The BSE Sensex and NSE Nifty shed nearly 3% for the week. While there was no good news from the Indian economy, the sentiment on the bourses was largely news driven. Markets closely followed the happenings on the battlefront. As the war had begun, gold and oil prices had fallen and equity markets had gained in the west on hopes of a short war. But as the allied forces found out that the task at hand is not as easy as expected and investors are moving out of equities to avoid unpleasant surprises.
Markets opened for the week on a sour note. As the day progressed, the selling intensified. The culprit was HLL that lost about 5% on Monday. Investors' seem to be concerned about the revenue growth prospects of the company. Also, there are concerns about the company facing stiff competition from smaller players in different segments. However, the management has taken various steps to realign its product portfolio, which is already reflected in better operating margins. While short-term concerns remain, the company is well poised to capitalize on any growth opportunity in the long run. Also, we believe hardly any cognizance has been given to the possibility of improving operational efficiencies by deploying technology. The stock had been covered in Quantum View – our product that carries a recommendation from Quantum Advisors Limited.
||Price on Mar 21 (Rs)
||Price on Mar 28 (Rs)
||52-WEEK H/L (Rs)
||3,538 / 2,828
|S&P CNX NFTY
||1,153 / 920
||70 / 38
||265 / 108
||217 / 145
||46 / 25
||190 / 45
On Tuesday the markets closed flat. Tata Tea gained ground during trading. Significant amount of debt taken by the company for its special purpose vehicle (SPV) that was formed for acquiring Tetley has been a key cause of concern. However, the company has completed a debt-restructuring package by refinancing the loan. This is expected to result in net savings of Rs 420 m per annum for Tata Tea. The stock also gained on the news that the company received dividends of Rs 253 m from the Board of Tata Tea (GB) Ltd, in which the company holds close to 84.5% of the equity. The stock was one of the key gainers on the BSE A group, closing with weekly gains of 6.7%.
||Price on Mar 21 (Rs)
||Price on Mar 28 (Rs)
||52-WEEK H/L (Rs)
||150 / 27
||77 / 12
|SHREE RAMA MULTI
||37 / 5
||46 / 8
||388 / 195
Wednesday too was lackluster. Hero Honda took a beating during the days trading closing 3% in the red. The stock has exhibited significant volatility off late on the back of concerns of weakening sales. While we expect the company's market share to touch around 46% mark (50% in FY02), three new models are slated for a launch in the coming fiscal. This should enable the company to stem the slide in growth. When compared with its peers, the stock is trading at relatively cheaper valuations. At the current market price of Rs 196 and last year’s dividends of Rs 17 for FY02, the dividend yield on the stock works out to be 8.6%. At the current market price the stock trades at a P/E multiple of 6.7x its FY04E earnings. The stock lost 13% during the week’s trading.
Thursday’s trading exhibited a strange pattern. The markets were range bound for most part of the day. However, in the last few minutes of trading select Nifty components that are largely stable like HDFC Bank witnessed significant selling pressure. The selling could have been with a view to reduce losses as the Nifty March series futures and options expired on Thursday. Hughes Software gained 5% during the days trading. The beleaguered telecom software company has broadened its portfolio offering and is now targeting a wider client base to get more business. We believe that the company should see business growth from demand for VoIP (voice over internet protocol) products and demand for service from the wireless network space. Also, the company has started to provide services in the maintenance space. The recent contract win from Lucent was to provide maintenance support to 3G software.
Friday’s trading was lack luster. However, banking sector stocks witnessed significant buying interest. The likes of Bank of India, Bank of Baroda, Oriental Bank, HDFC Bank, UTI Bank and Corporation Bank dominated the list of gainers. BoI saw a sharp spurt of 7%.
Infact, the sector that emerged as the most favourite during the week’s trading was banking. Hopes of banks recovering a significant part of their bad loans due to the recently enacted Securitisation Act has been fueling the buying interest in banking stocks. Further the repurchase; of high cost debt offered to the PSU banks in the Union Budget will further improve their bottomline in the further. As banks will have to provision the gains made from this transaction against NPAs. This in turn will reduce the provisioning needs in the future and consequently, bolster bottomlines. While the prospects look attractive we urge retail investors to do thorough research before making an investment decision.
Going forward, with a drought situation affecting fourteen states, markets are likely to remain range bound. This is because agricultural output is expected to decline by 3.3%, which will impact industrial output. Thus, it is unlikely that companies that are dependent on the domestic economy will bring relief to the bourses. Already two-wheeler majors like Hero Honda and Bajaj Auto have indicated of sales slowing down and are launching new models to counter the slowdown in sales. Thus, prospects for the next few months (at least till the monsoon is over) seem pretty challenging. And therefore, markets are likely to remain range bound.
However, as far as the domestic economy is concerned, structural changes have taken place at a steady pace. Consequently, post liberalization, the operating environment for businesses has improved dramatically. This is in terms of lower cost of capital, better roads and lower turn around time in ports. Though a lot needs to be done, increasingly, global majors are considering India as a manufacturing hub. Recently, Telco won a deal from Rover to export Indica to market is UK. In the two-wheeler segment, Bajaj Auto has inked a deal with Kawasaki to manufacture motorcycles.
It is but natural for investors to keep away from the markets when all the news they hear is negative. Further more, in India, retail investors have been cheated almost every time they have chosen to invest in equities (in fact by the supposedly most 'trust' worthy organisations). However, ignoring the structural changes in the Indian economy and the opportunities that lie in the waiting for Indian business would be mistake.
What further strengthens the case for investing in equities are the valuations. Due to negative sentiment, investors have kept away from equities since 2000. At the current market capitalisation, the Sensex trades at a P/E of 11.6x based on trailing twelve-month earnings. Investors have to make call whether this valuation given by the markets truly reflect the growth potential of India on the move? We feel India Inc has a lot more steam.