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RBI adds fuel to fire!

Apr 7, 2007

Thanks largely to the huge fall on Monday, bears were able to do an encore during yet another holiday-shortened week on the bourses. For the week ended 5th April 2007, both the 'BSE-Sensex' as well as 'NSE-Nifty' edged lower by 1% each.With sentiments already at a low, Reserve Bank of India's (RBI) decision to bundle the 'CRR' and 'Repo rate' hike together to take yet another shot at taming inflation, added further fuel to the fire and as expected, markets reacted to the news rather strongly. When markets opened for the week on Monday, the 'Sensex' tumbled by a huge 355 points within the first hour itself and by the time the closing bugle was sounded, the losses had snowballed to more than 600 points. Although the markets recovered and notched up gains for the remaining three days of the holiday shortened week, it would have required a huge effort from the bulls to reverse the decline of the first day and bring the markets back into the black. However, that was not the case and for the second week in a row, markets ended in the red.

(Rs m)MFs FIIs Total
30-Mar58 8,408 8,466
2-Apr 633 (4,735)(4,102)
3-Apr (1,050) (1,699)(2,749)
Total358)1,974 1,616

As far as the institutional activity is concerned, while the Mutual Funds turned out to be net sellers to the tune of Rs 358 mn, Foreign Institutional Investors (FIIs) turned out to be net buyers to the tune of Rs 2 bn.

IndexAs on March 30As on April 7% Change
BSE SMLCAP6,471 6,456 -0.2%
BSE PSU5,922 5,917 -0.1%
BSE OIL AND GAS6,419 6,370 -0.8%
BSE MIDCAP5,384 5,320 -1.2%
BSE METAL8,488 8,624 1.6%
BSE IT4,899 4,822 -1.6%
BSE HEALTHCARE3,649 3,647 -0.1%
BSE FMCG1,739 1,720 -1.1%
BSE BANKEX6,542 6,372 -2.6%
BSE AUTO4,869 4,606 -5.4%

As far as the sectoral indices are concerned, as it has happened so many times in recent weeks, all the indices ended the week with a coat of red. However, while it was being felt that the 'Bankex' would be the worst hit, it was the 'Auto' that faced the maximum investor fury as it edged lower by 5%. 'Bankex' though was the second worst hit as it lost 3% for the week. There are four auto stocks in the list of top seven losers on the Sensex during the week and this explains why the index took such a pounding in the markets.

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

The Reserve Bank of India (RBI) last Friday raised the cash reserve ratio (CRR) for the banking sector by 50 basis points to 6.5% (to be made effective in two tranches on April 14 and April 28, 2007) and the 'repo' rate from 7.5% to 7.75%. With these in place, the funds available to the banking sector will be reduced further by approximately Rs 155 bn. Though, the recent spate of interest rate hikes since December 2006, have slowed the credit growth, the same has been higher than the Central bank's targets. Credit growth has been slower at 29.5% YoY at the end of February 2007 as against 32.7% YoY a year ago. Also, deposits have grown by 24.8% as against 18% a year ago. The PLR hikes exercised by banks are expected to hurt the productive sections of the economy. Banking heavyweights ended the week in the red. PNB (down 7%), SBI (down 4%) and ICICI Bank (down 2%) were amongst the key losers.

Top gainers during the week (BSE A)
CompanyPrice on
March 29 (Rs)
Price on
April 5 (Rs)
%
Change
52-Week
H/L (Rs)
BSE Sensex12,980 12,856 -1.0% 14,691 / 8,799
S&P CNX NIFTY 3,798 3,752 -1.2% 4,232 / 2,596
HINDUSTAN ZINC550 648 17.8% 1,100 / 415
BHARAT ELEC 1,478 1,650 11.6% 1,759 / 815
NESTLE916 1,020 11.4% 1,303 / 800
SYNGENTA IND471 523 11.1% 520 / 250
GAIL264 293 10.9% 325 / 210

Automobile stocks also ended weak with Maruti and Hero Honda (down 7% each) among the biggest losers. India's second largest motorcycle manufacturer, Bajaj Auto, announced its sales figures for the month of March 2007. The company has recorded a slump in its overall sales as the number of units sold registered a 9% YoY decline. The dismal performance in the sales of two wheelers (especially motorcycles) has hurt the company's performance as the sales in this segment registered a negative growth of 10%. However, its total sales for FY07 are up 19% YoY (the company sold 2.7 m units during the full year). Bajaj Auto has set itself a sales target of 3 m units for FY08, a growth of 10% YoY. The rise in interest rates and a consequent impact on two-wheeler demand can, however, hurt this growth in the current fiscal.

CompanyPrice on
March 29 (Rs)
Price on
April 5 (Rs)
%
Change
52-Week
H/L (Rs)
CORPN BANK292 270 -7.7%435 / 205
HERO HONDA680 632 -7.0%905 / 629
PNB473440-6.9%580 / 300
MARUTI 811 756 -6.8%985 / 670
VIJAYA BANK 42 40 -6.2%58 / 33

BHEL, India's leading power generation equipment manufacturer, is expected to have a strong year with the order book projected to show an almost 50% YoY growth to Rs 250 bn. The company has captured 93% of the market share in the power generation equipment manufacturing business in the country, with orders totaling to 8,000 MW in FY07. Power shortages have been identified as one of the key infrastructure bottlenecks threatening the country's ability to sustain the 9% growth per annum recorded in the last two years. Currently, India has an installed generating capacity of 128,182 MW and plans to add an additional 68,870 MW during the next Plan (2007-12). BHEL has a manufacturing capacity of 8,000 MW and plans to ramp up capacity to 15,000 MW by FY10. The expansion programme of the company will be cheaper as it does not have to set up a greenfield capacity in the country. BHEL was among the top gainers on Nifty during the week as it edged higher by 4%. Peer ABB also edged higher by 2%.

HLL's 100% subsidiary, Unilever India Exports (UIEL) has reached an agreement to sell Sangam to Wadhawan Food Retail (WFRL) with effect from March 31, 2007. The value of the deal has not been disclosed. Sangam, a non-store home delivery retail business, was started in 2001 to experiment with the direct-to-consumer channel combining the twin benefits of convenience and value. The idea was to test market it in Mumbai under the brand Sangam Direct before taking a decision to extend it across the country. The decision for a larger roll-out was put on hold in the context of the evolving retail scenario in the country. The increasing competition in this segment was making it difficult to capture more market share. HLL in recent times is also exiting from segments, which are not performing as expected. The move to sell Sangam is also a part of HLL's strategy to focus on its core business. HLL ended 2% lower for the week while peer Dabur edged higher by 4%.

FY07 results will be upon us shortly and after the union budget, this is likely to be the biggest decider of which way the markets move next. Expectations are high as usual and barring a few surprises, we don't think the corporates are likely to disappoint. The actual point is how much of this is already factored into the prices and we believe quite a bit of it. However, any disappointing set of numbers will not be taken lightly and will only aggravate the fall. We believe it is in such times that one should be on the lookout for quality companies as while the markets raises doubts over its near term performance, we rest mostly assured that once these clouds clear, decent returns are in the offing.

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