the unfolding global subprime crisis. This could wipe off up to 9% of this year's profit. ICICI Bank and its subsidiaries abroad have an aggregate exposure of US$ 2.2 bn in credit derivatives. As of January 31, 2008, the mark-to-market negative on this portfolio due to movement of credit spreads was about US$ 155 m of which US$ 88 m had been provided for in the financial statements of the bank for 9mFY08. The bank would provide for another US$ 70 m, including US$ 20 m for subsidiaries in 4QFY08. The company has stated that it is only a notional loss because, as per accounting rules, it has to mark the depreciation in value of its investments in derivatives contracts. The losses have not been booked because ICICI has not gotten out of these contracts yet. While ICICI Bank closed lower by 18%, HDFC Bank ended 12% lower.

Top losers during the week (BSE A)
CompanyPrice on
February 29 (Rs)
Price on
March 7 (Rs)
%
Change
52-Week
H/L (Rs)
BOI 360271-24.5%466 / 132
RELIANCE CAPITAL 1,8181,384-23.9%2,925 / 575
CHAMBAL FERT 5945-22.6%94 / 30
KOTAK BANK 801631-21.3%1,436 / 420
IDBI 11894-20.6%181 / 67

It is hard to look back at the last 12 months and not be amazed by the movements in prices that market sentiments can bring about. It's amazing how gravity-defying stock prices, propped up by market euphoria, have nose-dived to terra firma. The natural question to ask is, "Which set of prices are correct?" Warren Buffett says in his latest letter to shareholders, "I should emphasize that we do not measure the progress of our investments by what their market prices do during any given year. Rather, we evaluate their performance by the two methods we apply to the businesses we own. The first test is improvement in earnings, with our making due allowance for industry conditions. The second test, more subjective, is whether their "moats" - a metaphor for the superiorities they possess that make life difficult for their competitors - have widened during the year." Simply put, once you've bought shares for the right reasons (fundamentals and valuations), dear reader, forget the quotes and concentrate on the business.


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