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Bulls take a breather! - Views on News from Equitymaster
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  • Mar 31, 2007

    Bulls take a breather!

    After a week's hiatus, bears were back in the reckoning on the bourses in the week gone by. As a consequence, for the week ended March 30, 2007, while the 'BSE-Sensex' ended lower by a tad less than 2%, losses on the 'NSE-Nifty' were a little lower at 1%.

    In such a volatile environment, gains of 6% in one week are enough to flag off a warning sign and that is exactly what happened to the markets during the holiday-shortened week. As mentioned, after having seen robust gains posted by the indices during the previous week, investors opted to take some money off the table, thus leading to the fall during the holiday shortened week. The Sensex lost nearly 400 points in the first two trading days. The magnitude was higher on the second day as the heavyweights, especially from the IT sector, came in for some strong pounding on the back of steep fall in dollar against the rupee. Although the markets did close in the positive for the remaining two days, the gains were not enough to offset the losses of the initial days, thus leading to the indices ending the week with a coat of red.

    As far as the institutional activity is concerned, while mutual funds remained net sellers to the tune of Rs 7 bn between 23rd and 29th March 2007, Foreign Institutional Investors (FIIs) emerged as net buyers to the tune of Rs 9.2 bn during the same period.

    (Rs m) MFs FIIs Total
    23-Mar (1,682) 6,785 5,104
    26-Mar (2,953) 805 (2,148)
    28-Mar (2,068) 5,202 3,134
    29-Mar (600) (3,590) (4,190)
    Total (7,302) 9,202 1,900

    As far as the sectoral indices are concerned, unlike the previous week where a uniform trend was witnessed, the indices this week ended rather mixed. Leading the gainers' list though was the 'FMCG' index that gained 3% during the week. ITC and HLL, which together account for close to 80% of the index edged higher by 5% and 3% respectively during the week and helped explain why the index ended 3% higher. Another top gainer was the 'Healthcare' index, whose gains were because of 7% and 6% gains in Ranbaxy and Dr. Reddy's respectively, the stocks that together account for close to 30% of the index weightage. Among losers, 'Bankex', last week's shining armor found itself out of favour as it ended lowest on the list with a decline of 4%. Banking behemoths like HDFC Bank and ICICI Bank were among the worst performers on the Nifty and this also led to a decline in the index.

    key indices over the week
    Index As on March 23 As on March 30 % Change
    BSE FMCG 1,689 1,739 2.9%
    BSE HEALTHCARE 3,574 3,649 2.1%
    BSE PSU 5,879 5,922 0.7%
    BSE METAL 8,454 8,488 0.4%
    BSE SMLCAP 6,457 6,471 0.2%
    BSE MIDCAP 5,395 5,384 -0.2%
    BSE OIL AND GAS 6,434 6,419 -0.2%
    BSE IT 5,068 4,899 -3.3%
    BSE AUTO 5,040 4,869 -3.4%
    BSE BANKEX 6,822 6,542 -4.1%

    Let us have a look at some of the stock/sector specific key development during the week:

    Banking stocks ended weak with HDFC Bank (down 5%), SBI (down 3%) and ICICI bank (down 4%) being the major losers. According to a leading business daily, ICICI bank has announced to raise US$ 5 bn in foreign markets this year through loans and bonds to fund its international business. Last year, the bank had borrowed close to US$ 5 bn and this year it expects the sum to be larger as it expects its whole business requirement to be greater. While most of the borrowing is expected to be in dollar terms, the bank is also considering a Euro denominated borrowing. Most of the money raised is expected to be used overseas itself, by way of ECBs (external commercial borrowings) by the Indian corporate sector. Last year, Indian companies spent US$ 8.5 bn on acquisitions abroad and ICICI bank had funded half of these deals in value terms.

    During the December 2006 quarter, the total advances of the bank's international branches reported a growth of 60% YoY.

    Top gainers during the week (BSE A)
    Company Price on
    March 23 (Rs)
    Price on
    March 30 (Rs)
    H/L (Rs)
    BSE Sensex 13,286 13,072 -1.6% 14,691 / 8,799
    S&P CNX NIFTY 3,861 3,822 -1.0% 4,232 / 2,596
    BALAJI TELEFILMS 118 127 7.6% 189 / 95
    AUROBINDO PHARMA 632 679 7.5% 759 / 468
    CHENNAI PETRO 176 188 7.0% 271 / 143
    RANBAXY 330 353 6.8% 525 / 306
    CESC LIMITED 354 378 6.6% 377 / 198

    Aventis announced mixed results for the fourth quarter and year ended December 2006. While the 14% YoY increase in revenues from the domestic market has largely driven the topline growth (up 9% YoY), revival in exports (up 25% YoY) especially in the fourth quarter has cushioned any further fall in exports for the full year. Operating margins have contracted by 270 basis points owing to a rise in raw material costs and other expenditure, the impact of which was more pronounced in the fourth quarter. Higher other income and a lower tax outgo have led to the bottomline growing at a faster pace than the topline for the full year. The stock ended the week with a decline of 3%. Domestic sector heavyweights witnessed a strong week with Dr. Reddy's (up 6%) and Ranbaxy (up 7%) leading the pack of gainers.

    Top losers during the week (BSE A)
    Company Price on
    March 23 (Rs)
    Price on
    March 30 (Rs)
    H/L (Rs)
    LIC HOUSING 152 138 -9.3% 233 / 128
    CMC LIMITED 1,324 1,211 -8.5% 1,417 / 335
    TATA MOTORS 789 728 -7.8% 991 / 651
    UTI BANK 532 490 -7.8% 590 / 222
    WIPRO 601 558 -7.1% 682 / 383

    Telecom stocks ended the week mixed with MTNL edging higher by 1% while Bharti Airtel and Reliance Communications losing 3% and 1% respectively. Reliance Communication (RCom) is planning an overseas public offer for its wholly owned subsidiary Flag Telecom. The company is to divest 10% to 15% equity with the proceeds being used to partly fund the capex planned for Flag. The company had, in December last year, announced its plans of building the world's largest next generation undersea cable network entailing an investment of about US$ 1.5 bn. The fiber optic cable network on completion will connect 60 countries and 5 bn global users. Flag is likely to be listed on the London Stock Exchange.

    After rolling back the prices earlier this month to help the government check inflation, the steel companies are gearing up to increase prices of hot rolled coils by Rs 500 to Rs 1,000 per tonne effective from 1st April 2007. The industry plans to raise the prices even though the landed import prices are higher than the domestic prices by Rs 2,500 to Rs 3,000 per tonne. The price hike will put the industry in confrontation with the government. Although there is no domestic scarcity yet, this possibility might change from 1st April 2007 with an expected US$ 30 to US$ 50 a tonne increase in the international price making exports more lucrative. The industry is expecting the prices to hit an all time high this year with major user countries like Russia turning into a net importer and with China curbing exports. It should be noted however that SAIL, the public sector behemoth has refused to be a party to it. Steel stocks ended firm with SAIL (up 2%) and Tata Steel (up 3%) being the key gainers.

    FY07 earnings announcement will start full throttle within a couple of weeks and this is likely to be the key to which way the markets move next. Although India Inc is expected to put up a good show, expectations are sky high and any negative surprise is likely to trigger a bigger correction than what is warranted. We however believe that this could turn out to be a potential opportunity to enter into good quality stocks with a long term view as this aberration would most likely be cyclical. Hence, once things regress to the mean, investors should stand to benefit from the potential upside.



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