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Consolidation moves? - Views on News from Equitymaster
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  • Mar 12, 2005

    Consolidation moves?

    It was time to take some breather for the Indian indices this week. After gaining nearly 11% in the last couple of months, 4% of which came in last week's trading, the indices have 'seemingly' gone into a consolidation mode at the current juncture. This is evident from the almost 'as flat as a pancake' closing of the Sensex (0.1%) and the Nifty (0.3%) for the week. However, while domestic players are seemingly somewhat apprehensive, FIIs continue to instill their faith in Indian stocks.

    The record-breaking feat of the Indian bourses continued on the bourses this week also. To put things in perspective with respect to the Sensex, backed by strong gains last week, the indices had a firm start in Monday's trade, which helped the Sensex achieve a new high of 6,900. However, this record was soon surpassed the following day when the Sensex nudged 6,930, which in turn was very short-lived as the index crossed 6,950 levels on Wednesday in opening trades. However, the one common thing post all this was the fact that every time a new high was attained or the bulls tried to become active (Thursday and early Friday), they had to counter a strong bout of profit booking, ultimately succumbing to the bear pressure.

    However, one silver lining (if we may call it so) was the relentless inflow of foreign money into Indian equities. The first 4 trading sessions of the week saw FII inflows of Rs 31 bn taking the cumulative FII investment in 2005 to Rs 143 bn or US$ 3.3 bn (!). This is no small amount by any measure! It must be noted that in the same period last year, the net FII inflows stood at approximately US$ 1.5 bn.

    One key factor that has had an important role to play in aiding the flow of FII money into emerging markets (including India) over the last couple of years is the weakening US currency against most otherworld currencies. It must be noted here that both in 2003 and 2004, the Indian rupee gained about 5% against the US greenback. This not only provides FIIs to reap gains when Indian currency strengthens, but it also provides them with an opportunity to be a part of the India growth story (reflected in improving earnings), which is riding on the back of improving cost efficiencies, higher productivity and strong consumption led domestic growth. Further, since investing in US currency denominated assets is not a relatively lucrative option considering the widening US trade deficit gap, low interest rates and a jobless US economic recovery, India seems a good investment opportunity.

    Key gainers over the week (NSE-50)
    Company Price on
    Mar 4 (Rs)
    Price on
    Mar 11 (Rs)
    H/L (Rs)
    BSE-SENSEX 6,849 6,854 0.1% 6,955 / 4,228
    S&P CNX NIFTY 2,148 2,154 0.3% 2,183 / 1,292
    OBC 328 366 11.4% 382 / 149
    NALCO 174 185 6.5% 209 / 95
    RANBAXY 1,024 1,074 4.8% 1,279 / 867
    HCL TECH 345 361 4.5% 407 / 234
    HDFC BANK 586 610 4.1% 629 / 256

    Coming back to sector/stock specific developments during the week on the Indian bourses:

    • Oriental Bank of Commerce (OBC) was a key gainer (up 11%) amongst index stocks this week. OBC is contemplating an equity issue of 58 m shares at a price band of Rs 275 to Rs 300.The issue will help the bank raise Rs 17.4 bn (at the higher end of the band) and bring down the government stake from 68% (at present) to 53%. With the proposed changes to the Banking Regulation Act, OBC is anticipating recovering Rs 3.5 bn through tax gains u/s 72 A of the IT Act. The bank posted a subdued performance for 3QFY05 due to the GTB hit and had NPAs 1.5% of advances. OBC claimed to have recovered Rs 1bn of NPAs that were on GTB's books during this period. The bank hopes to wipe out the losses accruing to it on account of the takeover of GTB by the end of FY07.Other banking stocks

    • Nalco was another key gainer (up 7%) amongst index stocks this week. The optimism towards the stock stems from the sustained strong alumina (US$ 450 per tonne) and aluminium prices (US$ 2,000 per tonne) in the international markets. Further, the gains in the stock were seemingly fuelled by the fact that as per reports, the company's recent consignment of alumina delivery was at a price higher by about 5%-6% compared to the previous month. Further, in the event of international prices firming up and since domestic prices follow global trends, there could be a possibility of aluminium prices being raised in the future. Hindalco also gained 2% during the week.

      Key losers over the week (NSE-50)
      Company Price on Mar 4 (Rs) Price on Mar 11 (Rs) % Change 52-Week H/L (Rs)
      ABB 1,296 1,223 -5.7% 1,320 / 491
      BHEL 864 816 -5.5% 884 / 375
      MARUTI 484 458 -5.4% 600 / 300
      TATA MOTORS 487 462 -5.1% 528 / 300
      BHARTI TELE 236 224 -5.1% 250 / 114

    • The negative sentiment towards Bharti Tele was a factor of the Telecom Dispute Settlement Appellate Tribunal (TDSAT) ruling going against the company, which dismissed Bharti's petition for a refund of Rs 1.35 bn paid by it as license fees. Apparently, Bharti has maintained the stand that post the regulatory changes with respect to the unified licensing regime, wherein cellular circle licenses were issued without any additional payment by telecom operators, Bharti's basic telecom licenses have become redundant and hence the refund. However, the telecom regulator has maintained that the license fee is non-refundable, as had been clearly indicated at the time of license issuance. The stock lost 5% this week.

    Going forward, while nothing much has changed since last week that would warrant a change in view with respect to the positive outlook towards stockmarkets in the long-term, the apprehensiveness of domestic investors was pretty apparent on the bourses. Further, while FIIs have continued to pour money into Indian equities consistently, it makes us want to be more cautious of this trend considering that US interest rates are on the rise, which could, if not reverse, slowdown the inflows. However, while we subscribe to the fact that investing at the current juncture is not devoid of risks, a selective, disciplined, staggered and long-term investment approach would help the investors mitigate much of the risks. Happy investing!



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